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 Northwest Territories, 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 2009. The 2009
payout ratio was 68.3 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 31 Auditors’ Report 31
Consolidated Financial Statements 32 Notes to the Consolidated Financial Statements 36
Management Team 53 Corporate Information 54
1 | NP REIT 2009 ANNUAL REPORT
O
ur Res
sults
00s)
me
Tota
Net
Asse
Distr
Distr
Distr
Payo
Num
Tota
al revenue ($00
operating incom
ets ($000s)
ributable incom
ributable incom
ributions per un
out ratio
mber of residen
al commercial s
me*
me per unit*
nit
tial units at De
square feet at D
cember 31
December 31
200
134,23
86,79
888,36
54,33
$2.1
$1.4
68.3
8,14
901,95
09
32
93
67
36
17
48
%
43
59
2008
127,759
84,305
872,922
52,139
$2.08
$1.48
71.0%
7,807
907,509
*Pleas
e refer to non-GAAP F
inancial Measures on p
page 6.
RE
EVENUES
A
BY AREA
BC …
Albe
NWT
Nuna
Nfld
….…….......12%
rta..…..…26%
T..……......28%
avut.…….20%
……….…..14%
L
NL
BC
NU
AB
NT
RE
EVENUE B
BY PROPE
E
RTY TYPE
Resident
Commer
tial …………..83
rcial ……….…17
%
7%
RE
($m
EVENUES
mm)
134
128
104
84
63
49
DISTRIB
INCOME
BUTABLE
E PER UNI
AV
IT ($) RA
VERAGE I
ATE (%)
T
INTEREST
1.82
1.64
2
1.52 1.52
2.17
8
2.08
13
6.1
5.76
5.55
5.39
5
5.13
4.87
04 05 06
07 08 09
04 05
06 07 08
8 09
0
4 05 06 0
07 08 09
2 | NP REIT 2
2009 ANNUAL
REPORT
Letter to Unitholders
Dear Fellow Unitholders:
I am pleased to provide these comments respecting NPR’s 2009 operations and financial results together with some thoughts about what
the future may hold for our business.
2009 IN REVIEW
As 2009 began, Northern Property management was apprehensive about our prospects for the year. 2007 had seen the arrival of the
subprime crisis, the credit crunch and a shaky economy beginning to emerge in the U.S. In the summer of 2008 oil prices began to
decline rapidly as the economy took a decided turn for the worst. Stock values evaporated, commercial credit virtually disappeared and
government agencies were scrambling to prop up what had become a desperate economic situation. Yet throughout 2008 Northern
Property’s business held fast. Apartment occupancy remained robust, rent increases were common and there was very little sign of
malaise in our markets. This seemed too good to last...and it was.
In January 2009 business conditions began to decline for the REIT. It became clear that the collapse in oil prices would have an
important impact on the economies in Western Canada. In January, fewer workers returned to the oil patch as the projects which had
been underway were completed. Planned expansions and new oil sands and heavy oil projects were simply stopped in their tracks.
Traffic in our natural gas levered areas in Northern BC was slower than normal. Vacancy in Yellowknife, a government City, with an
ordinarily flourishing diamond industry increased from 3 to 7%. Our furnished execusuites business in Yellowknife and Inuvik declined as
mineral and oil and gas activity settled to new lows.
Between January and August of 2009, NPR’s total apartment vacancy increased every month, peaking at 806 vacant doors in August.
Notwithstanding this negative change in business fundamentals, the REIT did pretty well financially in 2009 especially early in the year.
As the oil and gas based Alberta economy was melting down, NPR experienced strong rental market conditions in its Eastern regions of
Newfoundland and Nunavut. Both jurisdictions to some degree benefited from the difficulties in the West. Oil patch workers returned in
number to Newfoundland where they occupied apartments, bought vehicles, purchased houses and otherwise contributed to a newly
prosperous Newfoundland economy. The Nunavut Government which had experienced difficulty hiring skilled personnel in the south
during the boom years suddenly was able to find candidates willing to move to the far North. Our apartment portfolios in both Nunavut
and Newfoundland performed strongly throughout 2009. The low price of heating oil helped our bottom line in Yellowknife, Inuvik, Iqaluit
and in the Nunavut Hamlets. At a time when commercial real estate companies had difficulty refinancing their properties, CMHC insured
mortgages remained available in abundance at historically low rates. We tightened our belts relative to executive compensation. These
cost savings contributed to our bottom line.
NPR’s financial results for the first half of 2009 were surprisingly good in the face of a frightening economy and deteriorating business
conditions.
In Q3 NPR management resolved to ramp up our apartment capex investment especially in the oil producing areas of Alberta. In Fort
McMurray and Lloydminster, during the boom years it had been very difficult to keep buildings in the condition that Northern Property and
its tenants expect. As apartments became vacant for the first time in years, with workers and sub-trades suddenly available because of
the recession conditions, NPR set about the business of making our northern Alberta apartment buildings “Best in Class”. A small army
of workers renovated apartments, redecorated common areas, constructed security fencing, and carried out deferred maintenance tasks
which had been impossible to do in the years of labour shortages and ‘back to back’ month end apartment turns. Our capex investment
in the last half of 2009 was twice the normal. This explosion of investment in our buildings coupled with high vacancy did finally result in a
decline in our financial performance in Q3 and Q4.
WHERE WE ARE TODAY
I think it is important for REIT unitholders to step back and examine where the REIT is today, at the end of what has been described as
the worst economic decline since the Great Depression. NPR weathered this economic catastrophe considerably better than most other
REIT’s. Why?
First, NPR is mainly invested in apartments. While the apartment business is certainly subject to the prevailing economic winds, it does
not implode when recessionary conditions present. Our apartment vacancy increased from 6.8% in January to 12.9% at its worst in
August. A change of that type represents a decline in NOI and unitholder value but certainly not destruction.
3 | NP REIT 2009 ANNUAL REPORT
Second, NPR management and its Board of Trustees, since inception have believed in running a conservative fiscal ship. We have one
of the lowest payout ratios in the rental real estate industry, the lowest debt to gross book value in the apartment asset class, and the
best EBITA/interest coverage ratio. In boom times, NPR has occasionally been subject to some mild criticism for maintaining these
conservative operating metrics. But in troubled times, having a conservative financial ethos is a strength. So while NPR’s unit price
declined somewhat during the peak of the recession, the rate of decline was much less than REITs with higher leverage and payout
ratios. Northern Property was not in a position where it felt the need to “de-lever” – carry out an equity offering – as many others did
during 2009. Our balance sheet very well withstood 2009 without a dilutive equity raise. NPR raises equity when we have real estate to
buy, not to defend our balance sheet.
Late in 2009, NPR’s apartment business began to improve. Every month between September and December of 2009, apartment
occupancy began to build. This trend has continued to the present time.
Northern Property was able to exit 2009 with management feeling that business conditions were improving and that the bottom had been
reached financially. Our business is doing much better with the Northwest Territories returned to its pre-recession state, Nunavut and
Newfoundland doing exceptionally well, Northern BC being surprisingly steady given the importance of natural gas in its economy and the
oil producing areas of Alberta showing strong signs of recovery. Our one area of weakness, a weakness we expect to continue for a few
years, is in the natural gas levered city of Grande Prairie.
LOOKING AHEAD
We started the year with the achievement of an important milestone. With the payment of the monthly distribution for January 2010, NPR
unitholders that invested in our IPO in May of 2002 at $10.00 per unit had received a full $10.00 in distributions.
Apartment occupancy is continuing to build. NPR is beginning to seek out apartment investment and development opportunities once
again. Our experience in 2009 has taught us that apartments are the most reliable real estate asset class. Most of our growth going
forward will be in the further accumulation of apartment real estate.
I have been personally surprised that apartment acquisition prices after the recession, instead of declining, are at least at the levels they
were prior to the recession. This will make a negotiation with apartment owners difficult as there is a price beyond which NPR is simply
not prepared to pay.
In 2010 we seek to further diversify ourselves geographically. 2009 has illustrated the merits of not having all of one’s eggs in a single
basket. We operate in five geographic regions presently. Finding a sixth region in which to buy apartments is an important objective for
Northern Property.
NPR intends to observe its financially conservative operating metrics in the year ahead. We can never be certain that the economic
disruption that we have just experienced is truly behind us. Most economists are suggesting that interest rates will rise. As a result we
are extending term in our financing where possible, and we will keep our debt as low as possible to lessen our exposure to interest costs
should rates rise materially.
We are aware that real estate performance tends to lag the general economy. Our commercial, seniors and government tenants have all
delivered positive results for us in the last couple of years. Will the weak economy of 2009 and the fiscal readjustments in 2010 affect
these businesses of Northern Property? We cannot know the answer to this, but we will remain careful and vigilant. Significant
expansion for NPR in commercial, industrial and seniors real estate is not very likely in the next few years because of these risks.
So we have entered 2010 in decidedly better spirits than those of a year ago. However, our optimism will be tempered with great caution
as we move ahead.
Respectfully submitted,
B. James Britton,
President and Chief Executive Officer
March 22, 2010
4 | NP REIT 2009 ANNUAL REPORT
Management’s Discussion and Analysis
Management’s Discussion and Analysis of financial conditions and results of operations should be read in conjunction with
Northern Property Real Estate Investment Trusts (“NPR” or the “REIT”) audited consolidated financial statements for the years
ended December 31, 2009 and 2008.
Certain information contained in Management’s Discussion and Analysis contains forward looking statements relating to the
business and financial outlook of NPR. 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 17, 2010 and are based on information available to
management as of that date. NPR assumes no obligation to update or revise them to reflect new events or circumstances that
may arise after March 17, 2010, except as required by law.
Portfolio Summary – December 31, 2009
British Columbia
Northwest Territories
Alberta *
Nunavut
Newfoundland
Total
Multi-family
Execusuites
Seniors’
1,372
1,155
1,787
741
1,268
6,323
-
141
-
39
140
320
214
-
746
-
540
1,500
Total
Residential
(units)
Commercial
(sq ft)
1,586
1,296
2,533
780
1948
8,143
124,417
537,219
77,755
145,538
17,030
901,959
*Includes 189 units in Grande Prairie, Alberta which are in lease-up phase at December 31, 2009.
Financial Performance at a Glance
In $000’s except per unit amounts
Three Months
Ended December 31
Year Ended
December 31
2009
33,200
20,760
5,483
653
$0.026
9,286
$0.370
12,792
$0.510
72.6%
12,969
$0.517
71.6%
2008
32,515
21,424
6,803
6,427
$0.257
9,260
$0.370
13,560
$0.542
68.3%
13,758
$0.550
67.3%
2009
134,232
86,793
25,929
21,316
$0.850
37,100
$1.480
54,336
$2.166
68.3%
55,107
$2.196
67.3%
2008
127,759
84,305
26,417
22,702
$0.907
37,037
$1.480
52,139
$2.083
71.0%
53,079
$2.121
69.8%
Total revenue
Net operating income (“NOI”) **
Earnings before taxes
Net earnings
Net earnings per unit, basic
Distribution to unitholders
Distributions per unit
Distributable Income (“DI”) **
DI per unit, basic
Payout ratio
Funds from operation (“FFO”) **
FFO per unit, basic
FFO payout ratio
**See Non-GAAP Measures below.
5 | NP REIT 2009 ANNUAL REPORT
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 Net Operating Income, 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. These
measures are widely accepted measures of performance for Canadian real estate investment trusts, however are not defined by
Canadian generally accepted accounting principles (“GAAP”).
1. OVERVIEW
NPR is primarily a multi-family residential real estate investment trust, providing a broad spectrum of rental accommodations in
Canadian secondary markets with strong economic fundamentals. Geographically, NPR operates in British Columbia, the
Northwest Territories, Alberta, Nunavut and Newfoundland. The REIT’s multi-family 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 residents.
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.
Financial Highlights
•
•
•
•
•
•
•
Net earnings per unit for the fourth quarter of 2009 decreased to $0.026 compared to $0.257 for the same period of 2008.
Net earnings per unit for the year ended December 31, 2009 decreased to $0.850 compared to $0.907 for the same
period of 2008. DI per unit for the fourth quarter of 2009 was $0.510 compared to $0.542 for the fourth quarter of 2008.
DI per unit for the year ended December 31, 2009 increased to $2.166 compared to $2.083 for the same period of 2008.
FFO per unit for the fourth quarter of 2009 was $0.517 compared to $0.550 for the fourth quarter of 2008. FFO per unit
for the year ended December 31, 2009 increased to $2.196 compared to $2.121 for the same period of 2008.
FFO payout ratio for the fourth quarter of 2009 was 71.6% compared to 67.3% for the fourth quarter of 2008. FFO payout
ratio for the year ended December 31, 2009 was 67.3% compared to 69.8% for the same period of 2008.
Same door NOI decline of 6.0% for the fourth quarter and 2.9% for the year ended December 31, 2009 compared to
same door NOI growth of 6.1% and 6.1% for the same periods of 2008, respectively.
The weighted average cost of mortgage debt decreased to 4.87% compared to 5.13% at December 31, 2008.
Debt Service Coverage and Interest Coverage remained strong for the year ended December 31, 2008. Debt Service
Coverage was 1.89 for the year ended December 31, 2009 compared to 1.93 for the year ended December 31, 2008.
Interest Coverage was 3.01 for the year ended December 31, 2009 compared to 3.05 for the year ended December 31,
2008.
Future tax expense was $4.8 million for the fourth quarter of 2009 and an expense of $4.2 million for the year ended
December 31, 2009. $2.3 million of the future tax expense was due to increased temporary differences arising from the
accelerated CAPEX program which is capitalized and amortized for accounting purposes and expensed in the year
incurred for income tax purposes. The sharply higher CAPEX investment in rental properties has been flowed through to
NPR unitholders and is reflected in the return of capital on 2009 distributions which was 68% for 2009 compared to 53%
for 2008.
DI & FFO per unit were lower for the fourth quarter of 2009 compared to 2008, primarily the result of the decreased rental
revenue in the northern Alberta markets. Higher maintenance costs and one-time expenditures relating to the clean-up of fuel oil
spills and insurance deductibles relating to fires that occurred in 2008 and 2009 also contributed to the decrease in financial
results. Decreased rental revenue is the result of both increased vacancy and lower rental rates in Grande Prairie, Fort
McMurray and Lloydminster. Vacancy in these markets peaked in August 2009, with a modest improvement through the
remainder of 2009. Much higher maintenance expense and CAPEX investment in Fort McMurray and Lloydminster was
experienced in 2009 as NPR renewed and upgraded suites which had been fully occupied for several years. For the year ended
December 31, 2009 net earnings, DI and FFO were higher than the previous year, primarily due to NPR’s strong financial
performance for the first half of 2009 and the full years contribution of acquisitions completed in 2008. The weaker performance
of NPR’s northern Alberta markets during the second half of 2009 was offset by the following:
•
•
•
•
Continued strong performance of the Nunavut and Newfoundland portfolios;
Lower heating oil prices in the Northwest Territories;
Reduced interest expense resulting from the decrease in the weighted average interest rate of mortgage and loans
payable;
Decreased trust administration costs.
