ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CONSOLIDATED FINANCIAL STATEMENTS (AUDITED IN CANADIAN DOLLARS) FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 DATED: FEBRUARY 22, 2018 PRESIDENT’S MESSAGE... ..................................................................................................................... 1 TABLE OF CONTENTS PART I Basis of Presentation... .................................................................................................................................. 2 Forward-Looking Disclaimer ........................................................................................................................ 2 Overview of the Business .............................................................................................................................. 2 Business Environment and Outlook .............................................................................................................. 4 Development Pipeline and Acquisitions/Dispositions................................................................................... 4 Summary of Selected Year to Date Information…. ...................................................................................... 7 PART II Strategy .......................................................................................................................................................... 8 Key Performance Drivers and Indicators ...................................................................................................... 9 Property and Corporate Financial Performance 2017 and 2016 .................................................................. 11 Leasing and Occupancy ............................................................................................................................... 17 PART III Operating Liquidity and Working Capital ................................................................................................... 19 Capital Resources, Equity and Debt Activities ........................................................................................... 21 Commitments and Contingent Liabilities .................................................................................................... 26 PART IV Summary of Selected Quarterly Information .............................................................................................. 27 PART V Risks and Uncertainties ............................................................................................................................... 28 PART VI Related Party Transactions .......................................................................................................................... 29 PART VII Disclosure Controls and Procedures and Internal Controls over Financial Reporting ................................ 31 Critical Accounting Policies ........................................................................................................................ 32 Future Accounting Policy Changes ............................................................................................................. 32 Explanation of Non-IFRS Measures used in this Document ….. ................................................................ 34 Explanation of Additional IFRS Measures used in this Document ............................................................. 34 Additional Information ................................................................................................................................ 35 Properties of the Trust ................................................................................................................................. 35 Appendix A Fourth Quarter Consolidated Statements of Comprehensive Income……………………………………..36 CONSOLIDATED FINANCIAL STATEMENTS……………………………………………………..37 Plaza Retail REIT PRESIDENT’S MESSAGE Fellow Unitholders: We are pleased to report our results for the year ended December 31, 2017. Plaza Retail REIT continued to grow in 2017 through redevelopment and new development projects across our geography. Our Board of Trustees approved our 15 th consecutive annual distribution increase for 2018. Plaza has grown its distribution by 250% over the last 15 years. Our initial distribution of 8 cents per unit in 2003 has grown to 28 cents per unit in 2018. Plaza’s very focused and unique business model has delivered and should continue to deliver cash flow and distribution growth for our unitholders. The retail industry continues to experience dramatic changes. E-commerce disruption continues to influence retailer strategies, but creates opportunities for development-oriented landlords like ourselves. Plaza’s unit price has been significantly impacted by investors exiting retail REITs across North America. We believe that many of the reasons for this mass exit are not