2008 ANNUAL REPORT
Corporate Profile
Northern Property Real Estate Investment Trust owns and operates rental real estate in secondary markets in Canada. We have
significant multi-family residential real estate investments in Alberta, a growing position in British Columbia and are the largest multi-family
residential landlord in each of the NWT, Nunavut and the Province of Newfoundland and Labrador. NPR’s income producing portfolio is
primarily residential including multi-family apartment rental units, furnished execusuites and master leased seniors’ buildings. We also
have a portfolio of commercial buildings focused on government tenancies predominantly located in Canada’s far north.
Geographically Diversified
NPR works in five diverse regions of Canada: Nunavut, the Northwest Territories, Newfoundland, Alberta and British Columbia. We focus
on acquiring property in regions that are naturally wealthy or have the potential of becoming so. We are engaged in northern areas where
growth rates are generally higher and competition more restrained than in the metropolitan areas.
Mainly Residential/Government Focus
Our primary business is providing rental residential property to Canadians in these carefully selected communities. Our definition of
housing is broad. We own and operate rental apartments and town homes. We are a significant provider of housing to government and
corporations, which sublet our units to their staff. We provide furnished executive-suite accommodation in selected locations. The REIT
also owns and leases residential buildings and lands to companies which are in the business of providing accommodation and care
services to seniors.
In addition NPR has a portfolio of commercial properties primarily located in its northern communities. Our commercial property most
often involves government or corporate covenants and longer-term leases.
Exposure to Canada’s Natural
Resource Economy
NPR’s cities and towns are multi-faceted economically and often have an important natural resource component. Our properties are in
communities which have leadership positions in oil, natural gas, diamonds, forestry products or agriculture. The communities in which we
invest are filled with people who produce the commodities for which Canada is famous. NPR embraces the great Canadian resource
economy.
Conservatively Managed
The Trust operates on a financially prudent basis. The debt to gross book value ratio was 57.7 percent at year-end 2008. The 2008
payout ratio was 71.0 percent of distributable income.
Table of Contents
Our Results 2 Letter to Unitholders 3 Management’s Discussion and Analysis 5
Management’s Responsibility for Financial Statements 27 Auditors’ Report 27
Consolidated Financial Statements 28 Notes to the Consolidated Financial Statements 32
Management Team 49 Corporate Information 50
NPREIT 2008 ANNUAL REPORT
1
Our Results
Total revenue ($000s)
Net operating income
Assets ($000s)
Distributable income*
Distributable income per unit*
Distributions per unit
Payout ratio
Number of residential units at December 31
Total commercial square feet at December 31
*Please refer to non-GAAP Financial Measures on page 14.
2008
127,759
84,305
872,922
52,139
$2.08
$1.48
71.0%
7,807
907,509
2007
104,418
68,666
799,110
41,050
$1.82
$1.40
77.2%
6,973
863,083
REVENUES BY AREA
Nunavut …………..…..20%
NWT …………..………...25%
AB …………….....……….32%
BC …………..…...……….10%
Nfld ………..……..……..13%
NL
NU
BC
AB
NT
REVENUE BY PROPERTY TYPE
Residential …………..83%
Commercial ……….…17%
REVENUES
($mm)
DISTRIBUTABLE AVERAGE INTEREST
INCOME PER UNIT ($)
RATE (%)
NPREIT 2008 ANNUAL REPORT
2
Letter to Unitholders
Dear Fellow Unitholders:
I am pleased to provide these comments respecting NPR’s 2008 operating year and some thoughts about what lies ahead.
2008 IN REVIEW
Notwithstanding the devastating performance of the world economy in 2008, Northern Property had a very strong year in terms of its
internal financial performance. We were able to materially exceed virtually all of our approved business plan targets. NPR achieved a
record level of 2008 Distributable Income per Unit of $2.08, some 14% higher than the previous year.
Rental market conditions were positive in 2008. Occupancy levels in our 6,100 unit multi-family rental portfolio were generally firm as our
most formidable ‘competitor’, home ownership, became far less attractive for Canadians. Markets such as Fort McMurray and Yellowknife
seemed to benefit from the trend away from home ownership.
NPR’s apartment markets in Newfoundland and Nunavut strengthened as the economies of those places seemed more attractive to
workers than the parts of the country which were coming off the boom of previous years.
Rental apartment market weakness was experienced in natural gas industry oriented places such as Grande Prairie and Inuvik.
However, apartment rentals in Dawson Creek and Fort Nelson, where there is also important natural gas industry exposure, actually
improved as new and promising low cost gas fields were discovered and exploited.
NPR’s 320 unit, furnished execusuite properties performed well especially in St. John’s and Iqaluit. Our master leased seniors’ buildings
consisting of 1,389 units in Newfoundland, southern Alberta and in Burnaby all performed in accordance with lease expectations.
75% of the Northern Property’s commercial spaces are in Canada’s ‘far north’. They had a great year in 2008 in part due to the reality
that they are largely tenanted by government.
Among the challenges that management had to deal with was the rapid rise in the cost of utilities, especially heating oil costs early in the
year. This was a serious factor for us in the Northwest Territories and Nunavut. Escalating labour and material costs also were prevalent
for much of the year. The sharp drop in fuel prices as the year went on and more recently in labour costs, while helpful to our 2008
bottom line, is expected to have a greater impact on 2009 results.
We believe that energy costs are likely to trend higher when commodity prices recover. We have a major initiative underway in
Yellowknife to convert the primary source of apartment building heat from fuel oil to ‘carbon neutral’ wood pellet heating. NPR was a
recipient of the Arctic Energy Alliance 2008 Energy Action Award recognizing the important improvements in our carbon footprint due to
an extensive ‘green’ retrofit of four of our Yellowknife commercial buildings. The retrofit resulted in annual energy cost savings of
$370,000 for our tenants and reduces greenhouse gas emissions by 502 tonnes annually.
The credit crunch and meltdown of the equity markets caused NPR to constrain its acquisition activity for much of the year. We still were
able to buy or build 724 multi-family units, 94 seniors’ units and 40,233 square feet of commercial space. The availability of low cost
CMHC insured mortgages facilitated our expansion. A lot of hard work on financings resulted in the weighted average cost of our debt
decreasing to its lowest level ever – 5.13%.
2008 became a strong growth year for Northern Property. This was a particular achievement in the face of the chaos around us.
In a year in which the Toronto Stock Exchange lost 33% of its value and the Canadian REIT index 43%, Northern Property held up much
better with an aggregate return of -21%. The REIT’s conservative management style, at times criticized by market players in the past,
seemed virtuous in a declining economy. Our low debt and low payout ratios leave us in better condition, relative to many, to deal with a
prolonged and deep recession.
NPREIT 2008 ANNUAL REPORT
3
LOOKING AHEAD
Business is affected by the performance of the general economy and in this Northern Property is little different than others. The decline in
commodity prices, rising unemployment, diminished credit and constrained consumer spending must also result in challenges for us.
The level of same door growth that Northern Property enjoyed in 2007 and 2008 as a result of decreasing vacancy and strong rental rate
increases are not expected to happen again in 2009. Early in 2009 we are seeing modest upticks in the vacancy rate in some markets.
It is difficult to raise rents in recessionary times. Bad debt levels inevitably increase as tenants lose their jobs or are forced to take lower
paid situations.
After 3 or 4 years of commodity driven expansion, there are new realities for NPR multi-family managers. We must and shall work
exceptionally hard to retain our tenants. We will continue to invest in our buildings to keep them in excellent condition and make them
more competitive than the offerings of our competitors. We will market aggressively and price appropriately.
Our furnished execusuite business, while having some of the characteristics of the hospitality industry, will decline somewhat due to
economic conditions but is likely to fare much better than hotels. Putting up two or more employees in a furnished short stay apartment is
a good strategy for recession afflicted companies. In early 2009, we are finding a bit of weakness in our two NWT properties which are
levered to natural resources but business continues to be strong in our Nunavut and Newfoundland locations.
While NPR has no direct tenant risk in its master leased seniors’ buildings, we will continue to monitor the margins of our operator-lessors
to the degree that we are able. We take some comfort from the reality that our buildings house, what are to some degree, “essential
service” operations. The leases to the operators typically include 1% annual rent increases. In 2009, organic growth of this kind seems
pretty positive.
The long term leases and government tenancies which characterize our commercial properties should perform well for us in 2009 and we
have very few commercial financings to deal with in the near term.
We do not expect much in the way of acquisition activity to take place on our part in 2009. Unlike other classes of real estate, apartment
sale prices have not declined a great deal because owners can achieve respectable yields with the continued availability of low interest
CMHC insured mortgages. Moreover, a significant expansion would require an equity offering which seems inadvisable in current stock
market conditions.
While organic growth and accretive acquisition activity seem unlikely in 2009, NPR has some important advantages.
• We have low debt and some opportunity to refinance on exceptionally good terms in this environment.
• Utility costs are likely to be lower in 2009 than in the previous year.
• We have one of the lowest payout ratios among Canadian REIT’s, 83% of AFFO. The current level of cash distributions is protected
by a significant EBITDA buffer.
• Government spending is growing at a large rate. NPR is strongly levered to government activity in its staff housing leases, rent
supplemented tenancies, subsidized seniors’ operations and commercial leases.
• Our low cost base in communities with economies with a resource component will help us to reap the benefits when the economy
finally begins to recover.
Playing defense is not as much fun. But doing it well is an essential “part of the game”.
Respectfully submitted,
B. James Britton
President and Chief Executive Officer
March 25, 2009
NPREIT 2008 ANNUAL REPORT
4
Management’s Discussion and Analysis
Management’s Discussion and Analysis of financial conditions and results of operations should be read in conjunction with the
audited consolidated financial statements for the years ended December 31, 2008 and 2007.
Certain information contained in Management’s Discussion and Analysis contains forward looking statements relating to the
business and financial outlook of Northern Property Real Estate Investment Trust (“NPR” or the “REIT”). These forward looking
statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future
results expressed, projected or implied by such forward looking statements. These forward looking statements are made as of
March 3, 2009 and NPR assumes no obligation to update or revise them to reflect new events or circumstances that may arise
after March 3, 2009, except as required by law.
Portfolio Summary
Alberta
BC
Newfoundland
NWT
Nunavut
Total
Multi-family
Execusuites
Seniors
Total
Residential
(units)
Commercial
(sq ft)
1,598
1,372
1,228
1,155
745
6,098
-
-
140
141
39
320
746
214
429
-
-
1,389
2,344
1,586
1,797
1,296
784
7,807
77,755
124,417
17,030
542,769
145,538
907,509
Financial Performance at a Glance
Earnings Comparison
In $000’s except per unit amounts
Three Months
Ended December 31
Year Ended
December 31
Total revenue
Net operating income (“NOI”)
Net earnings
Distributable Income (“DI”)*
DI per unit*
Distribution to unitholders
Distributions per unit
Payout ratio
Funds from Operations (“FFO”) *
FFO per unit*
*Please refer to non-GAAP Financial Measures on page 14.
2008
32,515
21,424
6,427
13,560
$0.542
9,260
$0.370
68.3%
13,758
$0.550
2007
28,974
18,952
7,733
11,276
$0.451
9,037
$0.362
80.2%
11,620
$0.465
2008
127,759
84,305
22,702
52,139
$2.083
37,037
$1.480
71.0%
53,079
$2.121
2007
104,418
68,666
7,690
41,050
$1.820
31,691
$1.397
77.2%
42,251
$1.873
NPREIT 2008 ANNUAL REPORT
5
1. OVERVIEW
NPR is primarily a multi-family residential real estate investment trust, providing a broad spectrum of rental accommodations and
ancillary commercial space in Canadian secondary markets with strong economic fundamentals. Geographically, NPR operates
in British Columbia, the Northwest Territories, Alberta, Nunavut and Newfoundland.
The REIT’s residential portfolio is comprised of three segments: apartments, townhomes and single family rental units;
execusuite apartment rental units, where the rental periods range from a few days to several months; and seniors’ properties
where the properties are leased on a long term basis to qualified operators who provide services to individual tenants.
NPR’s commercial properties are located primarily in areas where NPR has residential operations. A significant portion of these
properties are leased to federal and territorial governments and high quality commercial tenants under long term leases.
2008 was a strong year for NPR. Financial highlights for the three months and year ended December 31, 2008 include:
• DI per unit for the fourth quarter increased by 20.2% to $0.542 compared to $0.451 in 2007. DI per unit for the year ended
December 31, 2008 increased by 14.5% to $2.083 compared to $1.820 in 2007.
• FFO per unit for the fourth quarter increased by 18.3% to $0.550 compared to $0.465 in 2007. FFO per unit for the year
ended December 31, 2008 increased by 13.2% to $2.121 compared to $1.873 in 2007.
• Same door NOI growth was 6.1% in the fourth quarter and 6.1% year to date. Same door NOI growth was driven by the
continued improved occupancy in Newfoundland and the Northwest Territories.
• Future income tax expense of $3.3 million resulting from amendments to prior year’s tax filings, additional temporary
differences arising from acquisitions and deferred financing cost and refinements to the calculation of temporary differences
between tax and accounting values of the REIT’s assets.
The strong financial results for 2008 were driven by continued same door growth throughout the portfolio, especially in Fort
McMurray, AB, Yellowknife, NWT and St. John’s, NF and acquisitions completed in 2007 and 2008. In addition, lower interest
rates on mortgage debt and the operating facility and decreasing utility costs in the fourth quarter contributed to the strong
financial performance.
Other highlights for 2008 include:
• Completion of three development projects during the year; a 48 unit multi-family rental development in Dawson Creek, BC
completed in July, 2008, a new Shoppers Drug Mart commercial property in Yellowknife, NWT completed in September,
2008 and at a 79 unit residential rental development in Fort St. John, BC completed in November, 2008. These projects
were completed within budget costs and timelines at a total cost of $18.1 million.
• The lease up of the 48 units in Dawson Creek, BC, was completed quickly with occupancy rising to 94% in just 4 months.
The Shoppers Drug Mart property was pre-leased prior to construction, with occupancy in mid-September. The lease up of
the 79 unit development in Fort St. John, BC, completed on November 1, has also progressed quickly with occupancy of
62% at December 31, 2008.
• Mortgage financings and refinancings totaling $144.6 million were completed during 2008, proceeds of which were used to
repay existing mortgages and the completion of acquisitions and developments.
• The weighted average cost of debt continued to decline to 5.13% at December 31, 2008 from 5.39% at December 31,
2007.
NPREIT 2008 ANNUAL REPORT
6
1. OVERVIEW (continued)
Acquisitions and Developments
While acquisition activity was curtailed during 2008, NPR completed acquisitions and developments totaling $80.4 million during
the year. NPR had entered into agreements to complete the majority of these transactions prior to the instability in the capital
markets that was experienced in the latter half of 2008. These acquisitions and developments were financed through a
combination of new mortgage financings, refinancing of underleveraged properties in the portfolio and the use of the operating
facility. The acquisitions and developments are summarized below:
Residential – units
Multi-family
Seniors’
Commercial – sq ft
Units / Sq Ft
724
94
818
40,233
$000’s
64,580
9,001
73,581
6,810
Acquisitions and developments completed in 2008 included entrance into two strong new markets, Lloydminster, AB and
surrounding area and Nanaimo, BC, infill for the commercial portfolio in downtown Yellowknife and multi-family properties to
round out the portfolios in Fort St. John and Dawson Creek, BC. Acquisition highlights include:
• 463 residential rental units were acquired in Lloydminster, AB and surrounding area, including 312 units in the
fourth quarter.
• 121 residential rental units in Nanaimo, BC.
• Seniors’ properties in Newfoundland totaling 94 units.
• Commercial properties totaling 40,233 square ft, including the development of a new Shoppers Drug Mart in
Yellowknife, NWT.
• The development of two residential rental properties in Dawson Creek and Fort St. John, BC totaling 127 units.
Current Economic Environment
The extremely troubled conditions in the capital markets throughout 2008 and in early 2009 have certainly had an effect on NPR.
In 2008 Canadian REITs, on average, had a negative 38.5% total return. NPR unitholders fared better than most, posting a
negative total return of 20.9%.