Net earnings were impacted by the non-cash future tax expense of $4.8 million in the fourth quarter of 2009.
6 | NP REIT 2009 ANNUAL REPORT
1. OVERVIEW (continued)
NPR in the Current Economic Environment
The current recession’s impact on NPR’s financial results increased during the second half of 2009. Specifically, Grand Prairie,
Fort McMurray and Lloydminster are experiencing vacancy levels significantly higher than 2008 and temporarily higher costs
associated with vacant suite repair and refurbishment.
Weaker crude oil and natural gas prices have had a significant impact on NPR’s residential rental portfolio, in northern Alberta.
The economies of both Fort McMurray and Lloydminster are highly dependent on oil related development and extraction activity.
Vacancies in these two communities increased month after month through the first half of 2009, with vacancies peaking in
August. A recovery in the price of crude oil in mid 2009 and the announcements of restarting previously postponed oilsands
projects has recently begun to have a positive impact on NPR’s vacancy in Lloydminster and to some degree in Fort McMurray.
During 2009 NPR temporarily accelerated its CAPEX program to refurbish suites and common areas in buildings where it had
been impossible to do so during the economic ‘boom’. Management expects to conclude the accelerated CAPEX program in Q2
2010. Management remains cautiously optimistic that the worst is behind us, however, is continuing its heightened leasing,
retention and CAPEX renovation efforts.
Grande Prairie’s economy depends on the natural gas, oil, forestry and agricultural industries. The vacancy levels in Grande
Prairie have stabilized at current levels of approximately 19% and are expected to remain at that level until there is a significant
increase in natural gas drilling programs. The 189 unit Westmore development is expected to remain in lease up phrase
throughout 2010.
NPR’s financial results and financial position have remained in very good condition through 2009 in spite of the challenges in its
northern Alberta portfolio. With its conservative balance sheet, low FFO payout ratio, strong Interest Coverage and Debt Service
Coverage (among the best of Canadian REITs), NPR is poised to take advantage of opportunities in 2010.
NPR’s investment in seniors’ and commercial properties have reduced the negative impact of its Alberta multi-family vacancy
losses by decreasing exposure to expenses, as operating costs in these portfolios are typically recovered from or paid directly by
the tenants. NPR’s strategy of maintaining its conservative balance sheet and low DI payout ratio were its best defense against
the weakened economy. NPR was able to maintain current distribution levels and low payout ratio while increasing its capital
maintenance program. There is a significant buffer between FFO and current distribution levels after allowing for capital
maintenance expenditures. Management believes this buffer provides unitholders with a reasonable level of protection from the
business risk attending the current economic environment.
Acquisitions, Developments and Disposals
During the year ended December 31, 2009, NPR completed five transactions in Newfoundland which were financed through a
combination of assumed mortgages, issuance of Class B Limited Partnership Units and the operating facilities. NPR curtailed its
acquisition activity during 2009 in response to the economic uncertainty, completing only those transactions that it had committed
to in 2008. Acquisitions completed in 2009 are summarized below:
Residential
Multi-family
Seniors’
Units
40
111
151
$000’s
2,302
9,351
11,653
NPR disposed of non-core assets during the fourth quarter totaling 5,550 square foot of commercial property and four residential
units in Yellowknife, NWT and in Nunavut. These properties were sold for proceeds of $992,000 and a gain on sale of $246,000.
7 | NP REIT 2009 ANNUAL REPORT
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, 2009
compared to the three months and year ended December 31, 2008. On August 31, 2009 NPR completed the 189 unit Westmore
Estates development in Grande Prairie, Alberta. Including land the cost of the project was $23.2 million. For the year ended
December 31, 2009, the financial results exclude the operations from the 189 units in Grande Prairie that are still in the lease-up
phase. Revenues and expenses associated with this property are capitalized until revenue from the property exceeds operating
and financing charges, in any event, no longer than 18 months.
Earnings Before Other Items and Taxes
In $000’s
Rental revenue
Other property income
Operating expenses
Net operating income
Interest on mortgages
Amortization
Earnings before other items
and income taxes
Three Months
Ended December 31
Year Ended
December 31
2009
32,373
827
33,200
(12,440)
20,760
(6,411)
(7,560)
6,789
2008
31,644
871
32,515
(11,091)
21,424
(6,239)
(6,867)
8,318
2009
130,767
3,465
134,232
(47,439)
86,793
(26,435)
(28,789)
31,569
2008
124,626
3,133
127,759
(43,454)
84,305
(24,499)
(26,447)
33,359
Rental Revenue and Other Property Income
In $000’s
Residential
Rental
Execusuites
Seniors’
Commercial
Total
Three Months
Ended December 31
Year Ended
December 31
2009
2008
2009
2008
21,069
1,837
4,452
27,358
5,842
33,200
20,818
1,797
4,202
26,817
5,698
32,515
85,294
8,398
17,486
111,178
23,054
134,232
79,839
8,497
16,494
104,830
22,929
127,759
Total revenue for the three months ended December 31, 2009 was $33.2 million, 2.1% higher than $32.5 million for the same
period of 2008. Total revenue for the year ended December 31, 2009 was $134.2 million, 5.1% higher than $127.8 million for the
same period of 2008. Factors impacting rental revenue are summarized below:
•
•
•
•
•
Acquisitions completed in 2008 and the four quarters of 2009 contributed revenue of $3.1 million in the fourth quarter
and $11.9 million for the year ended December 31, 2009.
Same door revenue decline was 1.6% for the fourth quarter, primarily the result of higher vacancies and lower rental
rates compared to the same period of 2008.
For the year ended December 31, 2009, same door revenue growth was 0.1%. NPR experienced same door revenue
growth for the first half of 2009. This became negative in the second half of the year as a result of higher vacancy and
declining rents in northern Alberta.
Higher vacancy in northern Alberta, some parts of northeast BC and Yellowknife was offset in part by rental increases
in Newfoundland, where the rental markets remain strong and in Fort Nelson, BC where rental increases are being
obtained as a result of the extensive renovation program completed in 2008.
Revenue for the year ended December 31, 2009 includes a number of one-time items relating to the settlement of
insurance claims and retroactive rental arbitrations totaling approximately $250,000.
8 | NP REIT 2009 ANNUAL REPORT
2.
YEAR-TO
O-DATE RE
ESULTS A
AND COM
MPARISON
NS (contin
nued)
Rent
over
senio
reve
inclu
tal revenue to be
r the terms of the
ors’ properties po
nue of $333,000 c
udes straight line r
received from leas
associated leases
ortfolios. Rental r
compared to $297
rental revenue of $
ses with rental rat
s. Rental revenue
revenue for the t
7,000 for the same
$1.3 million compa
tes varying over th
recorded on a str
hree months end
e period of 2008. R
ared to $1.2 million
he term of the leas
raight line basis is
ded December 31
Rental revenue fo
n for the same per
se is recorded on
s generated from t
1, 2009 includes
r the year ended D
riod of 2008.
a straight line bas
the commercial an
straight line rent
December 31, 200
sis
nd
tal
09
venue
Re
Resi
the s
$104
have
sidential R
idential rental reve
same period of 20
4.8 million for the
e been acquired si
Rental Rev
enue for the three
08. Residential re
same period of 20
ince January 1, 20
months ended D
ntal revenue for th
008. The increase
008. The increase
ecember 31, 2009
he year ended De
e is primarily the re
in revenue was p
9 was $27.4 millio
cember 31, 2009
esult of additions i
partially offset by h
on, 2.0% higher th
was $111.2 millio
in 2008. In total, 9
higher vacancy in c
han $26.8 million f
n, 6.1% higher tha
969 residential uni
certain regions.
for
an
its
Re
sidential V
Vacancy Lo
oss – Year
ended De
ecember 3
31
Market vacanc
cy loss
R
Renovation vacanc
cy loss
Total
2009
2008
2009
2008
2
9
2009
2008
ries
British Columbia
Northwest Territo
Alberta
Nunavut
Newfoundland
Overall
14.7%
4.8%
9.0%
0.7%
1.4%
6.4%
12.6%
2.0%
2.8%
0.7%
1.7%
3.5%
2.0%
2.1%
4.1%
0.2%
0.1%
2.0%
5
5.0%
1
1.5%
0
0.1%
0.2%
0
0
0.1%
1.2%
1
16.7%
%
6.9%
%
13.1%
%
%
0.9%
1.5%
%
%
8.4%
17.6%
3.5%
2.9%
0.9%
1.8%
4.7%
Vaca
all re
total
appr
ancy loss is calcu
esidential units. F
ing 189 units has
roximately 30%.
lated by dividing
or the year ended
been excluded fr
potential rental re
d December 31, 2
rom the vacancy lo
evenue from vacan
2009, the recently
oss calculation. O
nt residential units
y completed West
Occupancy in this
s by total potentia
tmore Estates in G
property at Dece
al rental revenue f
Grande Prairie, A
mber 31, 2009 wa
for
B,
as
Qu
uarterly Re
esidential R
Rental Vac
s
cancy Loss
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Ren
Vac
novation
cancy Loss
Mar
rket Vacancy
s
Loss
Q1 08
8
Q2 08
Q3 08
Q
Q4 08
Q1 09
09
Q2 0
Q3 09
Q4 09
Q
Resi
occu
the f
idential vacancy
upancy in Alberta,
five geographic reg
loss for the fourt
north-eastern BC
gions NPR operat
h quarter of 2009
C and in the Northw
tes in for the last 8
9 declined from
west Territories. T
8 quarters.
10% in the third
The following table
quarter. This wa
e provides the tota
as due to improve
al vacancy levels f
ed
for
9 | NP REIT 2
2009 ANNUAL
REPORT
2.
YEAR-TO
O-DATE RE
ESULTS A
AND COM
MPARISON
NS (contin
nued)
Qu
uarterly Re
esidential R
Rental Vac
s
cancy Loss
20%
16%
12%
8%
4%
0%
Q1 08
Q2 08
08
Q3 0
Q4 08
Q1 09
Q
Q2 09
Q3 09
9
Q4 09
Al
berta
Br
ritish Columbia
No
es
orthwest Territorie
Nu
unavut
Ne
ewfoundland
In th
Yello
expe
he Northwest Terr
owknife has receiv
ects this will transl
ritories, vacancy l
ved positive news
ate into reduced v
oss decreased fo
s with certain diam
vacancy loss durin
or both Yellowknif
mond mines cance
ng the first part of 2
fe and Inuvik in Q
elling planned exte
2010.
Q4 2009. Over the
ended shut down
e past few month
of operations. NP
hs,
PR
Vaca
ancy loss in Nunav
vut for 2009 rema
ins consistent with
h 2008 at 0.9%.
Vaca
Gan
ancy loss in Newf
der continue to be
foundland decrea
e strong and vacan
sed slightly from
ncy levels are exp
1.8% in 2008 to
pected to remain a
1.5% in 2009. Re
at this level through
ental markets in b
h 2010.
both St. John’s an
nd
Qu
uarterly Re
esidential R
Rental Vac
cancy Loss
a
s - Alberta
20%
16%
12%
8%
4%
0%
ay
Fort McMurra
Grande Prair
rie
r
Lloydminster
Q1 08
Q2 08
Q3
3 08
Q4 08
Q1 09
09
Q2 0
Q3 09
Q4 09
Tota
and
Lloyd
quar
Fort
Prair
al vacancy loss in
Lloydminster incre
dminster is mostl
rter, there were a n
McMurray and L
rie are expected to
Alberta was 13.1
eased steadily thr
y the result of de
number of indicato
loydminster, whic
o continue for the
% for 2009 comp
rough the first half
ecreased econom
ors, including an in
ch may lead to im
foreseeable future
pared to 2.9% in 2
f of 2009, peaking
mic activity due to
ncrease in the pric
mproved operating
e as the economy
2008. Vacancy los
g in August. Highe
the lower world
ce of crude oil and
results in these
is more reliant on
ss in Fort McMurr
er vacancy loss in
price of crude oil
d slightly improved
markets. Vacancy
n natural gas and f
ray, Grande Prairi
Fort McMurray an
l. During the four
d occupancy in bo
y losses in Grand
forestry.
e,
nd
rth
oth
de
10 | NP REIT
T 2009 ANNUAL
L REPORT
2.
YEAR-TO
O-DATE RE
ESULTS A
AND COM
MPARISON
NS (contin
nued)
Qu
uarterly Re
esidential R
Rental Vac
cancy Loss
s – BC
50%
40%
30%
20%
10%
0%
Fort Nelson
F
Dawson Creek
D
Fort St. John and Ta
F
aylor
Nanimo
N
Chetwynd
C
Q1 08
Q2 08
Q3
08
Q4 08
Q1 09
Q2 09
Q3 09
Q4
4 09
Resi
2009
num
renta
indu
idential vacancy i
9 with an overall v
ber of renovation
al markets traditio
stries.
n north eastern B
vacancy loss of 1
projects in 2009,
onally operate at
BC historically ave
6.7%, slightly imp
which in part con
higher levels of v
erages 10 – 15%.
proved from the 1
ntributed to the re
vacancy as a res
Vacancy in north
7.6% for the sam
educed vacancy in
sult of the season
h eastern BC rem
me period of 2008
n the second half
nality in the forest
mained high throug
. NPR completed
of the year. Thes
try and natural ga
gh
a
se
as
Man
durin
adju
shor
agement continue
ng 2009. Leasing
stments to rental
rt term and mainta
es its heightened
g initiatives includ
rates, where app
ain the future renta
focus on leasing,
de tenant retenti
propriate. The ove
al potential through
specifically in the
ion measures, fo
erall objective of th
h minimizing the a
e regions that exp
ocused marketing
he leasing progra
amount of rental ra
erienced sharp in
, increased leas
m is to maximize
ate decreases.
creases in vacanc
ing incentives an
net revenue in th
cy
nd
he
venue
Exe
Exec
2008
the s
finan
NWT
ecusuite R
cusuites rental rev
8. Execusuites re
same period of 20
ncial performance
T which experienc
Rental Rev
venue for the four
ental revenue for t
008. Throughout
. The strong perfo
ced decreased occ
rth quarter was $
he year ended De
2009, NPR’s exec
ormance of these
cupancy through m
1.84 million, 2.2%
ecember 31, 2009
cusuites in St. Jo
e assets was offse
most of 2009.
% higher than the
9 was $8.4 million,
ohn’s, Nfld and Iqa
et by lower financ
$1.80 million for
, 1.2% lower than
aluit, Nunavut con
cial results in Yello
the same period
the $8.5 million f
ntinued their stron
owknife and Inuvi
of
for
ng
ik,
Se
Rent
term
prop
reve
of 20
sam
2008
niors’ Ren
tal income from s
m triple net leases
perties, NPR is res
nue for the three
008. Rental reven
e period of 2008.