relevant to the Canadian retail REIT landscape or to Plaza. The Sears bankruptcy added additional selling pressure on retail REITs. Plaza possesses strong leasing and development infrastructures and as a result can seize interesting growth opportunities. For example, we were able to quickly take advantage of the Sears store closures. We acquired a 50% interest in a Sears store in Saguenay, QC in December 2017. This store features an excellent location in the heart of the market’s main commercial area and will be redeveloped into approximately 10 units leased to national retailers. In January 2018, we acquired the 1000 Islands Mall in Brockville, ON. The mall’s main anchor was a Sears store and we are in the process of simplifying the enclosed mall into a strip centre and redeveloping the former Sears store into a number of retail units. This redevelopment will dramatically transform this property. Plaza’s development and redevelopment pipeline remains strong. We foresee continued growth and opportunity for both redevelopments and new development projects. We continue to pursue a number of joint venture initiatives with various types of partners, such as residential land developers with excess retail lands and institutions and property owners seeking a strong and capable development partner such as Plaza. Plaza will continue to re-cycle capital in order to fund its growth and will pursue structured deals with private and institutional investors. Plaza’s business model has always focused on developing or redeveloping new space for value, specialty and necessity-based retailers. Over the years, we have built a stable and geographically diversified portfolio to support our monthly distributions to unitholders. In today’s investment environment, we offer investors a compelling yield combined with future growth. I wish to thank everyone responsible for our success: our staff; our Board of Trustees; our customers; and our Stakeholders. Sincerely, Michael Zakuta President and CEO Page 1 of 74 Plaza Retail REIT PART I BASIS OF PRESENTATION Financial information included in this Management’s Discussion and Analysis (“MD&A”) includes material information up to February 222018. The financial statements to which this MD&A relates were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). This MD&A has been reviewed and approved by management of Plaza Retail REIT (hereinafter referred to as “Plaza” or the “Trust”) and the Audit Committee on behalf of the Board of Trustees. In this MD&A, Plaza reports non-IFRS financial measures, including: funds from operations (“FFO”); adjusted funds from operations (“AFFO”); earnings before interest, taxes, depreciation and amortization (“EBITDA”); and same-asset net property operating income (“same-asset NOI”). Plaza also reports net property operating income (“NOI”) as an additional IFRS measure. These measures are widely used in the Canadian real estate industry. Plaza believes these financial measures provide useful information to both management and investors in measuring the financial performance and financial condition of Plaza. These financial measures do not have any standardized definitions prescribed by IFRS and may not be comparable to similar titled measures reported by other entities. Refer to Part VII of this MD&A under the headings “Explanation of Non-IFRS Measures Used in this Document” and “Explanation of Additional IFRS Measures Used in this Document”, for definitions of these financial measures. FORWARD-LOOKING DISCLAIMER This MD&A should be read in conjunction with the Trust’s Consolidated Financial Statements and the notes thereto for the year ended December 31, 2017 and 2016, along with the MD&A of the Trust for the year ended December 31, 2016, including the section on “Risks and Uncertainties”. Historical results, including trends which might appear, should not be taken as indicative of future operations or results. Certain information contained in this MD&A contains forward-looking statements, based on the Trust’s estimates and assumptions, which are subject to numerous risks and uncertainties, including those described under the heading “Risks and Uncertainties” in this MD&A. This may cause the actual results and performance of the Trust to differ materially from the forward-looking statements contained in this MD&A. Without limiting the foregoing, the words “believe”, “expect”, “continue”, “anticipate”, “should”, “may”, “intend”, “estimate”, “plan” or variations of such words and similar expressions identify forward-looking statements. Forward-looking statements (which involve significant risks and uncertainties and should not be read as guarantees of future performance or results) include, but are not limited to, statements related to distributions, development activities, financing and the availability of financing sources. Factors that could cause actual results to differ from