As a result of the meltdown in the capital markets, the REIT decelerated its acquisition program. The increased cost of capital
caused some potential property transactions to be discarded because concluding them would have been dilutive. Moreover,
management was concerned that replacing equity invested in additional property could be overly expensive or perhaps not even
possible to raise in the difficult stock market conditions. In late 2008 and early 2009, the REIT closed only on those properties
which it had agreed to purchase earlier in the year.
Notwithstanding the REIT’s low payout ratio, a decision was made in November 2008 not to increase the level of monthly
distributions. This was to preserve balance sheet liquidity and also provide additional protection to distributions should a
prolonged recession negatively affect occupancy and rental rates.
The slowdown in the economy generally had very little impact on NPR’s financial results in 2008. In the face of diminished
business activity in the forestry, oil and gas and mining industries, the REIT maintained stable levels of occupancy overall and
delivered solid same door growth. The loss of tenants to home ownership declined in most markets. The fall in commodity prices,
while slowing up the pace of rent increases, also resulted in lower utility costs in many locations. Declining interest rates on
CMHC insured mortgages also contributed to the growth in NPR’s bottom line.
Overall rent market conditions remain sound early in 2009 for NPR. However, inevitably we expect additional residential vacancy
in those markets which are levered to the oil and gas industry and to mining. Execusuite revenues can be expected to decline in
those markets as well. Rent increases will be far more difficult to capture during a recession. Government activity is a major
contributor to the economies of the NWT, Nunavut and Newfoundland. NPR expects these regions to be less effected by low
commodity prices and the recession than other areas.
NPREIT 2008 ANNUAL REPORT
7
2. YEAR-TO-DATE RESULTS AND COMPARISONS
The following section provides a comparison of the financial results for the three months and year ended December 31, 2008
compared to the three months and year ended December 31, 2007.
Earnings from Continuing Operations
In $000’s
Rental revenue
Other property income
Operating expenses
Net operating income
Interest on mortgages
Amortization
Earnings from continuing operations
before other items and income taxes
Rental Properties Revenue
In $000’s
Residential
Multi-family
Execusuites
Seniors’
Commercial
Total
Three Months
Ended December 31
Year Ended
December 31
2008
31,644
871
32,515
(11,091)
21,424
(6,239)
(6,867)
2007
28,407
567
28,974
(10,022)
18,952
(5,671)
(6,261)
2008
124,626
3,133
127,759
(43,454)
84,305
(24,499)
(26,447)
2007
102,223
2,195
104,418
(35,752)
68,666
(20,380)
(22,012)
8,318
7,020
33,359
26,274
Three Months
Ended December 31
Year Ended
December 31
2008
2007
2008
2007
20,818
1,797
4,202
26,817
5,698
32,515
18,394
1,925
3,870
24,189
4,785
28,974
79,839
8,497
16,494
104,830
22,929
127,759
67,776
8,038
14,159
89,973
14,445
104,418
Total revenue for the three months ended December 31, 2008 was $32.5 million, 12.2% higher than the same period of 2007
($29.0 million). Total revenue for the year ended December 31, 2008 was $127.8 million, 22.4% higher than the same period of
2007 ($104.4 million). The increase in revenue is primarily due to the significant acquisitions completed during 2007 and 2008,
which contributed $29.3 million to revenue in 2008. Same door revenue growth of 4.7% in the fourth quarter and of 5.2% in the
year ended December 31, 2008 also contributed to the increase.
Rental revenue to be received from leases with rental rates varying over the term of the lease is recorded on a straight line basis
over the terms of the associated leases. Rental revenue recorded on a straight line basis is generated from the commercial and
seniors’ properties portfolios. Rental revenue for the three months ended December 31, 2008 includes straight line rental
revenue of $297,000 (2007 – $345,000). Rental revenue for the year ended December 31, 2008 includes straight line rental
revenue of $1.2 million (2007 – $1.2 million).
Residential Revenue
Residential rental revenue for the three months ended December 31, 2008 was $26.8 million, 10.9% higher than the same period
of 2007 ($24.2 million). Residential rental revenue for the year ended December 31, 2008 was $104.8 million, 16.5% higher than
the same period of 2007 ($90.0 million). The increase is primarily the result of the significant acquisitions completed during 2007
and 2008. Same door revenue growth of 6.4% in the fourth quarter and 5.3% for the year ended December 31, 2008 also
contributed to the increase.
NPREIT 2008 ANNUAL REPORT
8
2. YEAR-TO-DATE RESULTS AND COMPARISONS (continued)
Residential Rental Vacancy Loss – Year Ended December 31
Northwest Territories
Nunavut
British Columbia
Alberta
Newfoundland
Overall
Market Vacancy Loss
Renovation Vacancy Loss
2008
2.0%
0.7%
12.6%
2.8%
1.7%
3.5%
2007
6.0%
1.1%
10.8%
1.3%
2.7%
3.8%
2008
1.5%
0.2%
5.0%
0.1%
0.1%
1.2%
2007
0.4%
0.1%
5.9%
-
0.1%
0.9%
Vacancy loss is calculated as rental revenue from vacant units divided by gross potential rental revenue.
Market vacancy loss excludes recently developed properties that are in the lease up phase. Market vacancy loss relating to
residential rental properties for the year ended December 31, 2008 decreased slightly to 3.5% compared to 3.8% for the year
ended December 31, 2007. The decreased market vacancy loss is driven by the improvement in both the Northwest Territories
and Newfoundland. The decrease was partially offset by a higher level of vacancy in north eastern BC and Grande Prairie, AB.
Market vacancy in Chetwynd and Fort Nelson in north eastern BC continue to be higher than the remainder of the portfolio.
Rental markets in north eastern BC traditionally operate at higher levels of vacancy (10% to 15%) as a result of the seasonal
forestry and natural gas industries. The portfolios in both communities were acquired with high vacancy levels built into the
acquisition assumptions. The financial performance of these two portfolios is consistent with long term projections completed at
the time of acquisition. With the recent significant natural gas discovery in the Horn River Basin, management expects that the
Fort Nelson portfolio’s financial performance will improve in the long term when the economic conditions exist for the
development of this gas discovery. Vacancy levels in Dawson Creek and Fort St. John continue to operate within normal
vacancy levels.
Renovation vacancy in the Northwest Territories is largely the result of fires in Yellowknife and Inuvik that destroyed 12 rental
units. Reconstruction of the fire damaged units in Yellowknife was completed in January, 2009. The renovation loss in BC
continues to decrease as the renovation project in Fort Nelson comes to a close. In Alberta, the renovation loss is primarily due
to the improvements underway in the portfolio acquired in Lloydminster during the year.
Quarterly Residential Rental Vacancy Loss
Total vacancy loss for the fourth quarter of 2008 decreased by approximately 0.4%, primarily due to improved occupancy in north
eastern BC and St. John’s, Newfoundland.
NPREIT 2008 ANNUAL REPORT
9
2. YEAR-TO-DATE RESULTS AND COMPARISONS (continued)
Execusuites rental revenue for the three months ended December 31, 2008 was $1.8 million, 6.6% lower than the same period
of 2007 ($1.9 million). Execusuites rental revenue for the year ended December 31, 2008 was $8.5 million, 5.7% higher than the
same period of 2007 ($8.0 million). The nature of the execusuite business is that Q4 is traditionally the weakest quarter due to
lower occupancy. 2008 continued this trend, especially in Yellowknife and Inuvik, NWT where occupancy decreased more
sharply than in previous years.
Rental income from seniors’ properties represents rental payments made to NPR by the operators of the facilities under long-
term triple net leases ranging from 15 to 20 years, with regularly scheduled increases, generally 1% per annum. For these
properties, NPR is responsible for the physical facilities and has no direct business relationship with the individual tenant. As a
result, NPR does not have exposure to vacancy for these properties. Rental revenue for the three months ended December 31,
2008 was $4.2 million, 8.6% higher than the same period of 2007 ($3.9 million). Seniors’ rental revenue for the year ended
December 31, 2008 was $16.5 million, 16.5% higher than the same period of 2007 ($14.2 million). The increase in revenue is the
result of the acquisition of the Newfoundland portfolio in 2007 and 2008 and scheduled rent increases.
Commercial Revenue
Commercial rental revenue for the three months ended December 31, 2008 was $5.7 million, 19.1% higher than the same period
of 2007 ($4.8 million). Commercial rental revenue for the year ended December 31, 2008 was $22.9 million, 58.7% higher than
the same period of 2007 ($14.4 million). The increase is primarily due to the acquisition of properties totaling approximately
427,000 square feet since January 1, 2007.
Vacancy increased to 43,000 square feet or 4.7% at December 31, 2008 compared to 14,000 square feet or 1.6% at December
31, 2007. The increase is primarily the result of the planned repositioning of YK Centre East in Yellowknife from a retail to an
office focused property. In September, Shoppers Drug Mart relocated to its newly constructed property adjacent to YK Centre
East, creating a significant portion of the vacancy. In September, NPR won the tender for a long term lease with the Government
of the Northwest Territories for approximately 20,000 square feet in YK Centre East for a consolidated medical clinic
commencing January 1, 2010. This will successfully complete the repositioning of the property and stabilize its tenancies in the
market for the foreseeable future.
Operating Expenses
In $000’s
Operating expenses:
Utilities
Property taxes
Other expenses
Three Months
Ended December 31
Year Ended
December 31
2008
2007
2008
2007
3,743
1,692
5,656
11,091
3,145
1,343
5,534
10,022
13,493
6,420
23,541
43,454
10,005
5,004
20,743
35,752
Utilities, expressed as a percentage of rental revenue, increased to 11.8% for the three months ended December 31, 2008 from
11.1% for the same period of 2007. Utilities, expressed as a percentage of rental revenue, increased to 10.8% for the year
ended December 31, 2008 from 9.8% for the same period of 2007. The increase is the result of two main factors. First, utilities
represent a greater portion of operating costs compared to the existing portfolio for the significant acquisitions completed in
2007, specifically the commercial portfolio in Yellowknife. These higher utility costs are ultimately recovered from commercial
tenants. Second, during 2008, utility prices in northern Canada and BC experienced rapid increases as underlying commodity
prices increased through the first half of the year. During the fourth quarter of 2008, utility costs decreased as underlying
commodity prices declined, though not at the same pace or to the same extent. An exception was in Nunavut where the
Government was forced to purchased its new supply of fuel oil at high mid-summer price levels. In the multi-family portfolio, the
REIT can recover these costs over time through rental increases. There is a time lag between the increase in expenses and
obtaining the rental rate increases due to statutory limitations on the timing and frequency of rental increases.
NPREIT 2008 ANNUAL REPORT
10
2. YEAR-TO-DATE RESULTS AND COMPARISONS (continued)
Net Operating Income
In $000’s
Residential
Multi-family
Execusuites
Seniors’
Commercial
Total
Three Months
Ended December 31
Year Ended
December 31
2008
2007
2008
2007
12,961
826
4,197
17,984
3,440
21,424
11,444
873
3,865
16,182
2,770
18,952
49,450
4,227
16,471
70,148
14,157
84,305
41,040
4,211
14,140
59,391
9,275
68,666
NOI derived from residential properties was 83.9% of total NOI for the three months ended December 31, 2008 compared to
85.4% for the same period of 2007. NOI derived from residential properties was 83.2% of total NOI for the year ended December
31, 2008 compared to 86.5% for the same period of 2007. The decrease is primarily a result of the significant acquisition of
commercial properties located in Yellowknife, NWT in the third quarter of 2007. The acquisition of the commercial and seniors’
properties, which are subject to net leases where the lessee is responsible for the operating costs, have reduced NPR’s
exposure to increases in operating costs.
The seniors’ and commercial properties provide stability to the REIT’s portfolio, reducing overall exposure to volatile utility prices
and severe winter temperatures in Nunavut and the Northwest Territories. In these business segments, tenants pay the
operating costs directly or the majority of the operating costs are recoverable from the tenants. For the year ended December 31,
2008, approximately 36.3% of NOI was derived from commercial and senior’s properties where tenants are primarily responsible
for operating costs.
Same Door NOI
NPR defines same door NOI growth as the annual change in net operating income from properties that have been owned by the
REIT for both the current and previous reporting periods, which for the purposes of this discussion include properties that were
owned by NPR on or before January 1, 2007. Same door NOI growth for the three months ended December 31, 2008 compared
to the same period of 2007 was 6.1%. Same door NOI growth for the year ended December 31, 2008 compared to the same
period of 2007 was 6.1%. The strong same door growth for the year ended December 31, 2008 was fuelled by lower vacancy in
Newfoundland, Yellowknife and Inuvik and normal rental increases throughout the other regions.
Quarterly Same Door Net Operating Income Growth
NPREIT 2008 ANNUAL REPORT
11
2. YEAR-TO-DATE RESULTS AND COMPARISONS (continued)
Interest on Mortgages
Interest on mortgages for the three months ended December 31, 2008 increased to $6.2 million compared to $5.7 million for the
same period of 2007. Interest on mortgages for the year ended December 31, 2008 increased to $24.5 million compared to
$20.4 million for the same period of 2007. The increase is primarily the result of mortgage debt on acquisitions completed in
2007. The increased interest expense was partially offset by the continued decline in the weighted average interest rates of
mortgages, which decreased to 5.13% at December 31, 2008 from 5.39% at December 31, 2007.
Amortization
Amortization for the three months ended December 31, 2008 increased to $6.9 million compared to $6.3 million for the same
period of 2007. Amortization for the year ended December 31, 2008 increased to $26.4 million compared to $22.0 million for the
same period of 2007. The increase in amortization is the result of significant acquisition activity in 2007.
Net Earnings
In $000’s except per unit amounts
Earnings from continuing operations
before the undernoted
Trust administration
Interest on operating facility
Interest and other income
Gain (loss) on settlement of debt
Gain on sale of rental properties
Non-controlling interest
Earnings from continuing operations
before income taxes
Current taxes
Future taxes
Earnings from continuing operations
Loss from discontinued operations
Net earnings
Other comprehensive earnings
Comprehensive earnings
Net earnings per unit
Basic:
Continuing operations
Discontinued operations
Diluted:
Continuing operations
Discontinued operations
Three Months
Ended December 31
2007
2008
8,318
(1,317)
(260)
96
(29)
-
(5)
6,803
(103)
(273)
6,427
-
6,427
118
6,545
$0.26
-
$0.26
$0.26
-
$0.26
7,020
(1,473)
(407)
200
104
3,245
-
8,689
(194)
(762)
7,733
-
7,733
133
7,866
$0.31
-
$0.31
$0.31
-
$0.31
Year Ended
December 31
2007
26,274
(5,542)
(1,565)
817
1,454
3,321
-
24,759
(541)
(16,523)
7,695
(5)
7,690
55
7,745
$0.34
-
$0.34
$0.34
-
$0.34
2008
33,359
(6,796)
(1,286)
509
558
136
(63)
26,417
(409)
(3,306)
22,702
-
22,702
68
22,770
$0.91
-
$0.91
$0.91
-
$0.91
Weighted average number of units
outstanding – basic (000’s)
Weighted average number of units
outstanding – diluted (000’s)
25,034
24,993
25,028
22,557
25,081
25,002
25,061
22,575
NPREIT 2008 ANNUAL REPORT
12
2. YEAR-TO-DATE RESULTS AND COMPARISONS (continued)
Interest on Operating Facility
Interest on the operating facility for the three months ended December 31, 2008 was $260,000 compared to $407,000 for the
same period of 2007. Interest on the operating facility for the year ended December 31, 2008 was $1.3 million compared to $1.6
million for the same period of 2007. The operating facility loan balance was $26.6 million at December 31, 2008 compared to
$25.2 million at December 31, 2007. Interest on the operating facility decreased as a result of lower average balances
throughout the year and a decrease in the prime rate from 6.0% at December 31, 2007 to 3.5% at December 31, 2008.
Trust Administration
Trust administration costs for the three months ended December 31, 2008 were $1.3 million compared to $1.5 million for the
same period of 2007. The decrease in costs for the fourth quarter of 2008 compared to same period of 2007 is primarily due to
lower executive performance pay, partially offset by one-time costs associated with contemplated acquisitions that were not
completed.