8 and scheduled re
ntal Revenu
seniors’ properties
s ranging from 15
sponsible for the p
months ended De
nue for the year e
The increase in
ent increases.
ue
s represents renta
5 to 20 years, wit
physical facilities a
ecember 31, 2009
ended December
revenue is the re
al payments made
th regularly sched
and has no direct
9 was $4.5 million,
31, 2009 was $17
esult of acquisition
e to NPR by the o
duled increases, g
business relation
5.9% higher than
7.5 million, 6.0%
ns and expansions
operators of the fa
generally 1% per
ship with individu
n the $4.2 million f
higher than the $
s totaling 205 uni
acilities under lon
g-
se
r annum. For thes
tal
al residents. Rent
od
for the same perio
he
$16.5 million for th
ts since January
1,
Co
Com
renta
in co
high
ommercial
mmercial rental rev
al revenue for the
ommercial rental
er vacancy due to
Rental Rev
venue for Q4 2009
year ended 2009
revenue are prim
o the planned repo
venue
9 was $5.8 million,
was $23.1 million
marily due to the a
ositioning of YK Ce
, 2.5% higher than
n, 0.5% higher tha
acquisitions and d
entre East in Yello
n $5.7 million for th
an $22.9 million fo
developments com
owknife from retail
he same period of
r the same period
mpleted in 2008
to office tenancie
f 2008. Commerci
of 2008. Increase
and were offset b
es.
ial
es
by
Vaca
31, 2
1, 20
East
of to
renta
ancy decreased to
2008. The decreas
010 the Governme
t, decreasing vaca
otal commercial sp
al rates.
o 34,905 square fe
se in vacancy from
ent of the North W
ancy to 14,905 squ
pace mature. Mana
eet or 3.9% at Dec
m December 31, 2
West Territories too
uare feet or 1.6%.
agement is confid
cember 31, 2009
2008 is primarily d
ok occupancy of th
During 2010, leas
ent that the major
compared to 43,0
due to decreased
he renovated 20,0
ses totaling appro
rity of these leases
000 square feet or
vacancy in Inuvik
00 square feet of
oximately 164,500
s will be renewed
r 4.7% at Decemb
, NWT. On Janua
space in YK Cent
square feet or 18
at or above curre
er
ry
tre
%
nt
11 | NP REIT
T 2009 ANNUAL
L REPORT
2. YEAR-TO-DATE RESULTS AND COMPARISONS (continued)
Operating Expenses
In $000’s
Operating expenses:
Utilities
Property taxes
Other expenses
Three Months
Ended December 31
Year Ended
December 31
2009
2008
2009
2008
3,063
1,740
7,637
12,440
3,743
1,692
5,656
11,091
12,659
6,837
27,943
47,439
13,493
6,420
23,541
43,454
Utilities, expressed as a percentage of rental revenue, decreased to 9.5% for Q4 2009 from 11.8% for the same period of 2008.
For the year ended December 31, 2009 utilities, expressed as a percentage of rental revenue, decreased to 9.7% from 10.8% for
the same period of 2008. Fuel oil costs in the NWT remained lower through the fourth quarter of 2009, however, have increased
slightly since the end of the second quarter of 2009 as the price of crude oil increased. The mid-2008 increase in the price of fuel
oil in Nunavut, where the price is set by the territorial government, remained intact through the first half of 2009. In June 2009,
the territorial government decreased the price of fuel oil by $0.10 per litre.
Building maintenance costs were much higher than normal during the fourth quarter as NPR completed deferred maintenance,
primarily on newly vacated apartments in northern Alberta.
Included in other expenses for the year ended December 31, 2009 were unplanned expenditures on heating system repairs,
clean up of four minor fuel oil spills in Nunavut and insurance deductibles relating to two fires in 2008 and one in 2009, totaling
$0.8 million. Acquisitions completed in 2008 and 2009 increased operating expenses by approximately $1.1 million for the three
months ended and $3.7 million for the year ended December 31, 2009.
Net Operating Income
In $000’s
Residential
Multi-family
Execusuites
Seniors’
Commercial
Total
Three Months
Ended December 31
Year Ended
December 31
2009
2008
2009
2008
12,145
772
4,446
17,363
3,397
20,760
12,961
826
4,197
17,984
3,440
21,424
51,359
4,064
17,462
72,885
13,908
86,793
49,450
4,227
16,471
70,148
14,157
84,305
NOI derived from residential properties was 83.6% of total NOI for Q4 2009 consistent with 83.9% for the same period of 2008.
For the year ended December 31, 2009, NOI derived from residential properties was 84.0% of total NOI compared to 83.2% for
the same period of 2008. The increase is due to the acquisition of multi-family and seniors’ properties in 2008 and 2009, which
accounted for approximately 92.6% of the total $92.0 million in acquisitions completed in 2008 and 2009. The increase in total
NOI was offset by same door NOI decline for the year ended December 31, 2009 of 2.9%.
The seniors’ and commercial properties provide stability to the REIT’s financial results, reducing NPR’s overall exposure to
apartment tenancy risk, volatile utility prices and severe winter temperatures in Nunavut and the Northwest Territories. In these
two business segments, the majority of operating costs are either recovered from or paid directly by the tenants. For the year
ended December 31, 2009, approximately 36.1% of NOI was derived from commercial and seniors’ properties where tenants are
primarily responsible for operating costs.
12 | NP REIT 2009 ANNUAL REPORT
2.
YEAR-TO
O-DATE RE
ESULTS A
AND COM
MPARISON
NS (contin
nued)
Sa
NPR
owne
owne
decli
2009
2008
temp
oil sp
NPR
me Door N
R defines same do
ed by the REIT fo
ed by NPR on or
ine of 6.0% comp
9, NPR experienc
8. Same door NO
porary higher main
pills and insuranc
R’s other geograph
NOI
oor NOI growth /
or both the current
before January 1
pared to same do
ced same door NO
OI decline is the
ntenance costs on
e deductibles. The
hic regions.
decline as the a
t and previous rep
1, 2008 are includ
or NOI growth of
OI decline of 2.9%
result of decreas
n newly vacant un
e impact was offs
nnual change in
porting periods. Fo
ded in the calcula
6.1% for the sam
% compared to sa
ed rental revenue
nits in northern Al
set in part by lowe
net operating inco
or the purposes of
ation. For Q4 2009
me period of 2008
ame door NOI gro
e in northern Alb
berta and unplann
er fuel costs in the
ome from propert
f this discussion p
9, NPR experienc
8. For the year en
owth of 6.1% for
erta and expense
ned expenditures
e NWT and same
en
ties that have bee
properties that we
re
ced same door NO
OI
31,
nded December 3
the same period
of
e growth related
to
uel
on clean up of fu
door NOI growth
in
Qu
uarterly Sa
ame Door N
Net Opera
ating Incom
me Growth
e
h / Decline
12%
9%
6%
3%
0%
-3%
-6%
-9%
Q1
08
Q2 08
Q3 08
Q4 08
Q1 09
Q
Q2 0
09
Q3 09
Q4 09
Int
Inter
mort
2008
in 20
decli
terest on M
rest on mortgages
tgages for the yea
8. The increase is
008 and 2009. Th
ine in the weighted
s
Mortgages
reased to $6.4 mi
s for Q4 2009 incr
ber 31, 2009 incre
ar ended Decemb
ult of the increase
s primarily the resu
erest expense res
he increase in inte
t rates of mortgag
d average interest
illion compared to
eased to $26.4 mil
ed mortgage debt
sulting from highe
es to 4.87% at De
o $6.2 million for t
llion compared to
from refinancing
er mortgage debt
ecember 31, 2009
the same period o
$24.5 million for
activities and acq
was partially offse
from 5.13% at De
on
of 2008. Interest o
the same period
of
ed
uisitions complete
et by the continue
ed
8.
ecember 31, 2008
Am
Amo
year
in am
certa
n
mortization
2009 increased to
ortization for Q4 2
r 31, 2009 increas
r ended Decembe
marily the result of
mortization is prim
that have reached
ain capital assets t
$7.6 million com
sed to $28.8 millio
acquisitions comp
d the end of their u
pared to $6.9 mil
on compared to $2
pleted in 2008. In a
useful lives.
lion for the same
26.4 million for the
addition, during th
period of 2008. A
e same period of
he fourth quarter, N
Amortization for th
2008. The increas
NPR fully amortize
he
se
ed
13 | NP REIT
T 2009 ANNUAL
L REPORT
2. YEAR-TO-DATE RESULTS AND COMPARISONS (continued)
Net Earnings
In $000’s except per unit amounts
Earnings before the undernoted
Trust administration
Interest on operating facilities
Interest and other income
Gain (loss) on settlement of debt
Gain on sale of rental properties
Non-controlling interest
Earnings before income taxes
Current
Future
Net earnings
Other comprehensive earnings (loss)
Comprehensive earnings
Net earnings per unit
Basic:
Diluted:
Weighted average number of units
outstanding – basic (000’s)
Weighted average number of units
outstanding – diluted (000’s)
Three Months
Ended December 31
2008
2009
6,789
(1,448)
(201)
128
-
246
(31)
5,483
(50)
(4,780)
653
-
653
8,318
(1,317)
(260)
96
(29)
-
(5)
6,803
(103)
(273)
6,427
118
6,545
$0.026
$0.026
$0.257
$0.256
Year Ended
December 31
2009
31,569
(5,619)
(755)
458
130
246
(100)
25,929
(373)
(4,240)
21,316
(123)
21,193
$0.850
$0.847
2008
33,359
(6,796)
(1,286)
509
558
136
(63)
26,417
(409)
(3,306)
22,702
68
22,770
$0.907
$0.906
25,104
25,034
25,089
25,028
25,174
25,081
25,155
25,061
Interest on Operating Facilities
Interest on the operating facilities for the three months ended December 31, 2009 was $201,000 compared to $260,000 for the
same period of 2008. Interest on the operating facilities for the year ended December 31, 2009 was $755,000 compared to $1.3
million for the same period of 2008. The operating facilities loan balance was $33.7 million at December 31, 2009 compared to
$26.6 million at December 31, 2008. Interest on the operating facilities decreased as a result of a lower average balance
outstanding and the decrease in the prime rate from 3.50% at January 1, 2009 to 2.25% in April. 2009.
Trust Administration
Trust administration costs for Q4 2009 were $1.4 million compared to $1.3 million for the same period of 2008. Trust
administration costs for the year ended December 31, 2009 were $5.6 million compared to $6.8 million for the same period of
2008. The decrease in trust administration compared to 2008 relates to lower executive performance pay and unit based
compensation, offset in part by higher fees associated with the REIT’s credit facilities and costs associated with the IFRS
implementation project. In addition, trust administration costs for 2008 included non-recurring items of approximately $400,000.
Gain on Sale of Rental Properties
NPR disposed of non-core assets during the fourth quarter totaling 5,550 square foot of commercial property and four residential
units in Yellowknife, NWT and in Nunavut. These properties were sold for proceeds of $992,000 and a gain on sale of $246,000.
Income Taxes
Current cash taxes arise from a taxable subsidiary and are consistent with 2008. Current income taxes for Q4 2009 are $50,000
compared to $103,000 for the same period of 2008. Current income taxes for the year ended December 31, 2009 are $373,000
compared to $409,000 for the same period of 2008.
14 | NP REIT 2009 ANNUAL REPORT
2. YEAR-TO-DATE RESULTS AND COMPARISONS (continued)
Future income tax expense for the fourth quarter was $4.8 million compared to $273,000 for the same period of 2008. Future
income tax expense for the year ended December 31, 2009 was $4.2 million compared to $3.3 million expense for the same
period of 2008. $2.3 million of the future tax expense was due to increased temporary differences arising from the accelerated
CAPEX program which is capitalized and amortized for accounting purposes and expensed in the year incurred for income tax
purposes. Acquisitions of rental properties, deferred financing costs and refinements to the calculation of future income taxes
payable accounted for the remainder of the future tax expense. The sharply higher CAPEX investment in rental properties has
been flowed through to NPR unitholders and is reflected in the return of capital on 2009 distributions which was 68% for 2009
compared to 53% for 2008. The additional expense was offset in part by a decrease in federal income tax rates in the first
quarter of 2009.
Management expects that approximately $34.5 million of the non-cash future income tax liability will be reversed in 2010 when
NPR executes the action plan to ensure NPR qualifies for the REIT Exemption under current tax legislation
Net Earnings
Net earnings for Q4 2009 were $0.7 million compared to $6.4 million for the same period of 2008. Net earnings for the year
ended December 31, 2009 were $21.3 million compared to $22.7 million for the same period of 2008. The decrease in net
earnings reflects the impact of the above noted items.
Other Comprehensive Earnings (Loss)
NPR has 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 (loss). NPR
recorded other comprehensive income of $nil for Q4 2009 compared to earnings of $118,000 for the same period of 2008. For
the year ended December 31, 2009 NPR recorded other comprehensive loss of $123,000 compared to earnings of $68,000 for
the same period of 2008. Effective July 1, 2009 the change in the fair value of the fixed price utility contract has been included in
operating costs.
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 regularly scheduled principal repayments on mortgages and loans payable. 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 the productive capacity of its real estate assets to enable the REIT to maintain unitholder
distributions at sustainable levels.
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 non-cash working capital
Amortization of deferred financing fees
Non-controlling interest
DI
Cash retained
Distributions to unitholders
Distributions to unitholders per unit
DI per unit – basic
DI per unit – diluted
DI payout ratio
15 | NP REIT 2009 ANNUAL REPORT
Three Months
Ended December 31
Year Ended
December 31
2009
14,785
(1,788)
(174)
(31)
12,792
(3,506)
9,286
$0.370
$0.510
$0.508
72.6%
2008
12,539
1,140
(114)
(5)
13,560
(4,300)
9,260
$0.370
$0.542
$0.541
68.3%
2009
56,193
2008
53,634
(679)
(1,078)
(100)
54,336
(17,236)
37,100
$1.480
$2.166
$2.160
68.3%
(885)
(547)
(63)
52,139
(15,102)
37,037
$1.480
$2.083
$2.080
71.0%
2. YEAR-TO-DATE RESULTS AND COMPARISONS (continued)
DI for Q4 2009 was $12.8 million or $0.510 per unit compared to $13.6 million or $0.542 per unit for the same period of 2008. DI
for the year ended December 31, 2009 was $54.3 million or $2.166 per unit compared to $52.1 million or $2.083 per unit for the
same period of 2008.
The DI payout ratio remains strong at 72.6% for Q4 2009 compared to 68.3% for the same period of 2008 and 68.3% for the year
ended December 31, 2009 compared to 71.0% for the same period of 2008. The REIT continues to maintain a sustainable
distribution level in comparison to DI and taking into consideration sustaining CAPEX requirements.