the forward-looking statements include, but are not limited to: economic, retail, capital market, debt market and competitive real estate conditions; Plaza’s ability to lease space; changes in interest rates; changes in operating costs; the availability of development and redevelopment opportunities for growth; and government regulations. Management believes that the expectations reflected in forward-looking statements are based upon reasonable assumptions, however, management can give no assurance that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of February 22, 2018 and Plaza assumes no obligation to update or revise them to reflect new events or circumstances, except for forward-looking information disclosed in a prior MD&A which, in light of intervening events, requires further explanation to avoid being misleading. OVERVIEW OF THE BUSINESS Headquartered in Fredericton, New Brunswick, Plaza is an unincorporated “open-ended” real estate investment trust (a “REIT”) established pursuant to its declaration of trust dated as of November 1, 2013 (the “Declaration of Trust”). Plaza is the successor to Plazacorp Retail Properties Ltd., which began operations in late 1999. Plaza trades on the Toronto Stock Exchange under the symbol “PLZ.UN”. Plaza is a developer, owner and manager of retail real estate primarily in Atlantic Canada, Quebec and Ontario. Plaza offers a unique business strategy that differs from many of its peers in the real estate industry. Plaza has a 15 year history of accretive growth and value creation, since beginning to pay distributions in late 2002; Plaza’s main business is driven by value-add opportunities to develop and redevelop, for its own account, unenclosed and enclosed retail real estate throughout Canada; Plaza has strong relationships with leading retailers; Page 2 of 74 Plaza Retail REIT Plaza has a competitive advantage as a developer in Atlantic Canada; Plaza’s entrepreneurial abilities allow it to adapt more easily to changing market conditions; Plaza is fully internalized and able to develop retail properties in-house; Plaza minimizes the amount of short-term debt that it obtains, therefore locking in returns for unitholders and minimizing financing risk; Insiders hold a significant position in Plaza; and Plaza is focused on cash flow per unit and per unit growth and conducts its business in order to maximize this and, accordingly, distributions for unitholders. Plaza’s growth is driven by value-add developments and redevelopments as well as organic growth from the existing portfolio as leases roll-over. Plaza’s unique business strategy and focus on cash flow per unit has allowed it to increase its distribution every year since it began paying distributions in November 2002. Plaza’s distribution compounded annual growth rate is approximately 9%. Yearly Distribution/Dividend Growth 2003(1) 2004 2005 2006 2007 2008 2009 2010 2011 2011-Aug 2012 2013 2014 2015 2016 2017 2018 8.00¢ 8.75¢ 10.50¢ 12.50¢ 15.00¢ 17.50¢ 18.50¢ 19.25¢ 20.25¢ 21.00¢ 21.50¢ 22.50¢ 24.00¢ 25.00¢ 26.00¢ 27.00¢ 28.00¢ (1) Plaza began paying distributions in November 2002. 2003 is the first full year of distribution payments. n/a 9.4% 20.0% 19.0% 20.0% 16.7% 5.7% 4.1% 5.2% 3.7% 2.4% 4.7% 6.7% 4.2% 4.0% 3.8% 3.7% $0.30 $0.25 $0.20 $0.15 $0.10 $0.05 $0.00 Distributions/Dividends per unit 3 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 1 1 0 2 - g u A The Board of Trustees approved the 15th consecutive annual distribution increase to $0.28 per unit for 2018, representing a 3.7% increase from 2017, and is effective for the regularly scheduled monthly distribution payment dates beginning with the January distribution, which was payable February 15, 2018. Summary of Properties The Trust’s portfolio at December 31, 2017 includes interests in 298 properties totaling approximately 7.8 million square feet (which are predominantly occupied by national tenants) and additional lands held for development. These include properties indirectly held by Plaza through its subsidiaries and through joint arrangements. Gross Leasable Area (sq. ft.) December 31, 2017(1) (2) 52,513 679,544 1,837,420 1,180,164 30,424 1,262,229 595,413 2,196,332 7,834,039 Includes properties under development and non-consolidated investments. Alberta Newfoundland and Labrador New Brunswick Nova Scotia Manitoba Ontario Prince Edward Island Quebec Total (1) (2) At 100%, regardless of the Trust’s ownership interest in the properties Number of Properties December 31, 2017(1) 10 12 51 37 6 71 11 100 298 Page 3 of 74 Number of Properties December 31, 2016(1) 10 12 51 37 6 73 11 98 298 Gross Leasable Area (sq. ft.) December 31, 2016(1) (2) 52,348 679,926 1,890,336 1,175,940 30,424 1,265,621 595,821 2,078,534 7,768,950 Plaza Retail REIT BUSINESS ENVIRONMENT AND OUTLOOK Plaza’s entrepreneurial culture and adaptability, combined with its strong fully internalized