Trust administration costs for the year ended December 31, 2008 were $6.8 million compared to $5.5 million for the same period
of 2007. The increase in trust administration costs are the result of the following:
• A compassionate settlement made to a former employee who suffered a serious criminal assault while temporarily assigned
to a remote community;
• One-time costs associated with the temporary increase in the operating facility in Q1.
• Costs related to contemplated acquisitions that were not completed in the second half of 2008.
• Unit-based compensation relating to unit options granted to management and trustees.
Gain on Sale of Rental Properties
During the first quarter of 2008, NPR completed the sale of two non-core assets located in Gjoa Haven, NWT and Iqaluit,
Nunavut for gross proceeds of $395,000 and a gain on sale of $136,000. The gain on sale of $3.3 million realized in 2007
resulted from the sale of a commercial property located in Inuvik, NWT, a non-core residential unit in Nunavut and 40% interest
in Vista Village Limited Partnership. The financial results from these properties have not been reclassified as discontinued
operations as they are not material to the financial results of the REIT.
Future Income Taxes
Under the current tax legislation and the proposed technical amendments relating to the proposed Specified Investment Flow
Throughs (“SIFTs”) income tax rules, NPR does not appear to qualify for the real estate investment trust (the “REIT Exemption”).
This is a result of two items, first, revenues earned from the execusuite portfolio do not appear to qualify as eligible revenue. The
legislation provides for a maximum of 5% of non-eligible revenue. For 2008 revenue earned from the execusuite portfolio
represents approximately 6.7% of total revenue. The second item relates to the structure of the holdings of limited partnership
units. Under the current legislation, it appears that the holdings of the Class B Exchangeable Limited Partnership units do not
meet the requirements of the legislation. As a result, NPR recorded future income tax expense of $3.7 million for the year ended
December 31, 2008 compared to $16.7 million for the same period of 2007. This non-cash charge arose from temporary
differences between the estimated accounting values and tax values of the REIT’s assets and liabilities at January 1, 2011 and
has no impact on NPR’s cash flows or its ability to make distributions to unitholders.
Future income tax expense for the three months ended December 31, 2008 was $273,000 compared to $762,000 for the same
period of 2007. Future income tax expense for the year ended December 31, 2008 was $3.3 million compared to $16.5 million
for the same period of 2007. The future income tax expense of $3.3 million for 2008 arises from incremental temporary
differences between the estimated accounting values and tax values of financing costs on mortgage financings and acquisitions
completed during the year and revisions to the calculations of the provision as a result of amendments to prior years’ tax filings
and refinements to the methodology used.
Management expects to be able to make changes, if required, to the structure and operations in order to qualify for the REIT
Exemption prior to 2011. Management continues to evaluate the alternatives available in making the required changes and will
update unitholders as further progress is made.
NPREIT 2008 ANNUAL REPORT
13
2. YEAR-TO-DATE RESULTS AND COMPARISONS (continued)
Other Comprehensive Earnings
As part of the acquisition of rental properties in Fort McMurray, AB in 2007, the REIT acquired financial instruments relating to
fixed-price utility contracts. The remaining obligation under these contracts is recorded at the current market price. Currently, the
fixed-price utility contract is “out-of-money” as a result of the decrease in natural gas prices since July 1, 2008. The adjustment to
the financial liability is included in other comprehensive earnings. The REIT recorded other comprehensive earnings of $118,000
(2007 – $133,000) for the three months ended December 31, 2008 and $68,000 (2007 – $55,000) for the year ended December
31, 2008.
Non-GAAP Financial Measures
NPR does not consider cash flows from operations as the most direct measure of the REIT’s performance as it includes changes
in non-cash working capital balances such as prepaid property taxes, differences in timing of collections of rents and payments
of expenses incurred. Management considers Distributable Income and Funds from Operations to be key performance indicators
of NPR’s financial performance and its capacity to make cash distributions to unitholders. Both measures are widely accepted
measures of performance for Canadian real estate investment trusts, however are not defined by Canadian generally accepted
accounting principles (“GAAP”).
Distributable Income
DI is calculated in accordance with NPR’s declaration of trust (the “Trust Declaration”) and as such, may not be comparable to
similar measures presented by other Canadian real estate investment trusts.
Cash retained by the REIT represents the difference between DI and distributions made to unitholders. Cash retained is used in
part to fund capital improvements and sustaining CAPEX, leasing costs and tenant improvements in the commercial portfolio,
capital acquisitions and a portion of the principal repayment on mortgages. Capital improvements and sustaining CAPEX are
incurred by the REIT to maintain the productive capacity of its properties, or their potential to maximize returns. NPR’s goal is to
maintain distributions at sustainable levels. NPR’s DI and DI per unit increased as a result of both internal growth and the
completion of accretive acquisitions.
In accordance with CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures, NPR is required to reconcile DI to cash
flow from operating activities. The following table outlines this reconciliation:
In $000’s except per unit amounts
Cash flows from operating activities
Adjustments:
Net change in operating working capital
Non-controlling interest
Distributable income
Cash retained
Distribution to unitholders
Distribution to unitholders per unit
DI per unit – basic
DI per unit – diluted
DI Payout ratio
Three Months
Ended December 31
2008
12,539
2007
10,398
Year Ended
December 31
2008
53,634
2007
35,369
1,026
(5)
13,560
(4,300)
9,260
$0.370
$0.542
$0.541
68.3%
878
-
11,276
(2,239)
9,037
$0.362
$0.451
$0.451
80.2%
(1,432)
(63)
52,139
(15,102)
37,037
$1.480
$2.083
$2.080
71.0%
5,681
-
41,050
(9,359)
31,691
$1.397
$1.820
$1.818
77.2%
DI for the three months ended December 31, 2008 was $13.6 million or $0.542 per unit compared to $11.3 million or $0.451 per
unit for the same period of 2007. DI for the year ended December 31, 2008 was $52.1 million or $2.083 per unit compared to
$41.1 million or $1.820 per unit for the same period of 2007. The increase in DI and DI per unit is the result of strong same door
NOI growth in the existing portfolio, accretive acquisitions completed during 2007 and 2008 and lower weighted average interest
rates on mortgages and the operating facility.
NPREIT 2008 ANNUAL REPORT
14
2. YEAR-TO-DATE RESULTS AND COMPARISONS (continued)
Distributions to unitholders for the three months ended December 31, 2008 were $9.3 million or $0.37 per unit compared to $9.0
million or $0.36 per unit for the same period of 2007. Distributions to unitholders for the year ended December 31, 2008 were
$37.0 million or $1.48 per unit compared to $31.7 million or $1.40 per unit for the same period of 2007. The REIT’s payout ratio
remains strong at 68.3% for the three months ended December 31, 2008 compared to 80.2% for the same period of 2007 and
71.0% for the year ended December 31, 2008 compared to 77.2% for the same period of 2007. The REIT continues to maintain
a sustainable distribution level in comparison to DI and taking into consideration sustaining CAPEX requirements.
Monthly distributions to unitholders on an annual basis were $1.48 per unit in 2008. Since inception, the Trustees of NPR have
increased annual distributions in the fourth quarter of each year. In 2008, the Trustees opted to forego the distribution increase
due to the uncertain economic climate.
Funds from Operations
FFO is calculated in accordance with the Real Property Association of Canada White Paper on Funds from Operations as
revised on February 1, 2007. FFO as presented may not be comparable to similar measures presented by other Canadian real
estate investment trusts.
In $000’s except per unit amounts
Earnings from continuing operations
Adjustments:
Amortization
Loss (gain) on settlement of debt
Gain on sale of rental properties
Future income tax
Unit-based compensation
Cash flows from discontinued operations
Funds from operations
Distribution to unitholders per unit
FFO per unit - basic
FFO per unit - diluted
FFO Payout ratio
Three Months
Ended December 31
2008
2007
6,427
7,733
6,867
29
-
273
162
-
6,261
(104)
(3,245)
762
213
-
13,758
11,620
$0.370
$0.550
$0.549
67.3%
$0.362
$0.465
$0.465
77.8%
Year Ended
December 31
2007
7,695
22,012
(1,454)
(3,321)
16,523
801
(5)
42,251
$1.397
$1.873
$1.872
75.0%
2008
22,702
26,447
(558)
(136)
3,306
1,318
-
53,079
$1.480
$2.121
$2.118
69.8%
FFO for the three months ended December 31, 2008 was $13.8 million or $0.550 per unit compared to $11.6 million or $0.465
per unit for the same period of 2007. FFO for the year ended December 31, 2008 was $53.1 million or $2.121 per unit compared
to $42.3 million or $1.873 per unit for the same period of 2007.
NPREIT 2008 ANNUAL REPORT
15
3. SUMMARY OF QUARTERLY RESULTS
Statement of Earnings and Comprehensive Earnings
In $000’s, except per unit amounts
2007
2008
Q1
22,345
444
22,789
(8,605)
14,184
(4,638)
(4,725)
4,821
(1,190)
(340)
154
694
76
-
Q2
23,706
524
24,230
(8,186)
16,044
(4,720)
(4,978)
6,346
(1,436)
(572)
266
510
-
-
Q3
27,765
660
28,425
(8,939)
19,486
(5,351)
(6,048)
8,087
(1,443)
(246)
197
146
-
-
Q4
28,407
567
28,974
(10,022)
18,952
(5,671)
(6,261)
7,020
(1,473)
(407)
200
104
3,245
-
4,215
(117)
91
5,114
(114)
6,741
(116)
(15,924) 72
8,689
(194)
(762)
Q1
29,852
658
30,510
(10,757)
19,753
(5,944)
(6,487)
Q2
31,211
845
32,056
(11,115)
20,941
(6,159)
(6,489)
Q3
759
Q4
31,919 31,644
871
32,678 32,515
(10,491) (11,091)
22,187 21,424
(6,239)
(6,157)
(6,867)
(6,604)
7,322
(1,869)
(450)
186
577
136
(15)
5,887
(86)
80
8,293
(1,976)
(283)
116
(13)
-
(17)
9,426
(1,634)
(293)
111
23
-
(26)
8,318
(1,317)
(260)
96
(29)
-
(5)
6,120
(92)
(318)
7,607
(128)
(2,795)
6,803
(103)
(273)
4,189
(10,924)
6,697
7,733
5,881
5,710
4,684
6,427
(5)
4,184
-
(10,924)
-
6,697
-
4,184
-
(10,924)
(78)
6,619
-
7,733
133
7,866
-
5,881
182
6,063
-
5,710
242
5,952
-
4,684
-
6,427
(474)
4,210
118
6,545
$0.206
-
$0.206
$(0.537)
-
$(0.537)
$0.274
-
$0.274
$0.309
-
$0.309
$0.235
-
$0.235
$0.228
-
$0.228
$0.187 $0.257
-
$0.187 $0.257
-
$0.206
-
$0.206
$(0.537)
-
$(0.537)
$0.273
-
$0.273
$0.309
-
$0.309
$0.235
-
$0.235
$0.228
-
$0.228
$0.187 $0.256
-
$0.187 $0.256
-
Rental revenue
Other property income
Operating expenses
Net operating income
Interest on mortgages
Amortization
Earnings from continuing
operations before the undernoted
Trust administration
Interest on operating facility
Interest and other income
Gain (loss) on settlement of debt
Gain on sale of rental properties
Non-controlling interest
Earnings from continuing
operations before income taxes
Current taxes
Future tax recovery (expense)
Earnings (loss) from
continuing operations
Loss from
discontinued operations
Net earnings (loss)
Other comprehensive
Earnings (Loss)
Comprehensive earnings (loss)
Net earnings (loss) per unit:
Basic:
Continuing operations
Discontinued operations
Diluted:
Continuing operations
Discontinued operations
NPREIT 2008 ANNUAL REPORT
16
3. SUMMARY OF QUARTERLY RESULTS (continued)
In $000’s except per unit amounts
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2007
2008
Distribution to unitholders
7,004
7,034
8,616
9,037
9,254
9,259
9,264
9,260
Distribution per unit
$0.345
$0.345
$0.345
$0.362
$0.370
$0.370
$0.370
$0.370
DI
7,958
9,437
12,379
11,276
11,501
12,950
14,128
13,560
DI per unit – basic
$0.392
$0.464
$0.506
$0.451
$0.460
$0.518
$0.565
$0.542
DI per unit – diluted
$0.391
$0.463
$0.505
$0.451
$0.459
$0.517
$0.564
$0.541
DI Payout ratio
88.0%
74.5%
69.6%
80.2%
80.5%
71.5%
65.6%
68.3%
FFO
8,236
9,668
12,727
11,620
11,783
13,172
14,366
13,758
FFO per unit – basic
$0.406
$0.475
$0.520
$0.465
$0.471
$0.526
$0.574
$0.550
FFO per unit – diluted
$0.405
$0.475
$0.519
$0.465
$0.470
$0.525
$0.573
$0.549
FFO Payout ratio
85.5%
72.6%
66.3%
77.8%
78.6%
70.3%
64.6%
67.3%
Closing trading price
$25.65
$23.06
$23.40
$22.35
$20.79
$22.52
$22.71
$16.21
4. RISK FACTORS
NPR operates under a strict set of guidelines as set out in its Trust Declaration, which covers areas such as the maximum debt
leverage allowed, investment restrictions, management authorities and environmental risks.
Interest Rate Risk
The REIT is exposed to interest rate risk on mortgages and loans payable and does not hold any financial instruments to mitigate
that risk. The REIT utilizes both fixed and floating rate debt. Interest rate risk related to floating interest rates is limited primarily to
the utilization of the credit facility. Management mitigates interest rate risk by utilizing fixed rate mortgages, ensuring access to a
number of sources of funding and staggering mortgage maturities with the objective of achieving relatively even annual debt
maturities. To the extent possible, the REIT maximizes the amount of mortgages on residential rental properties where it is
possible to lower interest rates through Canada Mortgage and Housing Corporation mortgage insurance.
A sensitivity analysis on floating rate debt has been completed based on the exposure to interest rates at the balance sheet date.
Floating rate debt includes all mortgages and loans payable which are not subject to fixed interest rates and the revolving line of
credit. If interest rates changed by 0.50% and all other variables remained constant, the REIT’s net earnings for the year ended
December 31, 2008 would have changed by $172,000.
Property Tax Risk
Over the past few years, property tax expense has increased as a result of re-evaluations of properties by municipalities and the
tax rates applied to the valuations. NPR, in conjunction with outside consultants, regularly reviews these re-evaluations and
appeals where warranted.
NPREIT 2008 ANNUAL REPORT
17
4. RISK FACTORS (continued)
Income Tax Risk
The federal Minister of Finance announced on October 31, 2006, a “Distribution Tax” on publicly traded investment trusts and
publicly listed partnerships. The announcement created a new tax regime for SIFTs, which include certain publicly listed income
trusts and publicly listed partnerships. These entities will be taxed in effect as corporations (at a rate comparable to the general
combined federal/provincial corporate income tax rate). Certain real estate investment trusts are excluded from the SIFT
definition and therefore are not subject to the new regime.
On June 22, 2007, the Budget Implementation Act, 2007, Bill C-52 received Royal Assent. Bill C-52 will not apply to an entity that
qualifies for the REIT Exemption. Where an entity does not qualify for the REIT Exemption certain distributions will not be
deductible in computing income for tax purposes and will be subject to tax on such distributions at a rate comparable to the
general corporate income tax rate. Bill C-52 provides for a transition period for publicly traded entities that existed prior to
November 1, 2006 and is not expected to apply to NPR until 2011.
On July 15, 2008, the Government of Canada released draft legislation to enact the proposed changes to the SIFT income tax
rules previously announced on December 21, 2007, which provided clarification to the rules relating to the REIT Exemption,
among other clarifications. There are no substantial changes in the draft legislation from the previously announced
amendments.
Under the current legislation and proposed technical amendments, NPR does not appear to qualify for the REIT Exemption.