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
Cash Flow from operating activities
Adjustments:
Net change in non-cash working capital
Deferred rental revenue
Amortization of fair value of debt
Amortization of above and below market leases
Amortization of deferred financing fees
Non-controlling interest
FFO
Distributions to unitholders per unit
FFO per unit – basic
FFO per unit – diluted
FFO payout ratio
Three Months
Ended December 31
2008
2009
14,785
12,539
(1,788)
333
(181)
25
(174)
(31)
12,969
$0.370
$0.517
$.0515
71.6%
1,140
297
(158)
59
(114)
(5)
13,758
$0.370
$0.550
$0.549
67.3%
Year Ended
December 31
2009
56,193
(679)
1,292
(681)
160
(1,078)
(100)
55,107
$1.480
$2.196
$2.191
67.3%
2008
53,634
(885)
1,209
(560)
291
(547)
(63)
53,079
$1.480
$2.121
$2.118
69.8%
Monthly distributions to unitholders for 2009 on an annual basis are $1.48 per unit. Distributions to unitholders for the Q4 2009
were $9.3 million or $0.37 per unit. For the year ended December 31, 2009, distributions to unitholders were $37.1 million or
$1.48 per unit. Distributions per unit to unitholders remained at the same level in 2008 and 2009. NPR’s FFO payout ratio
remains strong at 71.6% for Q4 2009 compared to 67.3% for the same period of 2008. For the year ended December 31, 2009,
the FFO payout ratio was 67.3% compared to 69.8% for the same period of 2008. The REIT continues to maintain a sustainable
distribution level after taking into consideration sustaining CAPEX requirements.
The increases in DI and FFO per unit were driven by acquisitions completed in 2008 and 2009, decreased trust administration
expenses and lower interest rates on mortgage debt and operating facilities. These positive factors were offset by increased
vacancy loss in northern Alberta and same door NOI decline of 6.0% for the three months ended December 31, 2009 and 2.9%
for the year ended December 31, 2009.
16 | NP REIT 2009 ANNUAL REPORT
3. SUMMARY OF ANNUAL AND QUARTERLY RESULTS
Three Year Summary of Annual Financial Results
In $000’s except per unit amounts
Total revenue
Net earnings
Net earnings per unit, diluted
Total assets
Mortgage and loans payable
Distributions declared per unit
Year Ended December 31
2009
134,232
21,316
$0.85
888,367
498,996
$1.480
2008
127,759
22,702
$0.91
872,922
482,800
$1.480
2007
104,418
7,690
$0.34
799,110
401,909
$1.397
Quarterly Summary of Financial Results
The increase in comparable operating results over the past eight quarters is the result of accretive acquisitions completed in
2007 and 2008. In 2008, NPR completed $80.4 million of acquisitions which were funded primarily through mortgage debt and
the operating facility. In addition, during 2008, NPR’s financial results benefited from same door NOI growth in existing properties
and decreasing weighted average interest rates on mortgages and loans payable. During 2009, the financial results have been
impacted by higher vacancy losses, rental declines and temporarily accelerated maintenance CAPEX costs in northern Alberta.
Occupancy in these areas improved in Q4 2009 compared to previous quarters, however, management does not expect
improved financial performance until the second quarter of 2010. The impact of lower rental revenue was mitigated to some
extent by lower mortgage interest rates, trust administration and utility costs.
NPR’s quarterly results continue to have a seasonal component to them resulting from significantly higher fuel oil consumption in
the NWT and Nunavut portfolios in the first and fourth quarters of each year.
17 | NP REIT 2009 ANNUAL REPORT
3. SUMMARY OF ANNUAL AND QUARTERLY RESULTS (continued)
The table below summarizes NPR’s financial results for the last eight fiscal quarters.
In $000’s, except per unit amounts
2008
2009
Q1
29,852
658
30,510
(10,757)
19,753
(5,944)
(6,487)
7,322
(1,869)
(450)
186
577
136
(15)
5,887
(86)
80
5,881
182
6,063
Rental revenue
Other property income
Operating expenses
Interest on mortgages
Amortization
Earnings before the undernoted
Trust administration
Interest on operating facilities
Interest and other income
Gain (loss) on settlement of debt
Gain on sale of rental properties
Non-controlling interest
Earnings from before income
taxes
Current taxes
Future tax (expense) recovery
Net earnings
Other comprehensive earnings (loss)
Comprehensive earnings
Net earnings per unit:
Basic
Diluted
Distribution to unitholders
Distribution per unit
DI
DI per unit – basic
DI per unit – diluted
DI payout ratio
FFO
FFO per unit – basic
FFO per unit – diluted
FFO payout ratio
Q2
32,844
867
33,711
(11,443)
22,268
Q4
Q3
31,644
31,919
871
759
32,678
32,515
(10,491) (11,091)
21,424
22,187
Q4
Q3
Q1
Q2
32,373
32,558
32,992
31,211
827
724
1,047
845
33,282
33,200
34,039
32,056
(10,821) (12,440)
(12,735)
(11,115)
20,941
20,760
22,461
21,304
(6,159) (6,157) (6,239) (6,556) (6,738) (6,730) (6,411)
(6,489) (6,604) (6,867) (7,114) (7,130) (6,985) (7,560)
8,746
7,634
8,293
6,789
8,318
(1,460) (1,448)
(1,395)
(1,976)
(1,317)
(181) (201)
(149)
(283)
(260)
128
109
116
96
-
-
(13)
(29)
-
-
246
-
(37) (31)
(5) (9)
(17)
9,426
(1,634)
(293)
111
23
-
(26)
8,400
(1,316)
(224)
135
84
-
(23)
86
46
-
6,120
(92)
(318)
5,710
242
5,952
7,607
6,803
(128) (103)
(2,795) (273)
6,427
4,684
(474)
118
6,545
4,210
$0.235
$0.235
9,254
$0.228
$0.228
9,259
$0.370
$0.370
11,501
$0.460
$0.459
80.5%
12,950
$0.518
$0.517
71.5%
11,783
$0.471
$0.470
78.6%
13,172
$0.526
$0.525
70.3%
$0.187
$0.187
9,264
$0.370
14,128
$0.565
$0.564
65.6%
14,366
$0.574
$0.573
64.6%
$0.257
$0.256
9,260
$0.370
13,560
$0.542
$0.541
68.3%
13,758
$0.550
$0.549
67.3%
6,190
(104)
1,015
7,101
(143)
6,958
$0.283
$0.283
9,266
$0.370
13,321
$0.532
$0.530
69.6%
13,514
$0.539
$0.538
68.6%
7,056
(98)
(225)
6,733
(42)
6,691
$0.268
$0.268
9,279
$0.370
14,057
$0.560
$0.559
66.0%
14,268
$0.569
$0.567
65.0%
7,200
5,483
(121) (50)
(250) (4,780)
653
-
653
6,829
62
6,891
$0.272
$0.271
9,269
$0.370
14,166
$0.564
$0.563
65.4%
14,356
0.572
0.570
64.6%
$0.026
$0.026
9,286
$0.370
12,792
$0.510
$0.508
72.6%
12,969
$0.517
$0.515
71.6%
Closing trading price
$20.79
$22.52
$22.71
$16.21
$17.25
$18.73
$20.50
$21.90
18 | NP REIT 2009 ANNUAL REPORT
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. Additional risk factors are identified
and discussed in NPR’s Annual Information Form which can be found on NPR’s website at www.npreit.com or on SEDAR at
www.sedar.com. Risks and uncertainties in NPR’s operations include, but are not limited to the following:
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 operating facilities. 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 lines 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, 2009 would have changed by $228,000.
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.
Income Tax Risk
On October 31, 2006, a “Distribution Tax” on publicly traded investment trusts and publicly listed partnerships was announced by
the federal Minister of Finance. The announcement created a new tax regime for Specified Investment Flow Throughs (“SIFTs”),
which include certain publicly listed income trusts and publicly listed partnerships. In effect, these entities will be taxed 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.
The legislation provided 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. The new tax regime does not apply to entities that qualify 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 combined federal/provincial
corporate income tax rate. There are two areas of the legislation that appear to cause NPR not to qualify for the REIT Exemption:
1) Not less than 95% of the REIT’s revenues must be derived from rent from real or immovable properties, interest, capital
gains from disposition of real or immovable properties, dividends or royalties. Revenue earned from NPR’s Execusuite
operations appear not to meet the above definition and are in excess of 5% of NPR’s total revenues.
2) The legislation does not appear to allow individuals to be owners of the Class B Limited Partnership units. NPR’s Limited
Partnership currently has a number of unitholders that are individuals.
Management is currently in the process of evaluating alternatives for reorganizing its structure and current operations to ensure it
qualifies for the REIT Exemption prior to 2011. Management expects to be in a position to implement its action plan in the
second half of 2010 to qualify for the REIT exemption by January 1, 2011.
Utility Cost Risk
NPR is exposed to utility cost risk, which results from the fluctuation in retail prices for fuel oil, natural gas and electricity, the
primary utilities used to heat the REITs 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 portfolio generally provide for recovery of operating costs
from tenants, 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 to manage exposure to utility cost risk.
19 | NP REIT 2009 ANNUAL REPORT
4. RISK FACTORS (continued)
Heating oil is the primary source of fuel for heating properties located in Nunavut and the Northwest Territories. Over the last two
years, NPR converted heating systems for 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. 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 main source of fuel for heating properties located in Alberta, BC and Inuvik, NWT. NPR has fixed price
contracts for certain of its properties which accounts for approximately 31% of the REIT’s usage in Alberta. During 2009, NPR
received approximately $40,000 in rebates under the Natural Gas Rebate Program which provided for rebates to consumers
when natural gas prices exceeded $5.50 per gigajoule from October to March. The government of Alberta did not renew the
Natural Gas Rebate Program for the 2009-2010 heating season. 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.
Management prepared a sensitivity analysis on the impact of price changes in the cost of heating oil and natural gas. A 10%
change over the average price of heating oil and natural gas would impact NPR’s net earnings by $283,000 for the year ended
December 31, 2009.
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.
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, 2009 NPR has two revolving credit facilities totaling $57.5 million. At December 31, 2009 NPR has utilized $33.7 million of its
operating facilities compared to $26.6 million at December 31, 2008. Cash flow projections are completed on a regular basis to
ensure there will be adequate liquidity to maintain operating, capital 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.
NPR has been able to continue its mortgage financing program for multi-family properties at lower interest rates than were
previously in place. It is not possible to predict whether the low interest rate environment will continue to enable NPR to reduce
its weighted average interest rates.
Credit Risk
NPR’s credit risk primarily arises from the possibility that tenants may not be able to fulfill their lease commitments. 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 residential units and commercial space 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 and Operating Facilities
NPR’s weighted average interest rate on mortgage debt at December 31, 2009 decreased to 4.87% compared to 5.13% at
December 31, 2008. The weighted average term to maturity decreased to 6.0 years compared to 6.7 years at December 31,
2008.
During 2009, NPR completed $77.5 million in mortgage financings, renewals and assumptions at a weighted average rate of
3.7% with a weighted average term to maturity of 4.2 years. The proceeds were used to repay existing mortgages, repay a
portion of the operating facility and to fund acquisitions completed in the first quarter. During the second half of 2009, mortgage
funds with terms of up to 10 years became available. NPR continues to manage its long term debt by optimizing both interest
rates and terms to maturity where available.
20 | NP REIT 2009 ANNUAL REPORT
5. LIQUIDITY AND CAPITAL RESOURCES (continued)
At December 31, 2009, the REIT has operating facilities totaling $57.5 million. During the year, NPR renewed its operating
facilities. Consistent with pricing seen across the real estate sector, pricing for NPR’s operating facilities was increased. Interest
rates have increased by 1.50% to prime plus 1.50% or Bankers Acceptances plus 3.00%. The operating facilities are secured by
certain rental properties with a net book value of $92.9 million. At December 31, 2009, NPR has utilized $33.7 million (December
31, 2008 – $26.6 million) of the operating facilities.
The following table outlines NPR’s mortgage and loans payable maturity schedule for the next ten years:
In $000’s
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Thereafter
Principal
Repayments
During the Year
16,041
14,870
12,686
11,006
8,918
8,173
6,214
5,644
4,622
4,211
9,561
101,946
Principal on
Maturity
30,500
30,012
37,595
79,997
69,300
8,699
46,726
10,771
34,386
10,053
58,927
416,966
Total
46,541
44,882
50,281
91,003
78,218
16,872
52,940
16,415
39,008
14,264
68,488
518,912
% of Total
9.0%
8.6%
9.7%
17.5%
15.1%
3.3%
10.2%
3.2%
7.5%
2.7%
13.2%
100.0%
Weighted
Average
Interest Rate
4.97%
5.49%
4.80%
4.51%
4.07%
4.76%
5.17%
4.99%
4.76%
4.48%
5.51%
4.87%
Debt to Gross Book Value
NPR’s Debt to Gross Book Value, as defined in the Trust Declaration, was unchanged at 57.7% at December 31, 2009
compared to 57.7% at December 31, 2008. A maximum of 70% is permitted by NPR’s Trust Declaration. The calculation of Debt
to Gross Book Value is shown below:
In $000’s
Bank indebtedness (cash)
Operating facilities
Mortgages and loans payable
Debt
December 31, 2009
1,820
33,698
518,912
554,430
December 31, 2008
(731)
26,600
502,277
528,146
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
836,251
7,046
20,423
-
118,764
(21,647)
960,837
Debt to Gross Book Value
57.7%
833,967
3,773
8,996
185
90,546
(21,625)
915,842
57.7%
21 | NP REIT 2009 ANNUAL REPORT
5. LIQUIDITY AND CAPITAL RESOURCES (continued)
Debt Service Coverage and Interest Service Coverage
NPR is subject to financial covenants in its mortgage and loans payable and operating facilities. The significant financial
covenants are defined as follows:
•
Debt Service Coverage– calculated as net earnings before interest, taxes and amortization divided by the debt service
payments (total interest expense and principal repayments);
Interest Coverage– calculated as net earnings before interest, taxes and amortization divided by total interest expense.
•
In $000’s
Earnings before income taxes
Amortization
Interest on mortgages
Interest on operating facilities
Net earnings before interest, taxes and amortization
Year ended
December 31, 2009
25,929
28,789
26,435
755
81,908
Year ended
December 31, 2008
26,417
26,447
24,499
1,286
78,649
Interest on mortgages
Interest on operating facilities
Total interest expense
Principal repayments
Debt Service Payments
Interest Coverage
Debt Service Coverage
26,435
755
27,190
16,198
43,388
3.01
1.89
24,499
1,286
25,785
14,983
40,768
3.05
1.93
Interest Coverage for the year ended December 31, 2009 decreased slightly to 3.01 compared to 3.05 for the year ended
December 31, 2008. Debt Service Coverage for the year ended December 31, 2009 decreased slightly to 1.89 compared to 1.93
for the year ended December 31, 2008. Both Interest Coverage and Debt Service Coverage continue to be among the strongest
among Canadian REITs.
Unitholders’ Equity
Total unitholders’ equity decreased to $290.9 million at December 31, 2009 from $305.1 million at December 31, 2008.
In 000’s
Unitholders’ equity – January 1, 2009
Units issued under prior year LTIP grants
Property acquisitions
Units issued under options
Units cancelled
Issue costs
Unit based compensation
LTIP Grants
Comprehensive earnings
Distributions to unitholders
Unitholders’ equity – December 31, 2009
Units
25,034
37
4
33
(2)
-
-
-
-
-
25,106
$
305,110
-
65
489
-
(2)
634
504
21,193
(37,100)
290,893
22 | NP REIT 2009 ANNUAL REPORT
5. LIQUIDITY AND CAPITAL RESOURCES (continued)
As of December 31, 2009, the authorized capital of the REIT consists of an unlimited number of trust units and special voting
units (collectively, the “Units”) of which 23,020,538 Units are issued and outstanding and 2,085,090 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 to one vote, either in
person or by proxy at the meeting of unitholders of the trust as if he or she were a unitholder.
Distributions to Unitholders
Cash distributions are made to unitholders on a monthly basis. Monthly distributions for 2008 and 2009 were $0.1233 per unit, or
$1.48 per unit on an annual basis. Distribution levels are reviewed regularly by management and Trustees. Factors considered
when determining distribution levels include financial results, annual business plans, and current economic environment. Return
of capital for 2009 distributions to NPR units was 68% compared to 53% in 2008. The primary reason for the increased return of
capital is the deduction of the accelerated CAPEX for tax purposes on properties owned directly by NPR. For Class B units,
return of capital was 42% compared to 44% in 2008.
Unit Options
On March 12, 2009, 157,500 options with an exercise price of $15.05 and an expiration date of March 12, 2014 were granted to
trustees and officers. The options vest over a three year period with the first one-third vesting immediately and the remaining
options vesting equally on March 12, 2010 and March 12, 2011. At December 31, 2009 there are 859,997 options outstanding
with a weighted average exercise price of $21.95, 510,003 of which are exercisable. During 2009, 32,503 options were exercised
by officers at an exercise price of $15.05 per unit. The following table summarized the outstanding unit options as at December
31, 2009:
Exercise
Price
Number
Outstanding at
December 31
Weighted-Average
Remaining Contractual
Life In Years
Weighted-
Average
Exercise Price
Number
Exercisable at
December 31
Weighted-
Average
Exercise Price
$23.12
$15.05
735,000
124,997
859,997
3.4
4.2
3.7
$23.12
$15.05
$21.95
489,999
20,004
510,003
$23.12
$15.05
$22.80
Non-cash unit-based compensation expense relating to these options included in trust administration was $113,000 for the three
months ended December 31, 2009 (2008 – $98,000) and $504,000 for the year ended December 31, 2009 (2008 – $631,000).
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
Year Ended
December 31
2009
5,453
3,651
9,104
2008
1,527
1,676
3,203
2009
11,843
9,214
21,057
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.
23 | NP REIT 2009 ANNUAL REPORT
5. LIQUIDITY AND CAPITAL RESOURCES (continued)
Sustaining CAPEX represents ongoing expenditures required to maintain the productive capacity of the REIT’s portfolio. These
include capital expenditures to maintain and renew common areas, HVAC systems, building envelopes, investments in wood
pellet boilers, expenditures to reduce energy consumption and to refurbish units on tenant turnover. Sustaining CAPEX is
generally funded through cash flow from operations. Sustaining CAPEX for the year ended December 31, 2009 was incurred
primarily in the residential rental portfolio and on a per door basis represents approximately $1,820 per unit (2008 – $960 per
unit). The significant increase during the fourth quarter of 2009 reflects an accelerated CAPEX program. Management expects
that capital expenditures on both sustaining CAPEX and capital improvements during 2010 will temporarily be at higher than
customary levels. Capital spending in what are normally traditionally low vacancy markets has not been possible in recent years
due to labour shortages and high levels of back to back turnover at month-end. The current higher level of vacancy makes these
CAPEX investments possible and necessary to maintain a high quality product for NPR’s existing and prospective tenants.
6. TRANSACTIONS WITH RELATED PARTIES
A Trustee of NPR is the Chairman of AgeCare, which leases six seniors’ properties from NPR. For the year ended December 31,
2009, NPR earned rental income, including rental revenue earned on a straight-line basis over the term of the lease, totaling
$12.6 million (2008 – $12.6 million) from AgeCare. Amounts outstanding in accounts receivable pertaining to this lease were $nil
at December 31, 2009 (December 31, 2008 – $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, 2009, NPR paid $120,000 for
these services (2008 – $120,000).
During 2009, the REIT completed renovations totaling $2.15 million to a seniors’ facility in BC which is leased to AgeCare. At
December 31, 2009, in accordance with the lease agreement, AgeCare is repaying this amount over 15 years. Interest revenue
of $51,800 was earned for the three months ended December 31, 2009 (2008 – $nil) relating to this receivable. Interest revenue
of $112,800 was earned for the year ended December 31, 2009 (2008 – $nil). Amounts outstanding at December 31, 2009
totaled $2.1 million (December 31, 2008 – $nil).
A company owned by a Trustee of NPR leases commercial space from NPR under normal lease terms. NPR earned rental
revenue of $481,000 from that arrangement for the year ended December 31, 2009 (2008 – $454,000). Amounts outstanding in
accounts receivable pertaining to this lease were $nil at December 31, 2009 (December 31, 2008 – $nil).
7. PROPOSED AND FUTURE TRANSACTIONS
Between January 1, 2010 and March 17, 2010 NPR completed mortgage financings and renewals totalling $22.4 million with
interest rates from 2.97% to 6.05% and terms to maturity from 6 months to 10 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 as at and for
the year ended December 31, 2009. 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.
24 | NP REIT 2009 ANNUAL REPORT
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 that are expected to exist on January 1, 2011. At December 31, 2009, NPR
has recorded a future tax liability of $43.8 million (December 31, 2008 – $39.5 million) using expected income tax rates between
19.13% and 28.40% (December 31, 2008 – 19.63% to 29.50%).
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 2008 or 2009.
Discontinued Operations
The financial results of non-core rental properties sold in 2008 and 2009 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 using the Black Scholes 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 in 2008; 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. The following assumptions were used in
calculating the fair value of the options granted on March 12, 2009; expected annual dividend rate of 9.83%, expected volatility of
28.8%, risk-free rate of return of 1.75% and expected life of 5 years. Unit-based compensation expense for the twelve month
period ended December 31, 2009 was $504,000 (2008 – $631,000).
9. CHANGE IN ACCOUNTING POLICIES AND RECENT
ACCOUNTING PRONOUNCEMENTS
Change in Accounting Policy
On January 1, 2009, NPR adopted the June 2009 amendments to the Canadian Institute of Chartered Accountants (“CICA”),
Handbook Section 3862, Financial Instruments — Disclosures. The amendments include enhanced disclosures related to the fair
value of financial instruments and the liquidity risk associated with financial instruments. The amendment requires a three level
hierarchy that reflects the significance of the inputs used in making the fair value measurements. The amendments will be
effective for annual financial statements for fiscal years ending after September 30, 2009. The amendments are consistent with
recent amendments to financial instrument disclosure standards in International Financial Reporting Standards (“IFRS”).
On January 1, 2009 NPR adopted the August 2009 amendments to CICA Handbook Section 3855, Financial Instruments —
Recognition and Measurement, relating to the impairment of financial assets. Amendments to this Section have revised the
guidance on the assessment of embedded derivatives on reclassification of financial assets from the held-for-trading and
available-for-sale categories into the loans and receivables category. The amendment also requires the use of the credit loss
model when assessing instruments held to maturity for impairment.
On January 1, 2009, NPR adopted EIC-173, Credit risk and the fair value of financial assets and financial liabilities. This abstract
requires that an entity's own credit risk (for financial liabilities) and the credit risk of the counterparty (for financial assets) should
be taken into account in determining the fair value of financial assets and financial liabilities, including derivative instruments.
Effective January 1, 2009, NPR adopted CICA Handbook Section 3064, Goodwill and Intangible Assets. These new
pronouncements establish standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its
initial recognition and of intangible assets by profit-oriented enterprises.
The new standards will have no impact on the REIT’s consolidated financial statements.
25 | NP REIT 2009 ANNUAL REPORT
9. CHANGE IN ACCOUNTING POLICIES AND RECENT
ACCOUNTING PRONOUNCEMENTS (continued)
Recent Accounting Pronouncements
On January 5, 2009, the AcSB released Handbook Section 1582 Business Combinations, Section 1601, Consolidated Financial
Statements and Section 1602 Non-Controlling interest which supersede Section 1581, Business Combinations and Section
1600, Consolidated Financial Statements. The released sections apply to interim and annual consolidated financial statements
relating to fiscal years beginning on or after January 1, 2011, and prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. The
Sections are consistent with IFRS standards. Early application and adoption are permitted.
International Financial Reporting Standards (“IFRS”)
On February 13, 2008 the Accounting Standards Board ("AcSB") confirmed that the transition date to 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.
The adoption of IFRS is expected to have a significant impact on NPR’s consolidated financial reports, financial ratios and key
Non-GAAP financial measures which are widely accepted indicators of the performance of Canadian real estate investment
trusts. Management is actively involved in the transition process from Canadian GAAP to IFRS and provides the Audit
Committee with regular reports on the status of the IFRS project. Management expects to complete its selection of appropriate
elections under IFRS1 – First time Adoption of International Financial Reporting Standards and selection of IFRSs and obtain
Audit Committee approval with sufficient lead time to prepare an opening January 1, 2010 Statement of Financial Position and
quarterly comparative financial statements for the first three quarters of 2010 during 2010.
NPR’s property management and data capture for financial reporting software has been proven to be sufficiently robust to
provide the capability to capture the transactional information required to report under IFRS. NPR will maintain both Canadian
GAAP and IFRS accounting records for the year 2010.
The Canadian Securities Administration Staff Notice 52-321, “Early Adoption of International Financial Reporting Standards”,
provides issuers with the option to early adopt IFRS effective January 1, 2009. NPR has determined it will not early adopt.
Because of the continuing updates to IFRS standards and the issuance of new standards, NPR will continue to identify effects on
the trust’s financial reporting and disclosure requirements. The following standards are expected to have the most significant
impact on NPR’s financial reporting.
International Accounting Standard “IAS 40” - Investment Property
IAS 40 defines Investment Property as property held to earn rent, capital appreciation, or both. Under IFRS, either the fair value
model or the cost model can be selected as the valuation method for investment property. Reporting Investment Property using
the fair value method will have the most significant impact on NPR’s financial reports from a transition and continuing valuation
perspective and as an ongoing business cost. Under the fair value model, deferred costs, intangible assets and liabilities related
to Investment Property would not be presented separately as their values are incorporated within the property’s fair value.
NPR expects to take the IFRS 1 exemption where fair value can be elected as deemed cost at the date of transition to IFRS.
Management has implemented a combined external appraisal valuation and internal calculation approach to fair value NPR’s
Investment Properties. Management has selected a sample of properties in each of NPR’s regions of operation for independent
external appraisal. Management contracted the services of three independent appraisal companies during the fourth quarter of
2009, each with expertise in the regions in which NPR operates, to perform external property appraisals. Management intends to
use certain variables identified in these independent appraisals in its internal calculation process for the remainder of its
Investment Properties. Due to the current economic conditions and the lack of observable market transactions in certain regions
that NPR owns Investment Property, alternative fair value measurement procedures are being contemplated. The resulting
adjustments of electing to use the fair value method under IFRS 1 will be recorded directly to retained earnings.
26 | NP REIT 2009 ANNUAL REPORT
9. CHANGE IN ACCOUNTING POLICIES AND RECENT
ACCOUNTING PRONOUNCEMENTS (continued)
NPR has substantially completed the design of its real estate valuation process for its opening balance sheet. Implementation of
the process began during the fourth quarter of 2009. The design and implementation of internal controls over this process have
been considered and will be evaluated during 2010.
NPR will continue to revise internal control processes and procedures to address the changes to existing accounting policies and
the requirement for dual record keeping during 2010.
NPR’s financial performance and financial position presented under current GAAP may be significantly different when presented
in accordance with IFRS. NPR continues to monitor the IASB‘s agenda to identify those standards that will affect its financial
reporting and compliance activities. 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 operating facilities and compensation arrangements.
Any changes to the REIT’s Declaration of Trust will not impact the REIT’s current distributions paid to Unitholders. NPR currently
distributes $0.1233 per month ($1.48 per year) per Unit. NPR has paid out all of its taxable income each year since it began
paying distributions on its Units in July 2002.
After transition, either the cost or the fair value method can be used to value Investment Property. Management has not
completed its analysis of the two alternatives; however, initial indications are that the fair value method is the preferred
alternative. All Investment Properties will receive external appraisals on a three to five year rotating basis. Ongoing changes to
the fair value of Investment Properties would be reported in profit and loss for the period in which they occur.
IFRS only allows for the capitalization of carrying costs, including interest, when properties are under active development. Costs
are no longer capitalized when a property is completed for its intended use under both Canadian GAAP and IFRS. IFRS
considers a property ready for its intended use when it is available for tenant possession, as compared to Canadian GAAP,
which provides for the completion after a lease-up period. The carrying costs of NPR’s Westmore Estates in Grande Prairie, AB
will be capitalized throughout the lease-up phase under Canadian GAAP and expensed under IFRS.
IFRS 3 - Business Combinations
Both IFRS and Canadian GAAP require the use of the acquisition method of accounting for all business combinations, however
there are differences between the two frameworks. Under IFRS transaction costs are expensed immediately while under
Canadian GAAP the costs are included in the cost of the asset. This may have a material negative impact on net income, FFO,
AFFO and EBITDA in the year of acquisition. IFRS requires the purchaser to measure any non-controlling interest in the
acquiree at either fair value or at the non-controlling interest’s proportionate share of the fair value of the acquirees’ identifiable
net assets. Canadian GAAP would require the minority interest to be measured at the non-controlling interest’s proportionate
share of the historical carrying value of the acquirees’ identifiable net assets.
The definition of a business combination is more encompassing under IFRS and may capture single asset acquisitions which
would be treated as an asset acquisition under Canadian GAAP. When an investment property acquisition includes some minor
ancillary processes such as a tenant laundry operation, the acquisition would be treated as an asset acquisition. When an
investment property acquisition meets the definition of a business acquisition, the investment property components would be
measured at the acquisition date fair value; the acquisition transaction costs would be expensed and any contingent
consideration would be recognized. This could result in the recognition of goodwill where the purchase price exceeds the net
asset value or a gain from a bargain purchase where the purchase price is less than the net asset value.
IAS 16 - Property, Plant and Equipment (PP&E)
IAS 16 defines PP&E as tangible assets used in the production or supply of goods and services or for administrative purposes,
and have expected lives of more than one year. NPR has certain staff accommodation, administrative office and warehouse
properties which will be classified as PP&E under IAS 16.
Property, plant and equipment initially are measured at cost. A choice can then be made between the cost and revaluation
models to measure each class of PP&E carried on the statement of changes in financial position. NPR intends to take the IFRS
1 exemption and exception from retrospective restatement of PP&E and will elect to measure certain classes of PP&E at the
date of transition to IFRS using fair value as deemed cost. NPR will identify those assets which have characteristics similar to
investment property and fair value them under the revaluation method. Any adjustments to the value of PP&E from the election
under IFRS 1 will be recorded directly in Retained Earnings.
27 | NP REIT 2009 ANNUAL REPORT
9. CHANGE IN ACCOUNTING POLICIES AND RECENT
ACCOUNTING PRONOUNCEMENTS (continued)
Under the revaluation model, classes of assets will be measured at fair value less any subsequent accumulated depreciation and
impairment losses. Fair value revaluations will be performed at regular intervals with revaluation gains being reported in Other
Comprehensive Income and shown separately in equity. Recognized revaluation losses on an asset on which a gain had
previously been recognized are reported in Other Comprehensive Income to the extent that revaluation gains exist for that class
of asset and then be reported in profit and loss.