Management believes that it will be able to make changes to the REIT’s structure and operations in order to qualify for the REIT
Exemption prior to 2011.
Utility Cost Risk
NPR is exposed to utility cost risk, which results from the fluctuation in utility prices for fuel oil, natural gas and electricity, the
primary utilities used to heat the REIT’s properties. The exposure to utility cost risk is restricted primarily to the REIT’s residential
rental and execusuites portfolio. The leases in the remainder of the NPR’s portfolio generally provide for recovery of operating
costs, including utilities. Because of the northern location of a portion of NPR’s portfolio, the exposure to utility price fluctuations
is more pronounced in the first and last fiscal quarter of the year.
NPR manages its exposure to utility risk through a number of preventative measures, including retrofitting properties with energy
efficient appliances, fixtures and windows. With the exception of a fixed price utility contract in place on certain residential rental
units in Alberta, NPR does not utilize hedges or forward contracts in the management of exposure to utility risk. Over the last two
years, NPR has been converting the heating of certain properties in Yellowknife from fuel oil based boilers to wood pellet boilers.
The investment in these environmentally friendly boilers continues to reduce NPR’s exposure to volatile heating oil prices.
Management continues to review the feasibility of converting more buildings in Yellowknife to wood pellet boilers.
Heating oil is the primary source of fuel for heating properties located in Nunavut and the Northwest Territories. Exposure to
increases in the cost of heating oil is partially offset by the ability to recover these increases from a significant proportion of its
commercial and some residential tenants.
Natural gas is the significant source of fuel for heating properties located in Alberta, BC and Inuvik. In Alberta, the provincial
government has a natural gas rebate program for energy costs incurred from October through March. In addition, NPR has fixed
price contracts for certain of its properties which account for approximately 38% of the REIT’s usage in Alberta. Natural gas
prices in Inuvik and BC are not subject to regulated price control and the REIT does not use financial instruments to manage the
exposure to the price risk.
Electricity is the primary source of fuel for heating properties located in Newfoundland as well as parts of north eastern BC. In
Newfoundland, electricity is purchased from the provincially regulated utility and is directly paid by the tenants for a significant
portion of the REIT’s multi-family rental units. As there is not a significant direct risk to NPR regarding the price of electricity, a
sensitivity analysis has not been prepared.
Management prepared a sensitivity analysis on the impact of price changes in the cost of heating oil and natural gas for the year
ended December 31, 2008. A 10% change over the average price of heating oil and natural gas for 2008 would impact NPR’s
net earnings by $283,000.
NPREIT 2008 ANNUAL REPORT
18
4. RISK FACTORS (continued)
Liquidity Risk
Ultimate responsibility for liquidity risk management lies with management and the Board of Trustees. NPR manages liquidity risk
by managing mortgage and loan maturities to ensure a relatively even amount of mortgage maturities in each year. At December
31, 2008 NPR has a revolving credit facility in the amount of $50.0 million (December 31, 2007 - $40.0 million). At December 31,
2008 NPR has utilized $26.6 million on its operating facility compared to $25.2 million at December 31, 2007. Cash flow
projections are completed on a regular basis to ensure there will be adequate liquidity to maintain operating and investment
activities in addition to making monthly distributions to unitholders. The Board of Trustees reviews the current financial results
and the annual business plan in determining appropriate distribution levels.
The current economic environment has resulted in a decrease in the availability of mortgage financing and higher rates for non-
residential properties. For residential properties, there continues to be an adequate supply of mortgage funds available to NPR.
The decrease in interest rates throughout 2008 and into early 2009 has presented an opportunity for NPR to continue its
mortgage financing program at lower interest rates than are currently in place. In the current uncertain economic environment,
it’s not possible to predict whether this low interest rate environment will continue.
Credit Risk
Credit risk arises from the possibility that tenants may not be able to fulfill their lease commitments. NPR’s credit risk is primarily
attributable to tenant receivables. Tenant receivables are comprised of a large number of tenants spread across the geographic
areas in which the REIT operates. There are no significant exposures to single tenants with the exception of AgeCare
Investments Ltd. (“AgeCare”), which leases seniors’ properties in Alberta and BC from the REIT, and the Governments of
Canada, the Northwest Territories and Nunavut, which lease a large number of rental units in the Northwest Territories and
Nunavut. NPR mitigates credit risk through conducting thorough credit checks on prospective tenants, requiring rental payments
on the first of the month, obtaining security deposits approximating one month’s rent from tenants where legislation permits, and
geographic diversification in its portfolio. NPR records a specific bad debt provision on balances owed from past tenants and
provides an allowance for receivables, net of security deposits, from current tenants where the expected amount to be collected
is less than the actual accounts receivable.
5. LIQUIDITY AND CAPITAL RESOURCES
Long-Term Debt
During 2008, NPR completed $144.6 million in mortgage financings, renewals and assumptions at a weighted average rate of
4.65% with a weighted average term to maturity of 5.8 years. This contributed to the reduction in the weighted average interest
rate of NPR’s mortgage debt at December 31, 2008 to 5.13% compared to 5.39% at December 31, 2007. The weighted average
term to maturity decreased to 6.7 years compared to 7.2 years at December 31, 2007.
At December 31, 2008, the REIT has credit facilities totaling $50.0 million, bearing interest at prime, for acquisition and operating
purposes. The operating facility is secured by certain rental properties. At December 31, 2008, NPR has utilized $26.6 million
(December 31, 2007 – $25.2 million).
During 2008, the REIT completed an assessment of its credit facilities with the intent to optimize the structure of these facilities.
Following this assessment, the acquisition facility was cancelled in July, 2008 and the operating facility was expanded from $40.0
million to $50.0 million.
NPREIT 2008 ANNUAL REPORT
19
5. LIQUIDITY AND CAPITAL RESOURCES (continued)
The following table outlines NPR’s mortgage and loans payable maturity schedule for the next ten years:
In $000’s
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Thereafter
Principal
Repayments
During the Year
Principal on
Maturity
Total % of Total
Weighted
Average
Interest Rate
14,552
12,770
12,734
10,996
10,064
8,215
7,987
6,028
5,495
4,488
13,668
106,997
48,437
15,635
19,478
33,228
80,291
33,833
8,699
45,295
10,771
32,733
66,880
395,280
62,989
28,405
32,212
44,224
90,355
42,048
16,686
51,323
16,266
37,221
80,548
502,277
12.5%
5.7%
6.4%
8.8%
18.0%
8.4%
3.3%
10.2%
3.2%
7.4%
16.1%
100.0%
5.47%
6.47%
6.51%
4.89%
4.52%
4.50%
4.77%
5.21%
4.99%
4.79%
5.41%
5.13%
Debt to Gross Book Value
NPR’s Debt to Gross Book Value, as defined in the Trust Declaration, increased to 57.7% at December 31, 2008 compared to
53.8% at December 31, 2007. NPR’s Trust Declaration permits total leverage up to 70%. The calculation of Debt to Gross Book
Value is shown below:
In $000’s
Bank indebtedness, net of cash
Operating facility
Mortgages and loans payable
Debt
Rental properties and other capital assets
Capital assets improvements in progress
Capital assets under development
Refundable deposits and mortgage proceeds held in trust
Accumulated amortization
Future income taxes arising on acquisitions
Gross book value
December 31, 2008
(731)
26,600
502,277
528,146
December 31, 2007
104
25,200
416,334
441,638
833,967
3,773
8,996
185
90,758
(21,625)
916,054
765,447
1,957
1,257
7,998
65,761
(21,458)
820,962
Debt to gross book value
57.7%
53.8%
NPREIT 2008 ANNUAL REPORT
20
5. LIQUIDITY AND CAPITAL RESOURCES (continued)
Debt Service Coverage Ratio and Interest Service Coverage Ratio
NPR is subject to financial covenants in its mortgage and loans payable and operating facility. The significant financial covenants
are defined as follows:
•
Debt Service Coverage Ratio – calculated as Net earnings before interest, taxes and amortization divided by the debt
service payments (interest expense and principal repayments);
Interest Service Coverage Ratio – calculated as Net earnings before interest, taxes and amortization divided by the interest
expense;
•
In $000’s
Earnings from continuing operations before taxes
Amortization
Interest on mortgages
Interest on operating facility
Net earnings before interest, taxes and amortization
December 31, 2008
26,417
26,447
24,499
1,286
78,649
December 31, 2007
24,759
22,012
20,380
1,565
68,716
Interest on mortgages
Interest on operating facility
Principal repayments
Debt service
Interest service coverage ratio
Debt service coverage ratio
24,499
1,286
14,983
40,768
3.05
1.93
20,380
1,565
15,086
37,031
3.13
1.86
The Interest Service Coverage Ratio for the year ended December 31, 2008 remained healthy at 3.05 compared to 3.13 for the
year ended December 31, 2007. The Debt Service Coverage Ratio for the year ended December 31, 2008 improved slightly to
1.93 compared to 1.86 for the year ended December 31, 2007. The change in both ratios is the result of higher debt levels at
lower interest rates, which were used to fund $80.4 million of acquisitions in 2008.
Unitholders’ Equity
Total unitholders’ equity decreased from $318.1 million at December 31, 2007 to $305.1 million at December 31, 2008.
In 000’s
Unitholders’ equity – January 1, 2008
Units issued under prior year LTIP grants
Issue costs
Unit based compensation
Long term incentive units granted
Comprehensive earnings
Distributions to unitholders
Unitholders’ equity – December 31, 2008
Units
25,004
30
-
-
-
-
-
25,034
$
318,067
-
(8)
631
687
22,770
(37,037)
305,110
NPREIT 2008 ANNUAL REPORT
21
5. LIQUIDITY AND CAPITAL RESOURCES (continued)
As of December 31, 2008, the authorized capital of the REIT consists of an unlimited number of trust units and special voting
units (collectively, the “Units”) of which 22,755,010 Units are issued and outstanding and 2,278,635 Units are reserved for
issuance upon the exchange of the Class “B” limited partnership units (“Class B Units”) of Northern Property Limited Partnership,
a subsidiary partnership of the REIT. The Class B Units can be exchanged for trust units at any time at the option of the holder
of the Class B Units. Each Class B Unit has a “Special Voting Unit” attached to it, which entitles the holder one vote, either in
person or by proxy at the meeting of unitholders of the trust as if he or she were a unitholder.
On May 20, 2008, 735,000 options were granted to trustees and officers with an exercise price of $23.12 with an expiration date
of May 20, 2013. The options vest over a three year period with the first third vesting immediately and the remaining options
vesting equally on May 20, 2009 and May 20, 2010. Non-cash unit-based compensation expense relating to these options
included in trust administration was $631,000 for the year ended December 31, 2008.
Financial Obligations
NPR continued the development of 189 multi-family residential rental units located in Grande Prairie, AB on land previously
acquired by the REIT. The estimated total cost of construction is approximately $22.9 million. Costs incurred to date are $11.8
million, including land. This project will be funded through a combination of the operating facility and construction financing,
which was arranged in February, 2009. Throughout the year end of December 31, 2008, these expenditures have been funded
through the operating facility.
Working Capital Requirements
NPR requires sufficient working capital resources to fund day to day operating expenditures, sustaining CAPEX, distributions to
unitholders and interest costs. NPR expects that funds generated from operations will be sufficient to cover these expenditures.
Principal repayments on existing mortgages are funded in part through the funds generated from operations and through
refinancing of mortgages maturing during the year.
Capital Improvements and Sustaining CAPEX
In $000’s
Sustaining CAPEX
Capital improvements
Three Months
Ended December 31
2007
1,268
1,875
3,143
2008
1,527
1,676
3,203
Year Ended
December 31
2007
4,599
4,800
9,399
2008
5,902
6,881
12,783
Capital improvements are expenditures made in the 18 months following the acquisition of a property to complete any deferred
maintenance, capital repairs or additions and to improve the building to meet investment requirements. Capital improvements are
generally funded from borrowings associated with the improvement projects.
Sustaining CAPEX represents ongoing expenditures required to maintain the productive capacity of the REIT’s portfolio. These
include capital expenditures to maintain common areas, HVAC systems, including the additional investment in wood pellet
boilers, building envelopes and to refurbish units on tenant turnover. Sustaining CAPEX also includes expenditures to reduce
energy consumption. Sustaining CAPEX is generally funded through cash flow from operations. Sustaining CAPEX for the year
ended December 31, 2008 was incurred primarily in the residential rental portfolio and on a per door basis represents
approximately $960 per unit.
NPREIT 2008 ANNUAL REPORT
22
6. TRANSACTIONS WITH RELATED PARTIES
A company owned by a Trustee of NPR leases commercial space from NPR under normal commercial terms. NPR earned rental
revenue from that arrangement of $454,350 for the year ended December 31, 2008 (2007 – $451,350). Amounts outstanding in
accounts receivable pertaining to this lease were $nil at December 31, 2008 (December 31, 2007 – $nil).
A Trustee of NPR is a senior partner of a law firm that provides legal services to NPR in the ordinary course of business. Fees
paid for the year ended December 31, 2008 were $41,000 (2007 – $214,000).
A Trustee of NPR is the Chairman of AgeCare, which leases six seniors’ properties from NPR. For the year ended December 31,
2008, NPR earned rental income, including rental revenue earned on a straight-line basis over the term of the lease, totaling
$12.6 million (2007 – $12.6 million) from AgeCare. Amounts outstanding in accounts receivable pertaining to this lease were $nil
at December 31, 2008 (December 31, 2007 – $nil). In addition, AgeCare is paid an annual fee for advisory services provided to
NPR respecting prospective acquisitions of seniors’ properties. For the year ended December 31, 2008, NPR paid $120,000 for
these services (2007 – $120,000).
In the second quarter of 2008, the REIT commenced renovations to a seniors’ facility in BC which is leased to AgeCare. The
renovations are being completed under the terms of existing lease agreements and will be recovered from AgeCare over a
period not to exceed the remaining term of the lease agreement. The approved budget for the renovation project is $2.2 million,
with $1.5 million incurred through December 31, 2008.
7. PROPOSED AND FUTURE TRANSACTIONS
In connection with the acquisition of certain seniors’ properties in Newfoundland, the tenants have agreed to expand or renovate
certain properties purchased by NPR. NPR has entered into agreements to purchase these capital improvements and
expansions once completed. In total, NPR has commitments totalling $6.2 million, which are expected to be completed in 2009.
Between January 1, 2009 and March 2, 2009, NPR completed the acquisition of 40 residential rental units and 52 units in
seniors’ properties, all located in Newfoundland. The combined purchase prices for these acquisitions was $7.3 million and were
financed through a combination of the operating facility, assumption of a mortgage and the issuance of Class B Limited
Partnership units.
Between January 1, 2009 and March 2, 2009, NPR completed mortgage financings and renewals totalling $8.9 million with
interest rates from 3.06% to 3.96% and terms to maturity from 2 years to 9 years. Proceeds from the mortgage financings were
used to repay existing mortgage debt and a portion of the operating facility.
8. CRITICAL ACCOUNTING ESTIMATES
Significant accounting policies for NPR are described in Note 2 to the Annual Consolidated Financial Statements for the year
ended December 31, 2008. Management believes the policies which are most subject to estimation and management’s judgment
are those outlined below.
Amortization
Amortization is recorded on buildings on a straight-line basis. A significant portion of the acquisition cost of each property is
allocated to building. The allocation of the acquisition cost to building and the determination of the useful life are based upon
estimates by management. In the event the allocation to building is inappropriate or the estimated useful life of buildings proves
incorrect, the computation of amortization will not be appropriately reflected over future periods.
Property Acquisitions
In accordance with the Canadian Institute of Chartered Accountants (“CICA”) 1581 Business Combinations and CICA 3062
Impairment of Long-term Assets, Management is required to perform procedures to determine the fair value of the acquisition
and the intangible value of above and below-market leases, as well as the identifiable direct benefits of tenant relationships on a
discounted basis. The procedures associated with CICA 1581 and CICA 3062 are subject to estimation and management’s
judgment. Management allocates acquisition costs to land, building and intangible assets and liabilities based upon the best
information available at the time of preparation of the financial statements. Any adjustments to these allocations will be reflected
prospectively in subsequent financial statements.
NPREIT 2008 ANNUAL REPORT
23
8. CRITICAL ACCOUNTING ESTIMATES (continued)
Future Income Taxes
The calculation of the future income tax assets and liabilities is based on estimated temporary differences between the book
value and tax value of NPR’s assets and liabilities on January 1, 2011. NPR has recorded a future tax liability of $39.5 million
(December 31, 2007 – $36.2 million) using expected income tax rates between 19.63% and 29.5%.
Impairment of Assets
Under Canadian GAAP, Management is required to write down to fair value, any investments in income properties that are
determined to have been permanently impaired. The fair value of investments in income properties is dependent upon
anticipated future cash flows from operations over the anticipated holding period. No provision was recorded in 2007 or 2008.
Discontinued Operations
The financial results of non-core rental properties sold in 2008 and 2007 have not been reclassified as discontinued operations
as the results are not material to the financial results of NPR.
Unit-based Compensation
The calculation of unit-based compensation is based on the fair value method, under which compensation expense is measured
at the date the options are granted and recognized over the vesting period. The following assumptions were used in calculating
the fair value of the options granted; expected annual dividend rate of 6.40%, expected volatility of 18%, risk-free rate of return of
3.10% and expected life of 5 years. Unit-based compensation expense for the three month period ended December 31, 2008
was $98,000 (2007 - $nil) and $631,000 (2007 - $nil) for the year ended December 31, 2008.
9. CHANGE IN ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS
Change in Accounting Policy
Effective January 1, 2008, NPR adopted CICA Handbook Section 1535, Capital Disclosures. This section requires the disclosure
of (i) an entity’s objectives, policies and process for managing capital; (ii) quantitative data about an entity’s managed capital; (iii)
whether an entity has complied with capital requirements; and (iv) if an entity has not complied with such capital requirements,
the consequences of such non-compliance.
Effective January 1, 2008, NPR adopted CICA Handbook Section 3862, Financial Instruments – Disclosures and Section 3863
Financial Instruments - Presentation. These sections require incremental disclosures regarding the significance of financial
instruments for the REIT’s financial position and performance; and the nature, extent and management of risks arising from
financial instruments to which the REIT is exposed.
Effective January 1, 2008, NPR adopted CICA Handbook Section 3031, Inventory. This section establishes standards for the
measurement of inventories, allocation of overhead, accounting for write-downs and disclosures. The new standard has no
material impact on the REIT’s financial statements.
The new standards will have no impact on the REIT’s consolidated financial statements beyond the additional disclosure in the
notes to the financial statements.
Recent Accounting Pronouncements
New accounting standards are anticipated regarding the accounting for business combinations. The proposed CICA Exposure
draft regarding business combinations may result in a decrease in NPR’s earnings during periods in which acquisitions are
completed as the proposed accounting standards would require the expensing of acquisition costs (such as legal costs) in
connection with a business combination in the period in which they are incurred. Currently, these costs are allocated to the cost
of the assets acquired under the business combination and amortized over the expected useful life of the assets.
NPREIT 2008 ANNUAL REPORT
24
9. CHANGE IN ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS (continued)
Section 3064, Goodwill and Intangible Assets, will replace the current Section 3062, Goodwill and Other Intangible Assets and
Section 3450, Research and Development Costs. Various changes have been made to other sections of the CICA Handbook for
consistency purposes. The new Section will be applicable to financial statements relating to fiscal years beginning on or after
October 1, 2008. Accordingly, the REIT will adopt the new standards for its fiscal year beginning January 1, 2009. It establishes
standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of
intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the
previous Section 3062. NPR is currently evaluating the impact of the adoption of this new Section on its consolidated financial
statements. Management does not expect that the adoption of this new Section will have a material impact on its consolidated
financial statements.
Section 1582 – Business Combinations will replace the current Section 1581 – Business Combinations and Section 1601 –
Consolidated Financial Statements and Section 1602 – Non-controlling Interests will replace the current section 1600 –
Consolidated Financial Statements. These new Sections will be applicable to financial statements relating to fiscal years
beginning on or after January 1, 2011. The new standards will require net assets, non-controlling interest and goodwill acquired
in a business combination to be recorded at fair value and non-controlling interests will be reported as a component of equity. In
addition, the definition of a business is expanded such that transactions currently accounted for as an asset acquisition may
come within the scope of these Sections. Acquisition costs will no longer be accounted for as part of the consideration and will be
expensed when incurred. Management expects that more acquisition transactions will be considered business combinations and
acquisition costs will be expensed the statement of net earnings when this section is adopted.
International Financial Reporting Standards
On February 13, 2008 the Accounting Standards Board ("AcSB") confirmed that the transition date to International Financial
Reporting Standards ("IFRS") from Canadian GAAP would be January 1, 2011. In April 2008, the AcSB issued an exposure draft
proposing to incorporate IFRS into the CICA Handbook as a replacement for current Canadian GAAP for most publicly
accountable enterprises including the REIT. NPR will adopt IFRS as the basis for preparing its consolidated financial statements
and will provide comparative financial information for the previous fiscal year using IFRS beginning with the quarter ending
March 31, 2011. The impact of the adoption of IFRS on the consolidated financial statements of NPR will likely be significant
and, as such, NPR has established and budgeted for an IFRS conversion project which began in the latter half of 2008. The
project will consist of training and education of the project team; a scoping analysis of NPR’s financial statements and the
applicable IFRS; implementation and training of accounting and operations staff; the conversion of integrated systems and
process changes if required; and a post implementation review.
NPR is currently training its implementation team and evaluating the impact of IFRS on the consolidated financial statements,
including the assessment of IFRS 1, First-time Adoption of International Financial Reporting Standards, which provides guidance
for the initial adoption of IFRS. The main differences between Canadian GAAP and IFRS identified to date include accounting
for investment properties, accounting for joint ventures, impairment testing for assets, accounting for Trust and LP units and
financial statement presentation. As part of the implementation, NPR will assess the impact of the IFRS conversion on
information systems, Disclosure Controls and Procedures and Internal Controls over Financial Reporting. The International
Accounting Standards Board (“IASB”) has activities currently underway that may or will, change IFRS and such changes may or
will, impact the REIT. NPR will assess any such changes as they occur. NPR is also developing a communication plan to
ensure all stakeholders will be informed of the progress made throughout the project.
NPR’s financial performance and financial position presented under current GAAP may be significantly different when presented
in accordance with IFRS. Management has identified a number of areas that will require a significant amount of time and effort to
address in order to meet the required timelines. These areas include potential amendments to the Trust Declaration, certain debt
covenants in credit facilities and compensation arrangements.
NPREIT 2008 ANNUAL REPORT
25
10. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL
CONTROLS OVER FINANCIAL REPORTING
Disclosure Controls and Procedures are designed and implemented by, or under the supervision of the issuer’s Chief Executive
Officer (“CEO”) and Chief Financial Officer (“CFO”) to ensure that material information relating to the issuer is communicated to
them by others in the organization as it becomes known and is appropriately disclosed as required under the continuous
disclosure requirements of securities legislation. In essence, these types of controls are related to the quality and timeliness of
financial and non-financial information in securities filings. During the year ended December 31, 2008, the effectiveness of the
design and operation of our disclosure controls and procedures was evaluated. The evaluation was performed using the COSO
control framework (Sponsoring Organizations of the Treadway Commission control framework) adopted by NPR. Based on this
evaluation, the CEO and CFO have concluded that NPR’s disclosure controls and procedures, as defined in Multilateral
Instruments 52-109, Certification of Disclosure in Issuer’s Annual and Interim Filings, are effective and ensure that information
required to be disclosed in reports that we file or submit under Canadian securities legislation is recorded, processed,
summarized and reported within the time periods specified in those rules and forms.
Management is responsible for establishing and maintaining adequate internal controls over financial reporting to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with Canadian GAAP. A control system, no matter how well designed, can provide only reasonable and
not absolute assurance that the objectives of the control system are met. As a result of inherent limitation in all control systems,
no evaluation of controls can provide absolute assurance that all control issues, including instances of fraud, if any, have been
detected.
The CEO and CFO have completed an evaluation of the design and effectiveness of such internal controls over financial
reporting as at December 31, 2008. Based on this evaluation, the CEO and CFO have concluded that internal controls over
financial reporting were effective as at December 31, 2008. Management believes that the consolidated financial statements
included in this report present fairly in all material respects the financial position, results of operations and cash flows for the
periods presented.
11. ADDITIONAL INFORMATION
Additional information relating to NPR, including the REIT’s annual information return, is available on SEDAR at www.sedar.com.
NPREIT 2008 ANNUAL REPORT
26
Management’s Responsibility for Financial
Statements
To the Unitholders of
Northern Property Real Estate Investment Trust (the “Trust”):
The accompanying consolidated financial statements and information included in this Annual Report have been prepared in
accordance with the recommendations of the Canadian Institute of Chartered Accountants. The Management of the Trust is
responsible for their integrity and objectivity. To fulfill this responsibility, the Trust maintains appropriate systems of internal
control, policies and procedures to ensure that it’s reporting practices and accounting and administrative procedures are of
high quality. The financial information presented elsewhere in this Annual Report is consistent with that in the consolidated
financial statements.
Deloitte & Touche LLP, the auditors appointed by the unitholders, have examined the consolidated financial statements in
accordance with Canadian generally accepted auditing standards to enable them to express to the unitholders their opinion
on the consolidated financial statements. Their report as auditors is set forth herein. The consolidated financial statements
have been further reviewed and approved by the Board of Trustees and its Audit Committee. The Audit Committee, which is
comprised of three trustees who are not officers of the Trust, reports to the Board of Trustees. The auditors have direct and
full access to the Audit Committee.
B. James Britton
President and Chief Executive Officer
Todd R. Cook
Chief Financial Officer
Auditors’ Report
To the Unitholders of
Northern Property Real Estate Investment Trust:
We have audited the consolidated balance sheets of Northern Property Real Estate Investment Trust (the “Trust”) as at
December 31, 2008 and 2007 and the consolidated statements of earnings and comprehensive earnings, unitholders’ equity,
and cash flows for the years ended December 31, 2008 and 2007. These financial statements are the responsibility of the
Trust’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that
we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Trust
as at December 31, 2008 and 2007 and the results of its operations and its cash flows for the years ended December 31,
2008 and 2007 in accordance with Canadian generally accepted accounting principles.
Calgary, Alberta
February 20, 2009
Chartered Accountants
NPREIT 2008 ANNUAL REPORT
27
CONSOLIDATED BALANCE SHEETS
At December 31
(Thousands of dollars)
ASSETS
Cash
Rental properties and other capital assets (Note 4)
Capital improvements in progress
Capital assets under development
Prepaid expenses and other assets (Note 5)
Accounts receivable (Note 17)
Tenant security deposits
Deferred rent receivable
Loans receivable
Intangible assets (Note 6)
LIABILITIES
Mortgages and loans payable (Note 7)
Bank indebtedness
Operating facility (Note 8)
Accounts payable and accrued liabilities
Distributions payable
Future income tax liability (Note 11)
Intangible liabilities (Note 6)
Non-controlling interest
UNITHOLDERS’ EQUITY
2008
2007
731
833,967
3,773
8,996
5,664
5,085
3,575
3,248
1,742
6,141
-
765,447
1,957
1,257
12,893
5,059
2,917
2,039
479
7,062
872,922
799,110
482,800
-
26,600
15,111
3,092
39,489
279
441
567,812
305,110
872,922
401,909
104
25,200
13,993
3,083
36,183
571
-
481,043
318,067
799,110
See accompanying notes to the consolidated financial statements.
Guarantees, commitments and contingencies (Note 14)
Subsequent events (Note 19)
APPROVED BY THE BOARD
Dennis J. Hoffman
Trustee
Todd R. Cook
Chief Financial Officer
NPREIT 2008 ANNUAL REPORT
28
CONSOLIDATED STATEMENTS OF EARNINGS AND
COMPREHENSIVE EARNINGS
Year Ended December 31
(Thousands of dollars, except per unit amounts)
REVENUE
Rental revenue
Other property income
Operating expenses
EXPENSES
Interest on mortgages
Amortization
EARNINGS FROM CONTINUING OPERATIONS
BEFORE THE UNDERNOTED
Trust administration
Interest on operating facility
Interest and other income
Gain on settlement of debt
Gain on sale of rental properties
Non-controlling interest
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
Current taxes (Note 11)
Future taxes (Note 11)
EARNINGS FROM CONTINUING OPERATIONS
LOSS FROM DISCONTINUED OPERATIONS
NET EARNINGS
Other comprehensive earnings
COMPREHENSIVE EARNINGS
Net Earnings per unit (Note 13)
Basic and Diluted:
Continuing operations
Discontinued operations
See accompanying notes to the consolidated financial statements.
2008
2007
124,626
3,133
127,759
(43,454)
84,305
(24,499)
(26,447)
(50,946)
33,359
(6,796)
(1,286)
509
558
136
(63)
102,223
2,195
104,418
(35,752)
68,666
(20,380)
(22,012)
(42,392)
26,274
(5,542)
(1,565)
817
1,454
3,321
-
26,417
24,759
(409)
(3,306)
(541)
(16,523)
22,702
-
22,702
68
7,695
(5)
7,690
55
22,770
7,745
$0.91
-
$0.91
$0.34
-
$0.34
NPREIT 2008 ANNUAL REPORT
29
CONSOLIDATED STATEMENTS OF UNITHOLDERS’ EQUITY
Year Ended December 31
(Thousands of dollars, except per unit amounts)
2008
2007
TRUST UNITS (Note 12)
Balance, beginning of year
Issuance of units
Issue Costs
Long term incentive plan units issued
Balance, end of year
CONTRIBUTED SURPLUS
Balance, beginning of year
Unit-based compensation
Long term incentive plan units granted
Long term incentive plan units issued
Balance, end of year
CUMULATIVE DEFICIT
CUMULATIVE NET EARNINGS
Balance, beginning of year
Net earnings
Balance, end of year
CUMULATIVE DISTRIBUTIONS TO UNITHOLDERS
Balance, beginning of year
Distributions declared to unitholders
Balance, end of year
366,789
-
(8)
665
367,446
1,023
631
687
(665)
1,676
63,354
22,702
86,056
(113,154)
(37,037)
(150,191)
261,730
108,750
(4,718)
1,027
366,789
1,249
-
801
(1,027)
1,023
55,664
7,690
63,354
(81,463)
(31,691)
(113,154)
CUMULATIVE DEFICIT, end of year
(64,135)
(49,800)
ACCUMULATED OTHER COMPREHENSIVE EARNINGS
Balance, beginning of year
Net earnings
Balance, end of year
55
68
123
-
55
55
TOTAL UNITHOLDERS’ EQUITY
305,110
318,067
See accompanying notes to the consolidated financial statements.
NPREIT 2008 ANNUAL REPORT
30
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
(Thousands of dollars)
CASH FLOWS RELATED TO THE FOLLOWING ACTIVITIES:
2008
2007
OPERATING
Net earnings from continuing operations
Adjustments for:
Deferred rental revenue
Amortization
Amortization of fair value of debt
Amortization of above and below market leases
Gain on settlement of debt
Gain on sale of rental properties
Non-controlling interest
Unit-based compensation
Future income taxes
Cash flows used in discontinued operations
Changes in non-cash working capital
FINANCING
Proceeds from public offering (net of issue costs)
Proceeds from mortgages and loans
Proceeds from operating facility
Proceeds from acquisition facility
Payments from non-controlling interest
Repayment of mortgages and loans payable
Repayment of acquisition facility
Distributions paid to unitholders
INVESTING
Acquisition of rental properties and other assets
Proceeds from sale of rental properties
Capital assets under development
Building capital maintenance
Capital improvements
NET INCREASE (DECREASE) IN CASH
(BANK INDEBTEDNESS)
CASH (BANK INDEBTEDNESS), BEGINNING OF YEAR
CASH (BANK INDEBTEDNESS), END OF YEAR
SUPPLEMENTARY INFORMATION
Interest paid
Interest received
Income taxes paid
See accompanying notes to the consolidated financial statements.