The remainder of NPR’s PP&E will be measured using the cost method. Assets valued using the cost method will also be
subject to depreciation and recognized impairment losses.
IFRS 16 also requires that PP&E be broken down into significant components and that depreciation be calculated on each
component. Management has identified significant asset components and their applicable useful lives for the purpose of
depreciating PP&E.
IAS 17 - Leases
Paragraph 52 of IAS 17 states that, “Indirect costs incurred by lessors in negotiating and arranging an operating lease shall be
added to the carrying amount of the leased asset and recognized as an expense over the term on the same basis as the lease
income”. For Canadian GAAP a separate intangible asset is presented on the balance sheet, whereas for IFRS, the deferred
leasing costs form a component of the total fair value of the investment property and are not accounted for separately.
NPR’s commercial leases can have three types of deferred leasing costs:
1) Tenant inducements - Where IAS 40 applies and investment properties are measured at fair value, the tenant inducements
are considered in the cash inflows modeled to measure the fair value of the investment property, forming part of the in-place
operating leases. In accordance with IAS 40.50(c), lease incentive assets are separated for presentation on the balance sheet by
deducting this amount from the fair value of the property to avoid double counting of assets;
2) Tenant improvements - Tenant improvements which benefit the tenant should be treated as an incentive and netted against
revenue in accordance with SIC-15 Operating Lease –Incentives. Where the tenant improvements are deemed the assets of the
lessor and IAS 40 applies and the investment property is measured at fair value, the tenant improvements form part of the fair
value of the property, and;
3) Deferred recoverable costs – The Standards eliminate any notion of deferring costs and creating an asset that does not meet
the strict definition of an asset or the recognition criteria. Both Canadian GAAP and IFRS require these incentives to be
amortized to rental revenue. The IFRS definition may differ from NPR’s current accounting policy which may result in more costs
being amortized to rental revenue.
Entities outside of North America do not defer recoverable costs as an intangible asset, as is the current practice in Canada.
Under adoption of IFRS, NPR may need to derecognize any unamortized portion of deferred recoverable costs and charge
opening retained earnings.
GAAP requires the prospective recognition of rental revenue from the adoption of the accounting policy, effective January 1,
2004, however, IFRS requires rental revenue to be recognized on a straight-line basis considering all rental payments from the
start date of each lease. After all commercial leases have been reviewed NPR will be able to quantify the adjustment to its
financial statements.
IAS 31 - Interests in Joint Ventures
Management is assessing the effect this standard will have on NPR’s financial reporting for its joint venture operations and the
effect IFRSs may have on reporting those business operations to its joint venture partners. The IASB’s Exposure Draft 9 made
reference to the unsuitability of the proportionate consolidation method and proposes to eliminate the option to proportionately
consolidate interests in jointly controlled entities. The basis for conclusions accompanying the final standard will describe when it
is appropriate for an entity to account for its share of assets and liabilities and when to account for it as an investment.
Management expects that the revaluation of investment property to fair value, the associated deferred tax and the changes to
accounting for deferred leasing cost will not have a material effect on joint venture financial statements. The ability to continue to
proportionately consolidate its joint venture operations cannot be determined at this time.
28 | NP REIT 2009 ANNUAL REPORT
9. CHANGE IN ACCOUNTING POLICIES AND RECENT
ACCOUNTING PRONOUNCEMENTS (continued)
IAS 36 – Impairment of Assets
Both Canadian GAAP and IFRS require that assets be tested for potential impairment. GAAP recognizes impairment when the
estimated fair value of undiscounted future cash flows from an asset is less than its carrying value. Under IFRS, an impairment
charge must be recognized if the recoverable amount, measured as the higher of the estimated fair value less costs to sell or
value-in-use, is less than the carrying value. Value-in-use is defined as the present value of estimated future cash flows
expected to arise from the planned use of an asset and from its disposal at the end of its life. Impairment losses are recognized
immediately in the profit and loss statement and the depreciation charge adjusted to allocate the revised carrying amount over
the remaining useful life of the asset.
The recognition of an impairment charge will be reviewed each reporting period to determine whether an impairment loss
previously recognized no longer exists. An impairment charge may be reversed to profit and loss when the recoverable amount
is higher than the carrying amount of the asset, up to the original carrying value of the asset (net of depreciation), that would
have been determined if no impairment charge had been recognized for the asset in prior years.
IAS 32 - Financial Instruments: Disclosure and Presentation; IAS 39 - Financial Instruments: Recognition
and Measurement, and; IAS 7 - Financial Instruments: Disclosures
These standards establish the principles for recognizing, measuring and presenting financial instruments as assets, liabilities or
equity and offsetting financial assets and liabilities.
Upon initial recognition, a financial instrument should be classified as a financial liability, a financial asset or equity in accordance
with the substance of the contractual arrangement applying the definitions in these sections. NPR will assess its contractual
arrangements and determine whether any give rise to treatment as a financial asset, financial liability or equity.
The IASB is currently analyzing possible amendments to IAS 32, for the relaxation of certain rules regarding the treatment of
puttable shares. A relaxation of the requirement to separate some puttable shares into equity and liability components may
rectify the current controversy regarding the equity or debt treatment of redeemable trust units and exchangeable LP units.
Canadian GAAP allows for the treatment of multiple classes of redeemable trust units or exchangeable LP units to be treated as
equity. IAS 32 stipulates that classes of equity must be identical to be treated as equity. The disclosure of separate classes of
equity under Canadian GAAP implies that redeemable trust units and exchangeable LP units are somehow different and
therefore would be treated differently under IAS 32. The ability to exchange LP units for Trust units may imply a liability element
exists because it imposes an unavoidable obligation to deliver units of the trust (i.e., a financial instrument of another entity). The
requirement that equity instruments have identical features appears to be a controversial issue that may have a significant
impact on NPR’s financial statement disclosures. Consistent with other real estate trusts with multiple classes of equity, NPR is
reviewing alternatives which would maintain the current equity treatment of its redeemable trust units and exchangeable LP units
and enhance comparability among similar entities.
The IASB and FASB are holding discussions with respect to the replacement of IAS 39. No decisions have been made related
to the classification and measurement of financial liabilities. The IASB is considering hedge accounting issues relating to
financial hedged items and is expected to address all hedge accounting issues in the first half of 2010. The IASB will permit
early adoption of the final IFRS and will require transition disclosure by all entities adopting the new IFRS.
Unit-based compensation in the form of options or deferred units is classified as equity under Canadian GAAP. Trust units that
are redeemable, but meet the puttable instrument exemption would not be treated as equity under current IAS 32. Since unit-
based compensation is to be settled by issuance of a financial liability itself, such unit-based compensation would be classified
as a financial liability. Measurement would be based upon the fair value of the trust units, recognized over the vesting period.
IAS 1 - Presentation of Financial Statements
The IASB and FASB tentatively decided to include the following in an exposure draft at their January joint meeting:
•
•
•
An entity with more than one reportable segment must present its disaggregated by-nature information in its
segmented note, and must also include its by-function information in the same note.
An entity that disaggregates income and expense items by both function and nature in the notes to the financial
statements should present its by-function information on the statement of comprehensive income.
An entity should disaggregate its income and expense items in a manner that presents useful information for
assessing the amount, timing and certainty of future cash flows. If disaggregation by function does not enhance the
usefulness for that purpose of the information on the statement of comprehensive income, an entity should instead
disaggregate its income and expense items by nature only.
NPR is continuing to review these requirements and identifying changes, if any, that may be required to its financial systems to
obtain the required breakdown of information.
29 | NP REIT 2009 ANNUAL REPORT
9. CHANGE IN ACCOUNTING POLICIES AND RECENT
ACCOUNTING PRONOUNCEMENTS (continued)
IAS 12 - Income Taxes
The expected changes to NPR’s opening statement of financial position as of January 1, 2010 arising from its transition to IFRS
will require a corresponding tax asset or liability to be established based on the resultant differences between the carried value of
assets and liabilities and their associated tax base. Management currently expects that the change to the deferred income tax
liability at transition to IFRS will be significant, as substantially all of its investment property will berevalued to fair value. The
deferred tax arising from fair value revaluations under IFRS 1 will be posted to retained earnings on the opening statement of
financial position.
10. DISCLOSURE CONTROLS AND PROCEDURES AND
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Disclosure Controls and Procedures (“DC&P”) and internal controls over financial reporting (“ICFR”) have been designed and
implemented by, or under the supervision of NPR’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). DC&P
ensure that material information relating to NPR 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. ICFR
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 evaluations of DC&P and ICFR were performed using the COSO control framework (Sponsoring Organizations of the
Treadway Commission control framework) as adopted by NPR for the year ended December 31, 2009. Based on this evaluation,
the CEO and CFO 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, were effective and provided reasonable assurance that
information required to be disclosed in reports that were filed or submitted under Canadian securities legislation related to NPR
are recorded, processed, summarized and reported within the time periods specified in those rules and forms. The CEO and
CFO also concluded that NPR’s internal controls over financial reporting were operating effectively as at December 31, 2009 and
provided reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for
external reporting in accordance with Canadian GAAP.
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. The presented information has been reviewed
by the Disclosure Committee, the Audit Committee and the Board of Trustees, which approved it prior to its publication.
11. ADDITIONAL INFORMATION
Additional information relating to NPR, including the REIT’s annual information return, is available on SEDAR at www.sedar.com.
30 | NP REIT 2009 ANNUAL REPORT
MAN
NAGEMEN
NT’S RES
SPONSIBIL
LITY FOR
FINANCIA
AL STATE
EMENTS
To the
Northe
e Unitholders of
ern Property Rea
al Estate Investm
ment Trust (the “
Trust”):
The ac
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high q
financi
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dance with the r
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onsolidated finan
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ntegrity and obje
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B. Jam
Presid
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dent and Chief E
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Todd R. Cook
T
Chief Financial O
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AUD
DITORS’ R
REPORT
To the
Northe
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ern Property Rea
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We ha
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and ca
Trust’s
ave audited the
mber 31, 2009 a
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s management. O
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December 31, 2
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December 31, 2
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Charter
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31 | NP REIT
T 2009 ANNUAL
L REPORT
Co
At D
(Tho
onsolid
December 31
ousands of dol
lars)
dated
Balanc
ce She
eets
AS
SSETS
2009
8
2008
836,251
8
7,046
20,423
5,088
-
4,158
3,555
4,539
2,456
4,851
888,367
8
498,996
4
33,698
1,820
15,555
3,096
43,751
94
464
597,474
5
290,893
2
888,367
8
67
833,96
73
3,77
96
8,99
64
5,66
73
31
85
5,08
75
3,57
48
3,24
42
1,74
41
6,14
872,92
22
482,80
26,60
00
00
-
11
15,11
92
3,09
89
39,48
79
27
41
44
567,81
12
305,11
10
872,92
22
sets (Note 4)
nd other capital as
ts in progress
r development
nd other assets (N
Note 5)
Re
ental properties an
Ca
apital improvemen
Ca
apital assets under
Pre
epaid expenses a
Ca
ash
ccounts receivable
Ac
enant security depo
Te
eferred rent receiv
De
Lo
ans receivable
Int
angible assets (N
e (Note 17)
osits
able
ote 6)
LIA
ABILITIES
Mo
Op
Ba
Ac
Dis
Fu
Int
No
7)
s payable (Note 7
Note 8)
ortgages and loan
perating facilities (
ank indebtedness
ccounts payable an
nd accrued liabiliti
e
stributions payable
ability (Note 11)
ture income tax lia
(Note 6)
angible liabilities (
rest
on-controlling inter
es (Note 17)
UN
NITHOLDERS’ EQ
QUITY
Se
ee accompanying n
notes to the conso
olidated financial s
statements.
Gu
uarantees, commit
tments and contin
)
gencies (Note 14)
AP
PPROVED BY TH
E BOARD
B. James
President
Britton
and Chief Execu
utive Officer
De
Tru
ennis J. Hoffman
ustee
32 | NP REIT
T 2009 ANNUAL
L REPORT
Consolidated Statements of Earnings and
Comprehensive Earnings
Years ended December 31
(Thousands of dollars, except per unit amounts)
2009
2008
REVENUE
Rental revenue
Other property income
Operating expenses
OTHER EXPENSES
Interest on mortgages and loans
Amortization
EARNINGS BEFORE THE
UNDERNOTED
Trust administration
Interest on operating facilities
Interest and other income
Gain on settlement of debt
Gain on sale of rental properties
Non-controlling interest
EARNINGS BEFORE INCOME TAXES
INCOME TAXES (Note 11)
Current
Future
NET EARNINGS
Other comprehensive earnings (loss)
COMPREHENSIVE EARNINGS
Net earnings per unit (Note 13)
Basic
Diluted
See accompanying notes to the consolidated financial statements.
130,767
3,465
134,232
(47,439)
86,793
(26,435)
(28,789)
(55,224)
31,569
(5,619)
(755)
458
130
246
(100)
(5,640)
25,929
(373)
(4,240)
(4,613)
21,316
(123)
21,193
$0.850
$0.847
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)
(6,942)
26,417
(409)
(3,306)
(3,715)
22,702
68
22,770
$0.907
$0.906
33 | NP REIT 2009 ANNUAL REPORT
Consolidated Statements of
Unitholders’ Equity
Year ended December 31
(Thousands of dollars)
TRUST UNITS (Note 12)
Balance, beginning of year
Issuance of units
Exercise of unit options
Units cancelled
Issue costs
Long term incentive plan units issued
Balance, December 31
CONTRIBUTED SURPLUS
Balance, beginning of year
Unit-based compensation
Exercise of unit options
Long term incentive plan units granted
Long term incentive plan units issued
Balance, December 31
CUMULATIVE DEFICIT
CUMULATIVE NET EARNINGS
Balance, beginning of year
Units cancelled
Net earnings
Balance, December 31
CUMULATIVE DISTRIBUTIONS TO
UNITHOLDERS
Balance, beginning of year
Distributions declared to unitholders
Balance, December 31
CUMULATIVE DEFICIT, December 31
ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSS)
Balance, beginning of year
Other comprehensive (loss) earnings
Balance, December 31
TOTAL UNITHOLDERS’ EQUITY
See accompanying notes to the consolidated financial statements.
34 | NP REIT 2009 ANNUAL REPORT
2009
367,446
65
528
(13)
(2)
666
368,690
1,676
504
(39)
634
(666)
2,109
86,056
13
21,316
107,385
(150,191)
(37,100)
(187,291)
(79,906)
123
(123)
-
290,893
2008
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)
(64,135)
55
68
123
305,110
Consolidated Statements of Cash Flows
Year ended December 31
(Thousands of dollars)
CASH FLOWS RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Net earnings
Adjustments for:
Deferred rental revenue
Amortization
Amortization of fair value of debt
Amortization of above and below market leases
Amortization of deferred financing fees
Gain on settlement of debt
Gain on sale of rental properties
Non-controlling interest
Unit-based compensation
Future income tax expense
Changes in non-cash working capital
FINANCING
Proceeds from mortgages and loans
Repayment of mortgages and loans
Proceeds from operating facilities
Payments (to) from non-controlling interest
Units issued under option plan
Unit issue costs
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 (DECREASE) INCREASE IN CASH
CASH (BANK INDEBTEDNESS),
BEGINNING OF YEAR
(BANK INDEBTEDNESS) CASH, END OF
YEAR
SUPPLEMENTARY INFORMATION
Interest paid
Interest received
Income taxes paid
See accompanying notes to the consolidated financial statements.