NPREIT 2008 ANNUAL REPORT
31
22,702
(1,209)
26,447
560
(291)
(558)
(136)
63
1,318
3,306
52,202
-
1,432
53,634
(8)
144,603
1,400
-
377
(58,659)
-
(37,029)
50,684
(65,645)
395
(25,450)
(5,902)
(6,881)
(103,483)
835
(104)
731
24,444
371
727
7,695
(1,228)
22,012
322
(295)
(1,454)
(3,321)
-
801
16,523
41,055
(5)
(5,681)
35,369
100,276
73,844
2,200
9,058
-
(37,880)
(9,058)
(30,940)
107,500
(135,152)
3,904
(3,019)
(4,599)
(4,800)
(143,666)
(797)
693
(104)
21,270
348
415
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
1. DESCRIPTION OF THE TRUST
Northern Property Real Estate Investment Trust (“NPR” or the “REIT”) is an unincorporated open-ended real estate investment
trust that invests in and owns a portfolio of residential and commercial income producing properties.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
NPR’s consolidated financial statements are prepared in conformity with Canadian generally accepted accounting principles
(“GAAP”).
Principles of consolidation
The consolidated financial statements include the accounts of NPR and its wholly-owned subsidiary, together with the
proportionate share of the assets, liabilities, revenue and expenses of joint ventures.
Use of estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and to make disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and revenue and expenses for the consolidated reported period. Actual
results could differ from those estimates. Estimates are used to determine amounts reported as allowance for doubtful accounts,
estimated useful lives and values of income producing properties, intangible and other assets, accrued liabilities and capital
adequacy. Actual amounts could differ from those estimates.
Capital assets
Rental properties, capital improvements in progress and capital assets under development are stated at the lower of cost less
accumulated amortization and net recoverable amount. Cost of the properties includes the original acquisition costs of the
property and other acquisition related costs. Costs associated with upgrading the existing facilities, other than ordinary repairs
and maintenance, are capitalized as project improvements. The net recoverable amount represents the undiscounted, estimated
future net cash flow expected to be received from the ongoing use of the property plus its residual worth and is intended to
determine recovery of an investment and is not an expression of a property’s fair market value.
All capital assets are recorded at cost and are amortized using the following annual rates and methods:
Buildings
Furniture, fixtures and equipment
Vehicles
Capital and leasehold improvements
30 - 40 years
20% - 30%
20% - 30%
3 - 20 years
straight-line basis
declining-balance
declining-balance
straight-line basis
Estimated useful lives of capital assets are periodically evaluated by management and any changes in these estimates are
accounted for on a prospective basis.
NPR reviews its capital assets and, if it is determined that the carrying value of a building exceeds the undiscounted estimated
future net cash flow expected to be received from the ongoing use and residual worth of the property, the carrying value of the
building is reduced to its estimated fair value. Based on this review, a provision for impairment of $nil has been recorded for the
year ended December 31, 2008 (December 31, 2007 - $nil).
Disposal of long-lived assets
Amounts related to the disposal of long-lived assets are classified as held for sale, and the results of operations and cash flows
associated with the assets disposed are reported separately as discontinued operations, less applicable income taxes. A long-
lived asset is classified as an asset held for sale at the point in time when it is available for immediate sale, management has
committed to a plan to sell the asset and are actively locating a buyer for the asset at a sales price that is reasonable in relation
to the current fair value of the asset, and the sale is probable and is expected to be completed within a one-year period. For
unsolicited interest in a long-lived asset, the asset is classified as held for sale only if all the conditions of the purchase and sale
agreement have been met, a sufficient purchaser deposit has been received and the sale is probable and expected to be
completed shortly after the end of the current period.
NPREIT 2008 ANNUAL REPORT
32
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Land equity leases
Prepaid land equity leases are amortized over the remaining lives of the related leases ranging from 15 to 30 years.
Deferred financing costs
Deferred financing costs are amortized using the effective interest method over the amortization period of the related loans.
Income taxes
NPR is taxed as a “mutual fund trust” for income tax purposes. Pursuant to the Declaration of Trust, the trustees of NPR will
make distributions or designate all taxable income earned; including the taxable part of net realized capital gains by NPR, to
unitholders and will deduct such distributions and designations for income tax purposes.
Income taxes are accounted for using the liability method. Under this method, future income taxes are recognized for the
expected future tax consequences of differences between the carrying amount of balance sheet items and their corresponding
tax values. Future income taxes are computed using substantively enacted corporate income tax rates for the years in which tax
and accounting basis differences are expected to reverse.
Future income tax liabilities of NPR are primarily in relation to tax and accounting base differences in corporate subsidiaries of
the REIT.
Revenue recognition
Revenue from a rental property is recognized when a tenant commences occupancy of a property and rent is due. NPR retains
all benefits and risk of ownership of its rental properties, and therefore, accounts for leases with its tenants as operating leases.
Rental revenue includes rent and other sundry revenue recoveries. Rental revenue to be received from leases with rental rates
varying over the term of the lease is recorded on a straight-line basis over the term of the associated lease. Accordingly, a
receivable amount from the tenants for the difference between the rental revenue recorded on a straight line basis and the rent
that is contractually due from the tenant has been recorded as deferred rent receivable for accounting purposes.
Intangible assets and liabilities
The REIT allocates the purchase price of real property to land, building, and intangible assets and liabilities, such as the value of
above-market and below-market leases, in-place leases and lease origination costs, if any. Intangible assets and liabilities are
recorded at cost and amortized over their estimated useful lives ranging from 1 year to 18 years.
The values of above-market and below-market leases for acquired properties are determined based on the present value of the
difference between the contractual base rentals under the lease and fair market lease rates for similar in-place leases, measured
from the date of acquisition to the end of the remaining lease term.
The values of in-place leases are calculated as the present value of the net operating income lost during a hypothetical expected
lease-up period required to replace the existing leases at the date of purchase.
Intangible assets and liabilities associated with the acquisition of real property are amortized over the remaining term of the
associated lease. Above and below market leases are amortized to rental revenue. The amortization of the remaining intangible
assets are included in amortization expense.
Unit-based Compensation
Under the REIT’s Long Term Incentive Plan, the fair value of the units granted to trustees, officers and employees is recognized
as compensation expense with an offsetting amount to contributed surplus based on the closing price of the REIT’s trust units on
December 31 of the fiscal year. Upon issuance in accordance with the vesting policy, the units issued are credited to capital with
an offsetting amount to contributed surplus based on the fair value of the units at the time of the grant.
Under the REIT’s Unit Option Plan, options to acquire units are granted to trustees, officers and employees from time to time at
exercise prices not less than the market value of the shares at the date of the grant. Options granted by the REIT are accounted
for in accordance with the fair-value method of accounting for stock-based compensation, and as such, the calculated fair value
of the option is recognized as compensation expense with an offsetting amount recorded to contributed surplus, based on an
estimate of the fair value using a Black-Scholes option-pricing model. Compensation expense is recognized over the vesting
period of the related options.
NPREIT 2008 ANNUAL REPORT
33
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Upon exercise of the options, consideration paid, which approximates the market value of the shares on grant date, is credited to
capital. In addition, contributed surplus, representing the calculated fair value of the options exercised, is reclassified to capital.
Forfeitures of options are accounted for as they occur.
3. CHANGE IN ACCOUNTING POLICY AND RECENT ACCOUNTING
PRONOUNCEMENTS
Change in accounting policy
Effective January 1, 2008, NPR adopted CICA Handbook Section 1535, Capital Disclosures. This section requires the disclosure
of (i) an entity’s objectives, policies and process for managing capital; (ii) quantitative data about an entity’s managed capital; (iii)
whether an entity has complied with capital requirements; and (iv) if an entity has not complied with such capital requirements,
the consequences of such non-compliance. This information has been presented in Note 18.
Effective January 1, 2008, NPR adopted CICA Handbook Section 3862, Financial Instruments - Disclosures and Section 3863
Financial Instruments - Presentation. These sections require incremental disclosures regarding the significance of financial
instruments for the REIT’s financial position and performance; and the nature, extent and management of risks arising from
financial instruments to which the REIT is exposed. This information has been presented in Note 17.
Effective January 1, 2008, NPR adopted CICA Handbook Section 3031, Inventory. This section establishes standards for the
measurement of inventories, allocation of overhead, accounting for write-downs and disclosures.
These new standards have no material impact on the REIT’s consolidated financial statements beyond additional disclosure in
the notes to the financial statements.
Recent accounting pronouncements
New accounting standards are anticipated regarding the accounting for business combinations. The proposed CICA Exposure
draft regarding business combinations may result in a decrease in NPR’s earnings during periods in which acquisitions are
completed as the proposed accounting standards would require the expensing of acquisition costs (such as legal costs) in
connection with a business combination in the period in which they are incurred. Currently these costs are allocated to the cost of
the assets acquired under the business combination and amortized over the expected useful life of the assets.
Section 3064, Goodwill and Intangible Assets, will replace the current Section 3062, Goodwill and Other Intangible Assets and
Section 3450, Research and Development Costs. Various changes have been made to other sections of the CICA Handbook for
consistency purposes. The new Section will be applicable to financial statements relating to fiscal years beginning on or after
October 1, 2008. Accordingly, the REIT will adopt the new standards for its fiscal year beginning January 1, 2009. It establishes
standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of
intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the
previous Section 3062. NPR is currently evaluating the impact of the adoption of this new Section on its consolidated financial
statements. Management does not expect that the adoption of this new Section will have a material impact on its consolidated
financial statements.
Section 1582 – Business Combinations will replace the current Section 1581 – Business Combinations and Section 1601 –
Consolidated Financial Statements and Section 1602 – Non-controlling Interests will replace the current section 1600 –
Consolidated Financial Statements. These new Sections will be applicable to financial statements relating to fiscal years
beginning on or after January 1, 2011. The new standards will require net assets, non-controlling interest and goodwill acquired
in a business combination to be recorded at fair value and non-controlling interests will be reported as a component of equity. In
addition, the definition of a business is expanded such that transactions currently accounted for as an asset acquisition may
come within the scope of these Sections. Acquisition costs will no longer be accounted for as part of the consideration and will be
expensed when incurred. Management expects that more acquisition transactions will be considered business combinations and
acquisition costs will be expensed the statement of net earnings when this section is adopted.
NPREIT 2008 ANNUAL REPORT
34
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
3. CHANGE IN ACCOUNTING POLICY AND RECENT ACCOUNTING
PRONOUNCEMENTS (continued)
The adoption of International Financial Reporting Standards (“IFRS”) will be effective for the interim and annual reporting periods
beginning on or after January 1, 2011 for Canadian publicly accountable profit oriented enterprises. IFRS will replace current
Canadian GAAP for these enterprises requiring the preparation of financial statements in accordance with IFRS for financial
years beginning on or after January 1, 2011. NPR will adopt IFRS as the basis for preparing its consolidated financial statements
and will provide comparative financial information for the previous fiscal year using IFRS beginning with the quarter ending
March 31, 2011. NPR will also provide an opening balance sheet as at January 1, 2010. NPR has established and budgeted for
an IFRS conversion project which began during the year ended December 31, 2008. The project will consist of training and
education of the project team; a scoping analysis of NPR’s financial statements and the applicable IFRS; implementation and
training of accounting and operations staff; the conversion of integrated systems and process changes if required; and a post
implementation review. NPR is currently in the scoping analysis phase of evaluating the impact of IFRS to the consolidated
financial statements. Any changes to integrated systems or process changes may require changes to NPR’s Disclosure Controls
and Procedures and Internal Controls over Financial Reporting. The REIT’s financial performance and financial position
presented under current GAAP may be significantly different when presented in accordance with IFRS. The Canadian Securities
Administrators issued Staff Notice 52-321, Early Adoption of International Financial Reporting Standards, which provides issuers
with the option to early adopt IFRS effective January 1, 2009. NPR does not intend to early adopt these standards on January 1,
2009.
4. RENTAL PROPERTIES AND OTHER CAPITAL ASSETS
December 31, 2008
Accumulated
Amortization
Cost
Net Book
Value
December 31, 2007
Accumulated
Amortization
Cost
Net Book
Value
Land
90,676
-
90,676
82,332
-
82,332
Buildings
Furniture, fixtures and
equipment
Vehicles
Capital and leasehold
improvements
Equipment under capital
lease
800,612
(76,187)
724,425
724,355
(55,525)
668,830
9,006
1,193
23,026
212
924,725
(3,757)
5,249
(732)
461
6,942
1,050
(2,767)
4,175
(561)
489
(9,870)
13,156
16,317
(6,758)
9,559
(212)
-
212
(150)
62
(90,758)
833,967
831,208
(65,761)
765,447
NPR periodically reviews the carrying value of its rental properties and, if it is determined that the carrying value of a building
exceeds the undiscounted estimated future net cash flow expected to be received from the ongoing use and residual worth of the
property, the carrying value of the building is reduced to its estimated fair value. No provision was recorded in 2007 or 2008.
NPREIT 2008 ANNUAL REPORT
35
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
4. RENTAL PROPERTIES AND OTHER CAPITAL ASSETS (continued)
NPR acquired properties and completed development projects in the year ended December 31, 2008 for a total purchase price of
$80.4 million (2007 – $189.7 million). The acquisitions and development projects were financed as follows:
Mortgages and debt assumed
Class B LP Units issued
Cash paid
Fair value adjustment to debt
Future tax liability recognized on acquisition
Total purchase price of property acquisitions and
developments
Residential units
Seniors’ units
Commercial square feet
2008
-
-
80,391
80,391
-
-
80,391
724
94
818
40,233
2007
51,788
3,728
134,185
189,701
331
9,475
199,507
683
332
1,015
386,449
During the year ended December 31, 2008, NPR disposed of two properties for gross proceeds of $395,000 and a gain on sale
of $136,000.
5. PREPAID EXPENSES AND OTHER ASSETS
Refundable deposits and mortgage proceeds held in trust
Prepaid equity leases
Prepaid expenses
Other
2008
185
2,167
2,812
500
5,664
2007
7,998
2,339
2,047
509
12,893
6. INTANGIBLE ASSETS AND LIABILITIES
Above-market leases
In-place leases
Lease origination costs
2008
Accumulated
Amortization
(114)
(1,588)
(564)
(2,266)
Net Book
Value
59
4,977
1,105
6,141
Cost
313
6,134
1,570
8,017
2007
Accumulated
Amortization
(97)
(672)
(186)
(955)
Net Book
Value
216
5,462
1,384
7,062
Cost
173
6,565
1,669
8,407
Below-market leases
1,220
(941)
279
1,203
(632)
571
Intangible assets are comprised of the value of above-market leases, in-place leases and lease origination costs for rental
property acquisitions completed. Intangible liabilities are comprised of the value of below-market leases for rental property
acquisitions completed.
NPREIT 2008 ANNUAL REPORT
36
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
7. MORTGAGES AND LOANS PAYABLE
Mortgages and loans payable
Fair value adjustment
Deferred financing costs
2008
502,277
(8,574)
(10,903)
482,800
2007
416,334
(8,379)
(6,046)
401,909
Mortgages and loans payable bear interest at rates ranging from 3.62% to 12.13% and have a weighted average rate of 5.13%
as at December 31, 2008 (December 31, 2007 – 5.39%). Mortgages and loans are payable in monthly installments of blended
principal and interest of approximately $3.4 million. The mortgages mature between 2009 and 2025 and are secured by charges
against specific properties. Land and buildings with a carrying value of $686.3 million have been pledged to secure mortgages
and loans payable of the REIT. The fair value of mortgages payable at December 31, 2008 is approximately $517.7 million
(December 31, 2007 – $408.9 million).
Minimum future principal payments required are as follows:
2009
2010
2011
2012
2013
Subsequent
62,989
28,405
32,212
44,224
90,355
244,092
502,277
8. OPERATING FACILITY
NPR has a revolving line of credit in the amount of $50.0 million (December 31, 2007 - $40.0 million) for acquisition and
operating purposes, bearing interest at prime or bankers’ acceptance rate with a maturity of May 31, 2009. Specific properties
with a carrying value of $86.5 million have been pledged as collateral security for the line of credit. At December 31, 2008, NPR
had utilized $26.6 million (December 31, 2007 – $25.2 million).