35 | NP REIT 2009 ANNUAL REPORT
2009
21,316
(1,292)
28,789
681
(160)
1,078
(130)
(246)
100
1,138
4,240
55,514
679
56,193
56,563
(41,716)
7,098
(76)
489
(2)
(37,096)
(14,740)
(12,764)
992
(11,426)
(11,235)
(9,571)
(44,004)
(2,551)
731
(1,820)
25,346
282
214
2008
22,702
(1,209)
26,447
560
(291)
547
(558)
(136)
63
1,318
3,306
52,749
885
53,634
144,603
(58,659)
1,400
377
-
(8)
(37,029)
50,684
(65,645)
395
(25,450)
(5,902)
(6,881)
(103,483)
835
(104)
731
24,444
371
727
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(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 rental 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 fair value. 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 fair value 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
Revenue and expenses associated with properties under development are capitalized until the properties achieve a satisfactory
level of occupancy.
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 fair value. Based on this review, a provision for impairment of $nil has been recorded for the year
ended December 31, 2009 (December 31, 2008 - $nil).
Disposal of long-lived assets
When management considers transactions to be material, 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.
36 | NP REIT 2009 ANNUAL REPORT
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(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 mortgages
and loans payable.
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, 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 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 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
NPR 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 is included in amortization expense.
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 and
loans payable, operating facilities, distributions payable, accounts payable and accrued liabilities and bank indebtedness.
Except for mortgages and loans payable, the fair value of financial instruments approximated carrying values due to the short-
term nature of the financial instruments. The fair value of mortgages and loans payable is disclosed in note 7.
Under NPR’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 NPR’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.
37 | NP REIT 2009 ANNUAL REPORT
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(Columnar amounts expressed in thousands of dollars except where indicated)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Unit-based compensation
Under NPR’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 NPR 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.
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
On January 1, 2009, NPR adopted the June 2009 amendments to the Canadian Institute of Chartered Accountants (“CICA”),
Handbook Section 3862, Financial Instruments — Disclosures. The amendments include enhanced disclosures related to the fair
value of financial instruments and the liquidity risk associated with financial instruments. The amendment requires a three level
hierarchy that reflects the significance of the inputs used in making the fair value measurements. The amendments will be
effective for annual financial statements for fiscal years ending after September 30, 2009. The amendments are consistent with
recent amendments to financial instrument disclosure standards in International Financial Reporting Standards (“IFRS”).
On January 1, 2009 NPR adopted the August 2009 amendments to CICA Handbook Section 3855, Financial Instruments —
Recognition and Measurement, relating to the impairment of financial assets. Amendments to this Section have revised the
guidance on the assessment of embedded derivatives on reclassification of financial assets from the held-for-trading and
available-for-sale categories into the loans and receivables category. The amendment also requires the use of the credit loss
model when assessing instruments held to maturity for impairment.
On January 1, 2009, NPR adopted EIC-173, Credit risk and the fair value of financial assets and financial liabilities. This abstract
requires that an entity's own credit risk (for financial liabilities) and the credit risk of the counterparty (for financial assets) should
be taken into account in determining the fair value of financial assets and financial liabilities, including derivative instruments.
Effective January 1, 2009, NPR adopted CICA Handbook Section 3064, Goodwill and Intangible Assets. These new
pronouncements establish standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its
initial recognition and of intangible assets by profit-oriented enterprises.
The new standards had no impact on NPR’s consolidated financial statements.
Recent accounting pronouncements
On January 5, 2009, the AcSB released Handbook Section 1582 Business Combinations, Section 1601, Consolidated Financial
Statements and Section 1602 Non-Controlling Interest which supersedes Section 1581, Business Combinations and Section
1600, Consolidated Financial Statements. The released sections apply to interim and annual consolidated financial statements
relating to fiscal years beginning on or after January 1, 2011, and prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. The
Sections are consistent with IFRS standards. Early application and adoption are permitted.
On February 13, 2008 the Accounting Standards Board ("AcSB") confirmed that the transition date to IFRS from Canadian GAAP
would be January 1, 2011 for all publicly accountable enterprises. 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 is expected to be significant. NPR
continues to evaluate the potential impact of IFRS to its consolidated financial statements. This is an ongoing process as the
International Accounting Standards Board and the AcSB issue new standards and recommendations.
38 | NP REIT 2009 ANNUAL REPORT
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(Columnar amounts expressed in thousands of dollars except where indicated)
4. RENTAL PROPERTIES AND OTHER CAPITAL ASSETS
Land
Buildings
Furniture, fixtures and
equipment
Vehicles
Capital and leasehold
improvements
2009
Accumulated
Amortization
Net Book
Value
Cost
2008
Accumulated
Amortization
Net Book
Value
-
90,906
90,676
-
90,676
98,983
717,002
800,612
76,187
724,425
4,956
5,370
674
633
9,006
1,193
14,151
22,340
23,026
118,764
836,251
924,513
3,757
732
9,870
90,546
5,249
461
13,156
833,967
Cost
90,906
815,985
10,326
1,307
36,491
955,015
NPR acquired properties and completed development projects in the year ended December 31, 2009 for a total purchase price of
$11.7 million (2008 – $80.4 million). During the year, NPR completed the sale of three non-core assets for gross proceeds of
$992,000 (2008 – $395,000) and a gain on sale of $246,000 (2008 – $136,000). Acquisitions and development projects were
financed as follows:
Cash paid
Mortgages payable
Class B LP Units issued
Total
Residential rental units
Seniors’ units
Units acquired
Commercial square feet
2009
9,800
1,788
65
11,653
40
111
151
-
5. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses
Prepaid equity leases
Other
Refundable deposits and mortgage proceeds held in trust
2009
2,543
1,997
548
-
5,088
2008
80,391
-
-
80,391
724
94
818
40,233
2008
2,812
2,167
500
185
5,664
39 | NP REIT 2009 ANNUAL REPORT
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(Columnar amounts expressed in thousands of dollars except where indicated)
6. INTANGIBLE ASSETS AND LIABILITIES
Above-market leases
In-place leases
Lease origination costs
2009
Accumulated
Amortization
(139)
(2,466)
(834)
(3,439)
Cost
173
6,474
1,643
8,290
Net Book
Value
34
4,008
809
4,851
Cost
173
6,565
1,669
8,407
2008
Accumulated
Amortization
(114)
(1,588)
(564)
(2,266)
Net Book
Value
59
4,977
1,105
6,141
Below-market leases
1,220
(1,126)
94
1,220
(941)
279
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.
7. MORTGAGES AND LOANS PAYABLE
Mortgages and loans payable
Fair value adjustment
Deferred financing costs
2009
518,912
(8,217)
(11,699)
498,996
2008
502,277
(8,574)
(10,903)
482,800
Mortgages and loans payable bear interest at rates ranging from 2.31% to 12.13% and have a weighted average rate of 4.87%
as at December 31, 2009 (December 31, 2008 – 5.13%). Mortgages and loans are payable in monthly installments of blended
principal and interest of approximately $3.5 million. The mortgages mature between 2010 and 2025 and are secured by charges
against specific properties. Land and buildings with a carrying value of $679 million have been pledged to secure mortgages and
loans payable of NPR. The fair value of mortgages and loans payable at December 31, 2009 is approximately $535.0 million
(December 31, 2008 – $517.7 million).
Minimum required future principal repayments, including maturities, are as follows:
2010
2011
2012
2013
2014
Subsequent
46,541
44,882
50,281
91,003
78,218
207,987
518,912
8. OPERATING FACILITIES
NPR has two revolving credit facilities totaling $57.5 million (December 31, 2008 - $50.0 million) for acquisition and operating
purposes. The $50.0 million facility bears interest at prime plus 1.50% or bankers’ acceptance plus 3.00% with a maturity date of
May 21, 2010. The $7.5 million facility bears interest at prime plus 1.50% or bankers’ acceptance plus 3.00% with a maturity date
of July 31, 2010. Specific properties with a carrying value of $92.9 million have been pledged as collateral security for the
operating facilities. At December 31, 2009 NPR had utilized $33.7 million (December 31, 2008 – $26.6 million) of the operating
facilities.
40 | NP REIT 2009 ANNUAL REPORT
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(Columnar amounts expressed in thousands of dollars except where indicated)
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, 2008
Units vested and issued – January, 2009
Units vested and issued – February, 2009
Units granted – December 31, 2009
Balance – December 31, 2009
Number
of Units
56,440
(8,408)
(28,509)
28,950
48,473
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 NPR 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, 2009, a total of 192,136 LTIP units had vested
and been issued (December 31, 2008 – 155,219).
NPR 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, NPR 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 NPR. The exercise price
is determined using the weighted average trading price of the units on the five days prior to the options being granted. The
following table summarized the outstanding unit options as at December 31, 2009:
Exercise
Price
Number
Outstanding at
December 31
Weighted-Average
Remaining Contractual
Life In Years
Weighted-
Average
Exercise Price
Number
Exercisable at
December 31
Weighted-
Average
Exercise Price
$23.12
$15.05
735,000
124,997
859,997
3.4
4.2
3.7
$23.12
$15.05
$21.95
489,999
20,004
510,003
$23.12
$15.05
$22.80
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 vested on May 20, 2009 and 244,997 will vest on May 20, 2010.
On March 12, 2009, 157,500 options with an exercise price of $15.05 and expiring on March 12, 2014 were granted to trustees
and officers. 52,507 options vested immediately, 52,497 options will vest on March 12, 2010 and 52,496 will vest on March 12,
2011. During the year ended December 31, 2009, 32,503 options were exercised at an exercise price of $15.05 per unit.
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 using the Black-Scholes model and recognized over the vesting period. The following assumptions were
used in calculating the fair value of the options granted on May 20, 2008; 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. The following assumptions were used in
calculating the fair value of the options granted on March 12, 2009; expected annual dividend rate of 9.83%, expected volatility of
28.8%, risk-free rate of return of 1.75% and expected life of 5 years. Compensation expense for the year ended December 31,
2009 relating to options granted was $504,000 (2008 – $631,000).
41 | NP REIT 2009 ANNUAL REPORT
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(Columnar amounts expressed in thousands of dollars except where indicated)
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 NPR contributes 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, 2009, employees invested a total of $117,434 (2008 – $115,562)
and NPR contributed $39,166 (2008 – $38,555). During the year ended December 31, 2009, 8,955 units (2008 – 7,974 units)
were purchased at an average cost of $18.71 per unit (2008 – $20.65 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 October 31, 2006, a “Distribution Tax” on publicly traded investment trusts and publicly listed partnerships was announced by
the federal Minister of Finance. The announcement created a new tax regime for Specified Investment Flow Throughs (“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.
The legislation 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, The new tax regime, does not apply to entities that qualify 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. At
December 31, 2009, NPR does not appear to qualify for the REIT exemption.
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 19.13% to 28.4% (December 31, 2008 – 19.63% to
29.5%).
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
Rental properties
Deferred financing costs
Other assets
2009
2008
9,304
28,868
1,574
4,005
43,751
9,614
24,963
981
3,931
39,489
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 provision for income taxes is comprised of the following:
Current income tax expense
Future income tax expense
Total income tax expense
2009
373
4,240
4,613
2008
409
3,306
3,715
42 | NP REIT 2009 ANNUAL REPORT
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(Columnar amounts expressed in thousands of dollars except where indicated)
11. INCOME TAXES (continued)
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 before income taxes
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
Future income tax expense
Total income tax expense
12. UNITHOLDERS’ CAPITAL
2009
25,929
(23,999)
1,930
19.13%
369
57
48
(101)
373
(310)
(1,250)
5,800
4,240
4,613
2008
26,417
(24,529)
1,888
19.63%
371
(88)
9
117
409
(394)
-
3,700
3,306
3,715
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, 2009 is 23,020,538 (December 31, 2008 – 22,755,010) representing a net book value of $343.3 million (December 31, 2008 -
$338.3 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 unit
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 unitholder 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, 2009, is
2,085,090 (December 31, 2008 – 2,278,635) representing a net book value of $25.4 million (December 31, 2008 – $29.1 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.
43 | NP REIT 2009 ANNUAL REPORT
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(Columnar amounts expressed in thousands of dollars except where indicated)
12. UNITHOLDERS’ CAPITAL (continued)
The total number of 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, 2009
is 25,105,628 (December 31, 2008 – 25,033,645), representing net proceeds of $368.7 million, net of issue costs of $19.6 million
(December 31, 2008 - $367.5 million, net of issue costs of $19.6 million). The number of units issued and outstanding is as
follows:
Date
Description
December 31, 2007
Trust Units
22,536,988
Issue
Price
Class B LP
Units
2,467,101
Issue
Price
Total
Units $(000’s)
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
Class B LP units exchanged
December 31, 2008
6,033
$23.12
11,592
$22.35
11,931
$22.35
-
188,466
22,755,010
-
-
-
-
-
-
-
(188,466)
2,278,635
January 2,2009
LTIP units issued
8,408
$24.20
-
-
-
-
-
-
-
-
January 6, 2009
Property acquisition
-
-
3,833
$16.91
February 5, 2009
LTIP units issued
28,509
$16.21
Options exercised
32,503
$15.05
July 24, 2009
Units cancelled
(1,270)
$10.00
Issue costs
Class B LP units exchanged
December 31, 2009
-
197,378
23,020,538
-
-
-
-
-
-
(197,378)
2,085,090
-
-
-
-
-
6,033
11,592
11,931
-
-
139
259
267
(8)
-
25,033,645
367,446
8,408
3,833
28,509
32,503
(1,270)
-
-
204
65
462
528
(13)
(2)
-
25,105,628
368,690
13. NET EARNINGS PER UNIT
Net earnings
Weighted average units for basic
net earnings per unit
Dilutive effect of units to be issued under the LTIP
Dilutive effect of Option Plan
Weighted average units for diluted
net earnings per unit
Net earnings per unit:
Basic
Diluted
2009
21,316
25,088,584
22,280
44,264
25,155,128
$0.850
$0.847
2008
22,702
25,027,697
19,978
13,270
25,060,945
$0.907
$0.906
44 | NP REIT 2009 ANNUAL REPORT
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(Columnar amounts expressed in thousands of dollars except where indicated)
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, 2009 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, 2009,
NPR has provided guarantees totaling $6.1 million (December 31, 2008 – $10.4 million). The mortgages bear interest at rates
ranging from 3.06% to 6.10% and mature July 2010 to December 2013 (December 2008 – 4.54% to 7.90% and mature June
2009 to December 2013). As at December 31, 2009, land and buildings with a carrying value of $6.3 million have been pledged
to secure these mortgage and loans payable (December 2008 – $6.5 million).