9. LONG-TERM INCENTIVE PLAN AND UNIT OPTION PLAN
NPR has a Long-Term Incentive Plan (“LTIP”) for the executives of NPR, based on the results of each fiscal year. Units granted
and issued under the LTIP are as follows:
Balance – December 31, 2007
Units vested and issued – January, 2008
Units vested and issued – February, 2008
Units vested and issued – May, 2008
Units granted – December 31, 2008
Balance – December 31, 2008
Number
of Units
43,586
(6,033)
(11,592)
(11,931)
42,410
56,440
The total amount of LTIP awards are determined at the end of each fiscal year by the Board of Trustees based on an
assessment of the performance of the REIT and the individual performance of the executives. The number of units issued is
based on the trading price on December 31 of each year. Pursuant to the policy, rights to units generally vest in 1/3 tranches:
immediately upon award, then 12 and 24 months following. As at December 31, 2008, a total of 155,219 LTIP units had vested
and been issued (December 31, 2007 – 125,663).
NPREIT 2008 ANNUAL REPORT
37
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
9. LONG-TERM INCENTIVE PLAN AND UNIT OPTION PLAN
(continued)
The REIT has a Unit Option Plan (the “Option Plan”), which is subject to the rules of the Toronto Stock Exchange (“TSX”). In
accordance with the Option Plan, the REIT may grant options to acquire units up to a total of 1,830,429 units. All options to
acquire units expire after 5 years and vest as determined by the Governance and Compensation Committee of the REIT. The
exercise price is determined using the weighted average trading price of the units on the five days prior to the options being
granted.
On May 20, 2008, 735,000 options with an exercise price of $23.12 and expiring on May 20, 2013 were granted to trustees and
officers. 245,002 options vested immediately, 245,001 options will vest on May 20, 2009 and 244,997 will vest on May 20, 2010.
All options remain outstanding at December 31, 2008.
The REIT accounts for its Option Plan using the fair value method, under which compensation expense is measured at the date
the options are granted and recognized over the vesting period. The following assumptions were used in calculating the fair
value of the options granted; expected annual dividend rate of 6.40%, expected volatility of 18%, risk-free rate of return of 3.10%
and expected life of 5 years. Compensation expense for the year ended December 31, 2008 relating to options granted was
$631,000 (2007 – $nil).
10. EMPLOYEE UNIT PURCHASE PLAN
Under the terms of the Employee Unit Purchase Plan (the “EUPP”), employees may invest a maximum of 5% of their salary in
NPR trust units and the REIT will contribute one unit for every three units acquired by an employee. The units are purchased on
the TSX at market prices. During the year ended December 31, 2008, employees invested a total of $115,562 (2007 – $94,221)
and the REIT contributed $38,555 (2007 – $32,644). During the year ended December 31, 2008, 7,974 units (2007 – 5,749
units) were purchased at an average cost of $20.65 per unit (2007 – $23.77 per unit).
11. INCOME TAXES
NPR has certain corporate subsidiaries which are subject to income tax on their respective taxable income at the applicable
legislated tax rates.
On June 22, 2007, the Budget Implementation Act, 2007, Bill C-52 (“Bill C-52”) received Royal Assent. Bill C-52 will not apply to
an entity that qualifies for the real estate investment trust exemption (the “REIT Exemption”). Where an entity does not qualify for
the REIT Exemption certain distributions will not be deductible in computing income for tax purposes and will be subject to tax on
such distributions at a rate comparable to the general corporate income tax rate. Bill C-52 provides for a transition period for
publicly traded entities that existed prior to November 1, 2006 and is not expected to apply to NPR until 2011.
GAAP requires NPR to recognize future income tax assets and liabilities based on estimated temporary differences expected as
at January 1, 2011. Under the current legislation, NPR does not appear to qualify for the REIT Exemption. The future income tax
provision arises from temporary differences between the estimated accounting and tax values of NPR’s assets and liabilities at
January 1, 2011 and has been calculated using the expected tax rates of 19.63% to 29.5%.
NPR has certain capital assets which have a lower tax value than their applicable accounting value. NPR has therefore recorded
a future tax liability of $39.5 million (December 31, 2007 – $36.2 million) using an expected income tax rate ranging from 19.63%
to 29.5% (2007 – 19.63% to 29.5%).
NPREIT 2008 ANNUAL REPORT
38
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
11. INCOME TAXES (continued)
The future tax liabilities arise from the temporary differences summarized below:
Future tax liabilities arising from temporary differences between
accounting and tax basis of:
Rental property assets in corporate subsidiaries
Acquisition of rental property assets in a business combination
Rental properties
Prepaid mortgages
Other assets
2008
2007
9,614
9,476
15,487
981
3,931
39,489
10,007
9,476
14,702
617
1,381
36,183
The provision for income taxes differs from the results which would be obtained by applying the combined federal and provincial
income tax rate to net income before taxes. The difference results from the following:
Earnings from continuing operations before income taxes
Loss from discontinued operations
Less income attributable to NPR not subject
to future income tax
Income in corporate subsidiaries
Income tax rate based on basic
and weighted average rates
Expected income tax expense from statutory income tax rate
Increase (decrease) in current taxes resulting from:
Non-deductible expenses
Sale of rental properties
Other
Current income tax expense
Increase (decrease) in future taxes resulting from:
Future income taxes - corporate subsidiaries
Decrease in future income tax rates
Future income taxes relating to Bill-C52
Adjustment to future income tax liabilities, and other
Future income tax expense
Total income tax expense
2008
26,417
-
26,417
2007
24,759
(5)
24,754
(24,529)
(23,417)
1,888
1,337
19.63%
371
(88)
9
117
409
(394)
-
3,700
-
3,306
3,715
20.75%
277
(3)
325
(58)
541
(172)
(567)
16,700
562
16,523
17,064
NPREIT 2008 ANNUAL REPORT
39
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
12. UNITHOLDERS’ CAPITAL
Total NPR Trust units and Class B units issued, as the result of an exchange of Class B limited partnership units of Northern
Property Limited Partnership (the “Class B LP Units”), outstanding and eligible for distributions at December 31, 2008 is
25,033,645 (December 31, 2007 – 25,004,089), representing net proceeds of $367.5 million, net of issue costs of $19.6 million
(December 31, 2007 - $366.8 million, net of issue costs of $19.6 million). The number of units issued and outstanding is as
follows:
Date
Description
December 31, 2006
Trust Units
17,852,667
Issue
Price
Class B LP
Units
Issue
Price
Total
Units $(000’s)
2,423,623
20,276,290
261,730
January 04, 2007
LTIP units issued
19,858
$17.70
February 16, 2007
LTIP units issued
8,139
$27.95
-
-
-
-
May 01, 2007
Property acquisition
May 08, 2007
Property acquisition
May 08, 2007
Issue costs
-
-
-
-
-
-
78,033
38,986
$25.63
$25.65
-
-
May 16, 2007
LTIP units issued
1,597
$27.95
-
-
June 21, 2007
LTIP units issued
16,317
$24.00
-
-
July 7, 2007
LTIP units issued
750
$11.99
-
-
19,858
8,139
78,033
38,986
-
1,597
16,317
750
353
227
2,000
1,000
(13)
45
393
9
July 11, 2007
Public offering
4,532,000
$23.17
-
-
4,532,000
105,006
July 11, 2007
Issue costs
November 1,2007
Property acquisition
November 1, 2007
Issue costs
Class B LP units exchanged
December 31, 2007
-
-
-
105,660
22,536,988
-
-
-
-
-
-
-
(4,587)
32,119
$23.17
32,119
-
-
(105,660) -
-
-
744
(118)
-
2,467,101
25,004,089
366,789
January 02, 2008
LTIP units issued
February 16, 2008
LTIP units issued
May 26, 2008
LTIP units issued
Issue costs
6,033
11,592
11,931
-
$23.12 -
$22.35 -
$22.35 -
-
-
-
-
-
-
Class B LP units exchanged
188,466
-
(188,466) -
6,033
11,592
11,931
-
-
139
259
267
(8)
-
December 31, 2008
22,755,010
2,278,635
25,033,645
367,446
Trust units
The total authorized number of trust units is unlimited. The total number of trust units of the REIT outstanding as at December
31, 2008 is 22,755,010 (December 31, 2007 – 22,536,988) representing a net book value of $338.3 million (December 31, 2007 -
$334.5 million), net of issue costs.
Class B Exchangeable Limited Partnership Units and Special Voting Units
The Class B Units can be exchanged for trust units at any time at the option of the holder of the Class B units. Each Class B
units has a “Special Voting Unit” attached to it, which entitles the holder to one vote, either in person or by proxy at the meeting
of unitholders of the trust as if he or she was a unitholders of the trust. Total number of Class B LP Units and special voting units
of Northern Property Limited Partnership, a controlled limited partnership, outstanding as at December 31, 2008, is 2,278,635
(December 31, 2007 – 2,467,101) representing a net book value of $29.1 million (December 31, 2007 – $32.3 million).
Distributions to unitholders
Pursuant to the Trust Declaration, holders of Trust units and Class B units are entitled to receive distributions made on each
Distribution Date as approved by the Trustees. Distributions for the year are required to be at least equal to the Net Income as
determined in accordance with the Income Tax Act.
NPREIT 2008 ANNUAL REPORT
40
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
13. NET EARNINGS PER UNIT
Earnings from continuing operations
Loss from discontinued operations
Net earnings
Weighted average units for basic
earnings per unit
Effect of dilutive units to be issued in respect of the LTIP
Dilutive effect of Option Plan
Weighted average units for diluted
Earnings per unit
Net earnings per unit:
Basic:
Continuing operations
Discontinued operations
Diluted:
Continuing operations
Discontinued operations
2008
22,702
-
22,702
2007
7,695
(5)
7,690
25,027,697
19,978
13,270
22,556,774
18,619
-
25,060,945
22,575,393
$0.91
-
$0.91
$0.91
-
$0.91
$0.34
-
$0.34
$0.34
-
$0.34
14. GUARANTEES, COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, NPR may provide indemnification commitments to counterparties in transactions such as
credit facilities, leasing transactions, service arrangements, director and officer indemnification agreements and sales of assets.
These indemnification agreements may require NPR to compensate the counterparties for costs incurred as a result of changes
in laws and regulations (including tax legislation) or as a result of litigation claims or statutory sanctions that may be suffered by
counterparties as a consequence of the transaction. The terms of these indemnification agreements may vary based on the
contract and do not provide any limit on the maximum potential liability. To date, NPR has not made any significant payments
under such indemnifications and no amount has been accrued in the financial statements with respect to these indemnification
commitments. In the normal course of operations, NPR becomes subject to various legal and other claims. Management and its
legal counsel evaluate these claims and where required, accrue the best estimate of costs relating to these claims. Management
believes the outcome of claims of this nature at December 31, 2008 will not have a material impact on NPR.
During the normal course of operations, NPR provided guarantees for mortgages and loans payable relating to investments in
corporations and joint ventures where NPR owns less than 100%. The mortgages and loans payable are secured by specific
charges against the properties owned by the corporations and joint ventures. In the event of a default of the corporation or joint
venture, NPR may be liable for 100% of the outstanding balances of these mortgages and loans payable. At December 31, 2008,
NPR has provided guarantees totaling $10.4 million (December 31, 2007 – $14.4 million). Of this amount, $5.2 million has been
included in mortgages and loans payable (December 31, 2007 – $7.2 million). The mortgages bear interest at rates ranging from
4.54% to 7.9% and mature June 2009 to December 2013 (December 2007 – 4.54% to 7.50% and mature June 2008 to January
2012). As at December 31, 2008, land and buildings with a carrying value of $6.5 million have been pledged to secure these
mortgage and loans payable.
NPR commenced the development of 189 multi-family residential rental units located in Grande Prairie, Alberta on land
previously acquired by NPR. The estimated total cost of construction, including the original cost of land, is approximately $22.9
million. Costs incurred to December 31, 2008 are $11.8 million, including the original cost of the land.
In connection with the acquisition of certain seniors’ properties in Newfoundland, the tenants have agreed to expand or renovate
certain properties purchased by NPR. NPR has entered into agreements to purchase these capital improvements and
expansions once completed. In total, NPR has commitments totalling $6.2 million, which are expected to be completed in 2009.
NPREIT 2008 ANNUAL REPORT
41
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
15. SEGMENTED INFORMATION
NPR considers residential multi-family, execusuites, seniors’ and commercial income producing properties to be separate
segments operating in five provinces and territories in Canada. The accounting policies of the segments are as described in Note
2. Discontinued operations are not allocated to individual segments. All items, except gain on sale of rental properties and gain
on settlement of debt, included in the Consolidated Statement of Earnings are related only to the REIT and are not allocated to
the defined segments. As such, NPR has not provided a reconciliation of Earnings from Continuing Operations Before Other
Items to Net Earnings. In 2007 and 2008, gain on sale of rental properties was earned in the residential rental and commercial
business segments in Nunavut and the Northwest Territories, respectively. Gain (loss) on settlement of debt was earned in the
residential business segments in all geographic segments. Segmented information for NPR is provided below:
Total Assets
December 31, 2008
Residential
Multi-family
Execusuites
Seniors’
Commercial
Trust
TOTAL ASSETS
Total Assets
December 31, 2007
Residential
Multi-family
Execusuites
Seniors’
Commercial
Trust
TOTAL ASSETS
Geographic Segments
2008
Rental revenue
Other income
Operating expenses
Net operating income
Interest on mortgages
Amortization
EARNINGS FROM CONTINUING
OPERATIONS BEFORE OTHER
ITEMS
Alberta
BC
Nfld
NWT
Nunavut
Total
161,176
-
123,794
284,970
8,912
5,560
299,442
90,384
-
15,710
106,094
21,409
-
127,503
56,109
9,495
40,965
106,569
1,222
-
107,791
86,323
8,019
-
94,342
97,868
-
192,210
115,131
9,853
-
124,984
20,992
-
145,976
509,123
27,367
180,469
716,959
150,403
5,560
872,922
Alberta
BC
Nfld
NWT
Nunavut
Total
119,189
-
126,006
245,195
11,423
5,350
261,968
Alberta
32,875
830
(6,960)
26,745
(9,814)
(6,940)
60,875
-
14,238
75,113
21,872
-
96,985
BC
14,082
427
(6,145)
8,364
(2,452)
(3,254)
55,963
9,921
32,923
98,807
1,273
-
100,080
Nfld
16,252
432
(5,901)
10,783
(2,372)
(3,210)
88,633
7,438
-
96,071
87,980
-
184,051
NWT
36,556
1,097
(16,851)
20,802
(5,464)
(7,246)
122,730
10,015
-
132,745
23,281
-
156,026
Nunavut
24,861
347
(7,597)
17,611
(4,397)
(5,797)
447,390
27,374
173,167
647,931
145,829
5,350
799,110
Total
124,626
3,133
(43,454)
84,305
(24,499)
(26,447)
9,991
2,658
5,201
8,092
7,417
33,359
NPREIT 2008 ANNUAL REPORT
42
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
15. SEGMENTED INFORMATION (continued)
Geographic Segments
2007
Rental revenue
Other income
Operating expenses
Net operating income
Interest on mortgages
Amortization
EARNINGS FROM CONTINUING
OPERATIONS BEFORE OTHER
ITEMS
Business Segments
2008
Rental revenue
Other income
Operating expenses
Net operating income
Interest on mortgages
Amortization
EARNINGS FROM CONTINUING
OPERATIONS BEFORE OTHER
ITEMS
Business Segments
2007
Rental revenue
Other income
Operating expenses
Net operating income
Interest on mortgages
Amortization
EARNINGS FROM CONTINUING
OPERATIONS BEFORE OTHER
ITEMS
Alberta
27,337
562
(5,205)
22,694
(8,026)
(5,934)
BC
10,080
293
(4,642)
5,731
(1,584)
(2,088)
Nfld
12,479
381
(5,725)
7,135
(1,969)
(2,301)
NWT
28,082
727
(13,302)
15,507
(4,301)
(5,702)
Nunavut
24,245
232
(6,878)
17,599
(4,500)
(5,987)
Total
102,223
2,195
(35,752)
68,666
(20,380)
(22,012)
8,734
2,059
2,865
5,504
7,112
26,274
Multi-family Execusuites
8,369
77,162
128
2,677
(4,270)
(30,389)
4,227
49,450
(872)
(14,631)
(1,035)
(16,374)
Seniors’
16,494
-
(23)
16,471
(6,286)
(4,217)
Total
Residential
Commercial
Total
102,025 22,601 124,626
2,805 328 3,133
(34,682)
(43,454)
(8,772)
70,148 14,157 84,305
(24,499)
(21,789)
(26,447)
(21,626)
(2,710)
(4,821)
18,445
2,320
5,968
26,733
6,626
33,359
Multi-family Execusuites
7,920
65,834
118
1,942
(3,827)
(26,736)
4,211
41,040
(11,623)
(795)
(13,732)
(1,146)
Seniors’
14,159
-
(19)
14,140
(6,198)
(3,673)
Total
Residential
87,913
2,060
(30,582)
59,391
(18,616)
(18,551)
Commercial
14,310
135
(5,170)
9,275
(1,764)
(3,461)
Total
102,223
2,195
(35,752)
68,666
(20,380)
(22,012)
15,685
2,270
4,269
22,224
4,050 26,274
16. RELATED PARTY TRANSACTIONS
A Trustee of NPR leases space from NPR under normal commercial terms. NPR earned rental revenue of $454,350 from that
arrangement for the year ended December 31, 2008 (2007 – $451,350). Amounts outstanding in accounts receivable pertaining
to this lease were $nil at December 31, 2008 (December 31, 2007 – $nil).
A Trustee of NPR is a senior partner of a law firm that provides legal services to NPR in the ordinary course of business. Fees
paid for the year ended December 31, 2008 were $41,000 (2007 – $214,000).
NPREIT 2008 ANNUAL REPORT
43
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
16. RELATED PARTY TRANSACTIONS (continued)
A Trustee of NPR is the Chairman of AgeCare Investments Ltd. (“AgeCare”), which leases six seniors’ properties from NPR. For
the year ended December 31, 2008, NPR earned rental income, including rental revenue earned on a straight-line basis over the
term of the lease, totaling $12.6 million (2007 – $12.6 million) from AgeCare. Amounts outstanding in accounts receivable
pertaining to this lease were $nil at December 31, 2008 (December 31, 2007 – $nil). In addition, AgeCare is paid an annual fee
of $120,000 for advisory services provided to NPR respecting prospective acquisitions of seniors’ properties. For the Year ended
December 31, 2008, NPR paid $120,000 for these services (2007 – $120,000).
In the second quarter of 2008, the REIT commenced renovations to a seniors’ facility in BC which is leased to AgeCare. The
renovations are being completed under the terms of existing lease agreements and costs will be recovered from AgeCare over
the remaining term of the lease agreement. The approved budget for the renovation project is $2.2 million, with $1.5 million
incurred through December 31, 2008.
17. FINANCIAL INSTRUMENTS
Management has determined that the majority of the NPR’s financial assets are designated as loans and receivables, as defined
by Section 3855 of the CICA Handbook, and are carried at amortized cost. Management has also determined that all of its
financial liabilities have been designated as other financial liabilities and are carried at amortized cost utilizing the effective
interest method. Financial instruments include loans receivable, accounts receivable, tenant security deposits, mortgages
payable, loans payable, accounts payable and accrued liabilities and bank indebtedness. Unless otherwise specified, the fair
value of these instruments approximates their carrying values.
Utility cost risk
The REIT is exposed to utility cost risk, which results from the fluctuation in utility prices for fuel oil, natural gas and electricity,
the primary utilities used to heat the REIT’s properties. The exposure to utility cost risk is restricted primarily to the REIT’s
residential rental and execusuites portfolio. The leases in the remainder of the REIT’s portfolio generally provide for recovery of
operating costs, including utilities. Because of the northern location of a portion of the REIT’s portfolio, the exposure to utility
price fluctuations is more pronounced in the first and last fiscal quarter of the year.
NPR manages its exposure to utility risk through a number of preventative measures, including retrofitting properties with energy
efficient appliances, fixtures and windows. With the exception of a fixed price utility contract in place on certain residential rental
units in Alberta, NPR does not utilize hedges or forward contracts in the management of exposure to utility risk.
Heating oil is the primary source of fuel for heating properties located in Nunavut and the Northwest Territories. Exposure to
increases in the cost of heating oil is partially offset by the ability to recover these increases from a significant proportion of its
commercial and some residential tenants.
Natural gas is the significant source of fuel for heating properties located in Alberta, BC and Inuvik. In Alberta, the provincial
government has a natural gas rebate program for energy costs incurred from October through March. In addition, the REIT has
fixed price contracts for certain of its properties which account for approximately 38% of the REIT’s usage in Alberta. Natural gas
prices in Inuvik and BC are not subject to regulated price control and the REIT does not use financial instruments to manage the
exposure to the price risk.
Electricity is the primary source of fuel for heating properties located in Newfoundland as well as parts of north eastern BC. In
Newfoundland, electricity is purchased from the provincially regulated utility and is directly paid by the tenants for a significant
portion of the REIT’s residential rental units. As there is not a significant direct risk to NPR regarding the price of electricity, a
sensitivity analysis has not been prepared.
Management prepared a sensitivity analysis on the impact of price changes in the cost of utilities, specifically heating oil and
natural gas, for the year ended December 31, 2008. A 10% change over the average price of utilities for 2008 would impact
NPR’s net earnings by $283,000.
NPREIT 2008 ANNUAL REPORT
44
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
17. FINANCIAL INSTRUMENTS (continued)
Liquidity risk
Ultimate responsibility for liquidity risk management lies with management and the Board of Trustees of the REIT. The REIT
manages liquidity risk by managing mortgage and loan maturities to ensure a relatively even amount of mortgage maturities in
each year. At December 31, 2008 the REIT has a revolving line of credit in the amount of $50.0 million (2007 - $40.0 million). At
December 31, 2008, $26.6 million of the revolving line of credit was utilized (2007 - $25.2 million). Cash flow projections are
completed on a regular basis to ensure there will be adequate liquidity to maintain operating and investment activities in addition
to making monthly distributions to unitholders. The Board of Trustees reviews the current financial results and the annual
business plan in determining appropriate distribution levels.
Credit risk
Credit risk arises from the possibility that tenants may not be able to fulfill their lease commitments. The REIT’s credit risk is
primarily attributable to tenant receivables. Tenant receivables are comprised of a large number of tenants spread across the
geographic areas in which the REIT operates. There are no significant exposures to single tenants with the exception of
AgeCare Investments Ltd, which leases seniors’ properties in Alberta and BC from the REIT, and the Governments of Canada,
the Northwest Territories and Nunavut, which leases a large number of rental units in the Northwest Territories and Nunavut.
NPR mitigates this risk through conducting thorough credit checks on prospective tenants, requiring rental payments on the first
of the month, obtaining security deposits approximating one month’s rent from tenants where legislation permits, and geographic
diversification in its portfolio. Tenants are required to pay rent on the first of each month, with the exception of certain
government leases where rent is due at the end of the month and certain commercial tenants where operating cost recoveries
are billed in arrears. As such, the majority of tenant receivables are past due at the balance sheet date.
The following is an aging of current tenant and other receivables:
0-30 days
31-60 days
61-90 days
Over 90 days
Tenant receivables
Other receivables
Allowance for doubtful accounts
December 31, 2008
December 31, 2007
987
267
130
722
2,106
3,329
(350)
5,085
835
40
23
396
1,294
4,015
(250)
5,059
NPR classifies tenants as past tenants on the date of their move out from a residential unit. Effective January 1, 2008 NPR
recorded a specific bad debt provision on all balances owed by past tenants. Any subsequent recovery of balances owed from
past tenants is recorded as a reduction in the bad debt provision for the period. In addition, NPR records an allowance for bad
debt from current tenants and other receivables where the expected amount to be collected is less than the actual accounts
receivable. The amounts disclosed on the balance sheet are net of allowances for uncollectible accounts from current tenants
and other receivables, estimated by Management based on prior experience and current economic conditions.
The reconciliation of changes in allowance for doubtful accounts is as follows:
Balance, December 31, 2007
Accounts receivable written off
Accounts recovered
Additional allowance
Balance, December 31, 2008
NPREIT 2008 ANNUAL REPORT
45
Total
250
(690)
355
435
350
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
17. FINANCIAL INSTRUMENTS (continued)
The following is an aging of accounts payable and accrued liabilities:
0-6 months
6 months to 1 year
Over 1 year
Tenant security deposits
December 31, 2008
9,916
1,251
51
11,218
3,893
15,111
December 31, 2007
8,877
322
130
9,329
4,664
13,993
NPR has an operating facility to ensure it has sufficient available funds to meet current and foreseeable financial requirements.
Management believes that future cash flows from operations and availability under the current credit facility will be adequate to
support these financial liabilities.
Interest rate risk
The REIT is exposed to interest rate risk on mortgages and loans payable and does not hold any financial instruments to mitigate
that risk. The REIT utilizes both fixed and floating rate debt. Interest rate risk related to floating interest rates is limited primarily to
the utilization of the credit facility. Management mitigates interest rate risk by utilizing fixed rate mortgages, ensuring access to a
number of sources of funding and staggering mortgage maturities with the objective of achieving relatively even annual debt
maturities. To the extent possible, the REIT maximizes the amount of mortgages on residential rental properties where it is
possible to lower interest rates through Canada Mortgage and Housing Corporation mortgage insurance.
The sensitivity analysis for floating rate debt has been completed based on the exposure to interest rates at the balance sheet
date. Floating rate debt includes all mortgage and loans payable which are not subject to fixed interest rates and the revolving
line of credit. If interest rates changed by 0.50% and all other variables remained constant, the REIT’s net earnings for the Year
ended December 31, 2008 would have changed by $172,000.
18. CAPITAL MANAGEMENT
The REIT’s objective when managing its capital is to safeguard its assets while maximizing the growth of its business, returns to
unitholders and maintaining the sustainability of cash distributions. The REIT’s capital consists of mortgages and loans payable,
operating and acquisition facilities, Trust Units and Class B LP Units.
Management monitors the REIT’s capital structure on an ongoing basis to determine the appropriate level of mortgage debt and
loans payable to be placed on specific properties at the time of acquisition or when existing debt matures. The REIT follows
conservative guidelines which are set out in the Trust Declaration. In determining the most appropriate debt, consideration is
given to strength of cash flow generated from the specific property, interest rate, amortization period, maturity of the debt in
relation to the existing debt of the REIT, interest and debt service ratios, and limits on the amount of floating rate debt. The REIT
has an operating facility which is used to fund acquisitions and capital expenditures until specific mortgage debt is placed or
additional equity is raised.
NPREIT 2008 ANNUAL REPORT
46
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
18. CAPITAL MANAGEMENT (continued)
Consistent with others in the industry, the REIT monitors capital on the basis of debt to gross book value ratio. The Declaration of
Trust provides for a maximum debt to gross book value ratio of 70%. The REIT does not anticipate operating above a debt to
gross book value ratio of 60%. The REIT’s debt to gross book value is as follows:
Bank indebtedness, net of cash
Operating facility
Mortgages and loans payable
Debt
Rental properties and other capital assets
Capital assets improvements in progress
Capital assets under development
Refundable deposits and mortgage proceeds held in trust
Accumulated amortization
Future income taxes on acquisitions
Gross book value
December 31, 2008
(731)
26,600
502,277
528,146
December 31 ,2007
104
25,200
416,334
441,638
833,967
3,773
8,996
185
90,758
(21,625)
916,054
765,447
1,957
1,257
7,998
65,761
(21,458)
820,962
Debt to gross book value
57.7%
53.8%
NPR is subject to three principal financial covenants in its mortgage and loans payable and operating facility. The financial
covenants are described as follows:
•
Debt Service Coverage Ratio – calculated as Net earnings before interest, taxes and amortization divided by the debt
service payments (interest expense and principal repayments);
Interest Service Coverage Ratio – calculated as Net earnings before interest, taxes and amortization divided by the interest
expense;
Debt to Gross Book value as calculated above.
•
•
Earnings from continuing operations before taxes
Amortization
Interest on mortgages
Interest on operating facility
Net earnings before interest, taxes and amortization
Interest on mortgages
Interest on operating facility
Principal repayments
Debt service
Interest service coverage ratio
Debt service coverage ratio
December 31, 2008
December 31, 2007
26,417
26,447
24,499
1,286
78,649
24,499
1,286
14,983
40,768
3.05
1.93
24,759
22,012
20,380
1,565
68,716
20,380
1,565
15,086
37,031
3.13
1.86
As at and during the year ended December 31, 2008, the REIT complied with all externally imposed capital requirements and all
covenants relating to its debt facilities.
NPREIT 2008 ANNUAL REPORT
47
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
19. SUBSEQUENT EVENTS
Between January 1, 2009 and March 2, 2009, NPR completed the acquisition of 40 residential rental units and 52 units in
seniors’ properties, all located in Newfoundland. The combined purchase prices for these properties was $7.3 million and were
financed through a combination of the operating facility, assumption of a mortgage and the issuance of Class B Limited
Partnership units.
Between January 1, 2009 and March 2, 2009, NPR competed mortgage financings and renewals totalling $8.9 million with
interest rates from 3.06% to 3.96% and terms to maturity from 2 years to 9 years. Proceeds from the mortgage financings were
used to repay existing mortgage debt and a portion of the operating facility.
NPREIT 2008 ANNUAL REPORT
48
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
Management Team
TRUSTEES
Douglas H. Mitchell, Q.C.
Chair of the Trust
B. James Britton
President, Chief Executive Officer
and Trustee
John C. Charles, CA
Trustee
Kenn Harper
Trustee
Dennis J. Hoffman, CA
Trustee
Kabir Jivraj, MBBS
Trustee
Dennis G. Patterson, LLB
Trustee
C. Donald Wilson
Trustee
OFFICERS
B. James Britton
President and
Chief Executive Officer
Todd R. Cook, CA
Chief Financial
Officer
Alan V. Vaughan
Vice President,
Business Development
Richard Anda
Vice President,
Operations
Barbara Lavery
Corporate Secretary
NPREIT 2008 ANNUAL REPORT
49
Notes to the Consolidated Financial Statements
Years ended December 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where indicated)
Corporate Information
ANNUAL GENERAL MEETING
Tuesday, May 12, 2009, 1:30 pm
Calgary TELUS Convention Centre
Telus 101, 102
120 Ninth Avenue SE
Calgary, AB T2G 0P3
STOCK EXCHANGE
Toronto Stock Exchange (TSX)
Trading Symbol: NPR.UN
LEGAL COUNSEL
Borden Ladner Gervais LLP
AUDITORS
Deloitte & Touche LLP
REGISTRAR AND TRANSFER AGENT
Computershare Trust Company of Canada
Valiant Trust Company
CORPORATE OFFICE
110, 6131 – 6th Street SE
Calgary, AB T2H 1L9
Tel: 403.531.0720
Fax: 403.531.0727
Email: info@npreit.com
www.npreit.com
NPREIT 2008 ANNUAL REPORT
50
Northern Property Real Estate Investment Trust owns and operates rental real estate in secondary markets in Canada. We have
significant multi-family residential real estate investments in Alberta, a growing position in British Columbia and are the largest multi-family
residential landlord in each of the NWT, Nunavut and the Province of Newfoundland and Labrador. NPR’s income producing portfolio is
primarily residential including multi-family apartment rental units, furnished execusuites and master leased seniors’ buildings. We also
have a portfolio of commercial buildings focused on government tenancies predominantly located in Canada’s far north.
110, 6131 – 6th Street SE
Calgary, AB T2H 1L9
Tel: 403.531.0720
Fax: 403.531.0727
Email: info@npreit.com
www.npreit.com