NPR has included its proportionate share of its joint ventures’ mortgages and loans payable totaling $4.9 million at December 31,
2009 (December 31, 2008 – $5.2 million) in these consolidated financial statements.
In connection with the acquisition of certain seniors’ properties in Newfoundland, the tenants have agreed to expand certain
properties purchased by NPR. NPR has entered into agreements to purchase these expansions once completed. In total, NPR
has commitments totalling $2.0 million.
15. SEGMENTED INFORMATION
The primary business segments used by management are geographic segments (i.e. provinces and territories). NPR operates in
5 geographic segments, British Columbia, Alberta, the Northwest Territories, Nunavut and Newfoundland. Within its geographic
business segments, NPR has two business operating segments: residential and commercial income producing properties. The
REIT’s residential properties are comprised of three components: 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 residents. The
commercial business segment is comprised of office, industrial and retail properties in areas where NPR has residential
operations. All items, except gain on sale of rental properties and gain on settlement of debt which are related only to the REIT
and are included in the Consolidated Statement of Earnings, are not allocated to the defined segments. As such, NPR has not
provided a reconciliation of Earnings before Other Items to Net Earnings. In 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 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, 2009
Residential
Multi-family
Execusuites
Seniors’
Commercial
Trust
TOTAL ASSETS
45 | NP REIT 2009 ANNUAL REPORT
BC
Alberta
NWT
Nunavut
Nfld
Total
92,488
-
16,230
108,718
21,289
-
130,007
176,982
-
121,691
298,673
9,083
3,776
311,532
85,046
10,470
-
95,516
90,388
-
185,904
113,105
9,537
-
122,642
19,660
-
142,302
58,392
9,428
49,610
117,430
1,192
-
118,622
526,013
29,435
187,531
742,979
141,612
3,776
888,367
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(Columnar amounts expressed in thousands of dollars except where indicated)
15. SEGMENTED INFORMATION (continued)
Total Assets
December 31, 2008
Residential
Multi-family
Execusuites
Seniors’
Commercial
Trust
TOTAL ASSETS
Geographic Segments
Year ended
December 31, 2009
Rental revenue
Other income
Operating expenses
Interest on mortgages
Amortization
EARNINGS BEFORE OTHER ITEMS
Geographic Segments
Year ended
December 31, 2008
Rental revenue
Other income
Operating expenses
Interest on mortgages
Amortization
EARNINGS BEFORE OTHER ITEMS
BC
Alberta
NWT
Nunavut
Nfld
Total
90,384
-
15,710
106,094
21,409
-
127,503
161,176
-
123,794
284,970
8,912
5,560
299,442
86,323
8,019
-
94,342
97,868
-
192,210
115,131
9,853
-
124,984
20,992
-
145,976
56,109
9,495
40,965
106,569
1,222
-
107,791
509,123
27,367
180,469
716,959
150,403
5,560
872,922
BC
Alberta
NWT
Nunavut
Nfld
Total
16,169
462
(6,292)
10,339
(3,002)
(4,085)
3,252
33,963
943
(9,816)
25,090
(10,978)
(7,500)
6,612
36,364
1,106
(16,495)
20,975
(5,908)
(7,899)
7,168
25,812
18,459
130,767
553
(8,596)
17,769
(3,867)
(5,715)
8,187
401
(6,240)
12,620
(2,680)
(3,590)
6,350
3,465
(47,439)
86,793
(26,435)
(28,789)
31,569
BC
Alberta
NWT
Nunavut
Nfld
Total
14,082
427
(6,145)
8,364
(2,452)
(3,254)
2,658
32,875
830
(6,960)
26,745
(9,814)
(6,940)
9,991
36,556
1,097
(16,851)
20,802
(5,464)
(7,246)
8,092
24,861
16,252
124,626
347
(7,597)
17,611
(4,397)
(5,797)
7,417
432
(5,901)
10,783
(2,372)
(3,210)
5,201
3,133
(43,454)
84,305
(24,499)
(26,447)
33,359
46 | NP REIT 2009 ANNUAL REPORT
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(Columnar amounts expressed in thousands of dollars except where indicated)
15. SEGMENTED INFORMATION (continued)
Business Segments
Year ended
December 31, 2009
Rental revenue
Other income
Operating expenses
Interest on mortgages
Amortization
EARNINGS BEFORE OTHER ITEMS
Business Segments
Year ended
December 31, 2008
Rental revenue
Other income
Operating expenses
Interest on mortgages
Amortization
EARNINGS BEFORE OTHER ITEMS
Multi-
family
82,352
2,942
(33,935)
51,359
(16,670)
(18,062)
16,627
Execusuites
Seniors’
Total
Residential
Commercial
Total
8,190
208
(4,334)
4,064
(969)
(1,305)
1,790
17,486
108,028
3,150
(24)
(38,293)
17,462
(6,130)
(4,460)
6,872
72,885
(23,769)
(23,827)
25,289
22,739
315
(9,146)
13,908
(2,666)
(4,962)
6,280
130,767
3,465
(47,439)
86,793
(26,435)
(28,789)
31,569
Multi-family
Execusuites
Seniors’
Total
Residential
Commercial
Total
77,162
2,677
(30,389)
49,450
(14,631)
(16,374)
18,445
8,369
128
(4,270)
4,227
(872)
(1,035)
2,320
16,494
102,025
22,601
124,626
-
(23)
16,471
(6,286)
(4,217)
5,968
2,805
(34,682)
70,148
(21,789)
(21,626)
26,733
328
(8,772)
14,157
(2,710)
(4,821)
6,626
3,133
(43,454)
84,305
(24,499)
(26,447)
33,359
16. RELATED PARTY TRANSACTIONS
Related party transactions are conducted in the normal course of operations and are measured at the exchange amount, which
is the amount of consideration established and agreed upon by the related parties. A Trustee of NPR is the Chairman of
AgeCare Investment Ltd. (“AgeCare”), which leases six seniors’ properties from NPR. For the year ended December 31, 2009,
NPR earned rental income, including rental revenue earned on a straight-line basis over the term of the lease, totaling $12.6
million (2008 – $12.6 million) from AgeCare. Amounts outstanding in accounts receivable pertaining to this lease were $nil at
December 31, 2009 (December 31, 2008 – $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, 2009, NPR paid $120,000 for
these services (2008 – $120,000).
During the first quarter of 2009, NPR completed renovations totaling $2.15 million to a seniors’ facility in BC which is leased to
AgeCare. At December 31, 2009, In accordance with the lease agreement, AgeCare is repaying this amount over 15 years.
Interest revenue of $112,800 was earned for the year ended December 31, 2009 (2008 – $nil) relating to this receivable.
Amounts outstanding at December 31, 2009 was $2.1 million (December 31, 2008 – $nil).
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 $481,000 for the year ended December 31, 2009 (2008 – $454,000). Amounts outstanding in
accounts receivable pertaining to this lease were $nil at December 31, 2009 (December 31, 2008 – $nil).
47 | NP REIT 2009 ANNUAL REPORT
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(Columnar amounts expressed in thousands of dollars except where indicated)
17. FINANCIAL INSTRUMENTS
NPR’s accounts and loans receivable and other financial liabilities are substantially carried at amortized cost, which
approximates fair value. Such fair value estimates are not necessarily indicative of the amounts the Trust might pay or receive in
actual market transactions.
The fair value hierarchy of financial instruments measured at fair value on the balance sheet is as follows:
December 31, 2009
Level 1
Level 2
Level 3
Level 1
December 31, 2008
Level 2
Level 3
Financial assets and liabilities:
Cash
Bank indebtedness
-
1,820
-
-
-
-
731
-
-
-
-
-
The three levels of the fair value hierarchy are described as follows:
Level 1: Values based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical
assets or liabilities.
Level 2: Values based on quoted prices in markets that are not active or model inputs that are observable either directly or
indirectly for substantially the full term of the asset or liability.
Level 3: Values based on prices or valuation techniques that require inputs that are both unobservable and significant to the
overall fair value measurement.
NPR had no embedded derivatives requiring separate recognition for the years ended December 31, 2009 and 2008.
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 REITs 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 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 for certain residential rental units in Alberta, NPR does not utilize hedges or forward
contracts to manage exposure to utility cost risk.
Heating oil is the primary source of fuel for heating properties located in Nunavut and the Northwest Territories. Over the last two
years, NPR converted heating systems for 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. 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, NWT. NPR has fixed price
contracts for certain of its properties which accounts for approximately 31% of the REIT’s usage in Alberta. During 2009, NPR
received approximately $40,000 in rebates under the Natural Gas Rebate Program which provided for rebates to consumers
when natural gas prices exceeded $5.50 per gigajoule from October to March. The government of Alberta did not renew the
Natural Gas Rebate Program for the 2009-2010 heating season. 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.
Management prepared a sensitivity analysis on the impact of price changes in the cost of heating oil and natural gas. A 10%
change over the average price of heating oil and natural gas would impact NPR’s net earnings by $283,000 for the year ended
December 31, 2009.
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.
48 | NP REIT 2009 ANNUAL REPORT
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(Columnar amounts expressed in thousands of dollars except where indicated)
17. FINANCIAL INSTRUMENTS (continued)
Liquidity risk
Ultimate responsibility for monitoring liquidity risk management lies with management and the Board of Trustees of the REIT.
The REIT moderates liquidity risk by managing mortgage and loan maturities to ensure a relatively even amount of mortgage
maturities in each year. At December 31, 2009 the REIT has operating facilities totaling $57.5 million (December 31, 2008 –
$50.0 million). At December 31, 2009, $33.7 million of the operating facilities were utilized (December 31, 2008 – $26.6 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 current financial
results and the annual business plan in determining appropriate distribution levels.
Credit risk
NPR’s credit risk primarily arises from the possibility that tenants may not be able to fulfill their lease commitments. 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. (See note 16), 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 residential units and commercial property 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
2009
1,405
221
58
730
2,414
2,094
(350)
4,158
2008
987
267
130
722
2,106
3,329
(350)
5,085
NPR classifies tenants as past tenants on the date of their move out from a residential unit. NPR records a specific allowance
for doubtful accounts 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 doubtful accounts
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 and past
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, beginning of period
Accounts receivable written off
Accounts recovered
Increase (decrease) in allowance
Balance, December 31
49 | NP REIT 2009 ANNUAL REPORT
2009
350
(532)
590
(58)
350
2008
250
(690)
355
435
350
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(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
2009
10,629
1,193
212
12,034
3,521
15,555
2008
9,916
1,251
51
11,218
3,893
15,111
Management believes that future cash flows from operations and availability under the current operating facilities provide
sufficient available funds through the foreseeable future to support these financial liabilities.
Interest rate risk
NPR is exposed to interest rate risk on mortgages and loans payable and does not hold any financial instruments to mitigate that
risk. NPR utilizes both fixed and floating rate debt. Interest rate risk related to floating interest rates is limited primarily to the
utilization of operating facilities. 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, NPR 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, NPR’s net earnings for the year
ended December 31, 2009 would have changed by $228,000.
18. CAPITAL MANAGEMENT
NPR’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. NPR’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. NPR 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. NPR has
operating facilities which is used to fund acquisitions and capital expenditures until specific mortgage debt is placed or additional
equity is raised.
50 | NP REIT 2009 ANNUAL REPORT
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(Columnar amounts expressed in thousands of dollars except where indicated)
18. CAPITAL MANAGEMENT (continued)
Consistent with others in the industry, NPR 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%. NPR’s debt to gross book value is as follows:
Bank indebtedness (cash)
Operating facilities
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
Debt to Gross Book Value
December 31, 2009
1,820
33,698
518,912
554,430
December 31 ,2008
(731)
26,600
502,277
528,146
836,251
7,046
20,423
-
118,764
(21,647)
960,837
57.7%
833,967
3,773
8,996
185
90,546
(21,625)
915,842
57.7%
NPR is subject to three principal financial covenants in its mortgage and loans payable and operating facilities. The financial
covenants are described as follows:
•
Debt Service Coverage – calculated as Net earnings before interest, taxes and amortization divided by the debt service
payments (total interest expense and principal repayments);
Interest Coverage – calculated as Net earnings before interest, taxes and amortization divided by total interest expense;
Debt to Gross Book Value as calculated above.
•
•
Earnings from continuing operations before taxes
Amortization
Interest on mortgages
Interest on operating facilities
Net earnings before interest, taxes and amortization
Interest on mortgages
Interest on operating facilities
Total Interest Expense
Principal repayments
Debt Service Payments
Interest Coverage
Debt Service Coverage
2009
25,929
28,789
26,435
755
81,908
26,435
755
27,190
16,198
43,388
3.01
1.89
2008
26,417
26,447
24,499
1,286
78,649
24,499
1,286
25,785
14,983
40,768
3.05
1.93
As at and during the year ended December 31, 2009, NPR complied with all externally imposed capital requirements and all
covenants relating to its debt facilities.
51 | NP REIT 2009 ANNUAL REPORT
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(Columnar amounts expressed in thousands of dollars except where indicated)
19. SUBSEQUENT EVENTS
Between January 1, 2010 and March 17, 2010 NPR completed mortgage financings and renewals totalling $22.4 million with
interest rates from 2.97% to 6.05% and terms to maturity from 6 months to 10 years. Proceeds from the mortgage financings
were used to repay existing mortgage debt and a portion of the operating facility.
52 | NP REIT 2009 ANNUAL REPORT
No
Yea
(Col
otes to th
rs ended Decem
lumnar amount
he Conso
mber 31, 2009 a
ts expressed in
olidated
and 2008
thousands of d
Financia
al Statem
ments
dollars except w
d)
where indicated
Manage
M
ement T
Team
TR
RUSTEES
Doug
Chai
glas H. Mitchell, Q
ir of the Trust
Q.C.
B. James Brit
President, Ch
and Trustee
tton
hief Executive Offi
icer
John
Trus
n C. Charles, CA
stee
Kenn
Trus
n Harper
stee
Dennis J. Hof
Trustee
ffman, CA
Kab
Trus
ir Jivraj, MBBS
stee
Denn
Trus
nis G. Patterson, L
stee
LLB
C. Donald Wi
Trustee
ilson
OF
FFICERS
B. Ja
Pres
Chie
ames Britton
sident and
er
ef Executive Office
Todd R. Cook
Chief Financi
Officer
k, CA
ial
Alan
Vice
Bus
n V. Vaughan
e President,
nt
iness Developmen
Rich
Vice
Ope
hard Anda
e President,
rations
Barbara Lave
Corporate Se
ery
ecretary
53 | NP REIT
T 2009 ANNUAL
L REPORT
Notes to the Consolidated Financial Statements
Years ended December 31, 2009 and 2008
(Columnar amounts expressed in thousands of dollars except where indicated)
Corporate Information
ANNUAL GENERAL AND SPECIAL MEETING
Tuesday, May 11, 2010, 1:30 pm
The Ranchmen’s Club
Bennett Room
710 – 13 Avenue SW
Calgary, AB T2R 0K9
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
54 | NP REIT 2009 ANNUAL REPORT
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