platform, has allowed, and will continue to allow, Plaza to grow and take advantage of opportunities in the market-place. Plaza has always had a focused strategy of growing the business through value-add developments and redevelopments and opportunistic acquisitions. Its properties are primarily leased to national retailers, with a focus on retailers in the consumer staples market segment – a segment that tends to withstand broader economic conditions or other retail trends, such as online sales. Plaza’s execution of this strategy and its leasing efforts over the years have produced a portfolio that is dominated by national retailers, providing investors with a stable and growing cash flow. Barring unforeseen events, management believes it can continue to deliver growth and a solid performance in 2018. While it continues to be tough for certain retailers, particularly those focused on fashion, retailers with a focus on consumer staple goods or value goods continue to perform well. These are the retailers that dominate Plaza’s portfolio and ongoing developments/redevelopments. Notwithstanding increases in Government of Canada bond rates as a result of Bank of Canada rate increases (and anticipated further ones in 2018), long-term debt financing continues to be readily available from lenders, not only at competitive and low fixed rates, but with long amortization periods and long terms as well. DEVELOPMENT PIPELINE AND ACQUISITIONS/DISPOSITIONS Development Pipeline Plaza’s development pipeline is robust and will continue to drive growth going forward. Plaza currently owns an interest in the following projects under development or redevelopment which, upon completion, are expected to be accretive to Plaza’s earnings. The following properties are under construction, active development, or active planning and are anticipated to be completed at various points over the next three years as follows: Page 4 of 74 Plaza Retail REIT Properties under development/redevelopment In Planning/In Development: Strip Plaza: Plaza de L’Ouest, Sherbrooke, QC – Phase III Fairville Boulevard, Saint John, NB – Phase III St. Jerome, St. Jerome (Montreal), QC -Phase III(2) 7550 Rue Beclard, Anjou, QC(3) 100 Saint-Jude Nord, Granby, QC – Phase II(2) 90 Blvd. Tache Ouest, Montmagny, QC Lawrence Avenue Plaza, Scarborough (Toronto), ON(3) 1324 Blvd Talbot, Saguenay (Chicoutimi), QC The Shoppes at Galway, St. John’s, NL – Phase I(2) The Shoppes at Galway, St. John’s, NL – Phase II(2) The Shoppes at Galway, St. John’s, NL – Phase III(2) Single Use: 1675 Rue Notre Dame Ouest, Lachine, QC(3) 9205 Bd. Lacordaire, St. Leonard, QC(3) 6685 Century Avenue, Mississauga, ON 144 Denison, Granby, QC(2) Queens Plaza Dr, Liverpool, NS Expansion: Bedford Commons Plaza, Bedford (Halifax), NS Pleasant Street, Yarmouth, NS In Construction: Enclosed Mall to Strip Plaza: Park Street Plaza, Kenora, ON Mountainview Plaza, Midland, ON Northumberland, Miramichi, NB Eastcourt, Cornwall, ON Timiskaming, New Liskeard, ON Strip Plaza: 600 JP Perrault, Sherbrooke, QC Single Use: 3000 Bd. St. Charles, Kirkland, QC(3) 1943 Baseline Road, Ottawa, ON Expansion: 9025 Torbram Rd, Brampton, ON(3) Main Place, Fredericton, NB Gateway Mall, Sussex, NB(2) KGH Plaza, Miramichi, NB Lansdowne Plaza, Saint John, NB Total Square Footage(1) Ownership Occupied or Committed at December 31, 2017(4) Anticipated Completion Date 30,000 10,000 100,000 40,030 100,000 3,500 7,540 84,000 265,000 335,000 100,000 2,989 2,632 70,000 10,000 10,000 3,500 2,000 69,177 201,448 102,436 144,075 93,284 50% 100% 20% 100% 8% 50% 100% 50% 50% 50% 50% 100% 100% 50% 25% 100% 100% 100% 20% 20% 50% 50% 50% n/a n/a n/a n/a n/a n/a 100% n/a n/a n/a n/a n/a n/a 100% 100% 100% 100% n/a 97% 99% 96% 96% 60% 1-2 years 1-2 years 1-2 years Q3 2018 2-3 years 1-2 years Q3 2018 2019 1-2 years 2-3 years 2-3 years 1-2 years Q3 2018 Q2 2019 Q4 2018 Q4 2018 Q3 2018 1-2 years Q2 2018 Q2 2018 Q2 2018 Q1 2018 Q3 2018 103,822 50% 74% Q1 2018 2,554 1,590 34,272 2,178 3,000 3,000 3,000 1,940,027 100% 100% 100% 100% 25% 25% 100% 100% 100% 100% 100% 100% 100% 100% Q1 2018 Q1 2018 Q3 2018 Q4 2018 Q3 2018 Q3 2018 Q3 2018 (1) Approximate square footage upon completion or to be added on expansion. (2) This is owned in a limited partnership that is part of the Trust’s non-consolidated trusts and partnerships. (3) This is an existing property being redeveloped. (4) Occupied or committed based on redeveloped square footage. Page 5 of 74 Plaza Retail REIT Plaza’s goal is to achieve unlevered returns on developments/redevelopments of between 8%-10%. There is excess density at existing properties which would represent approximately 62 thousand additional square feet of gross leasable area. At December 31, 2017, there are three land assemblies under purchase agreement and subject to due diligence or other conditions. These land purchases, if executed, will represent an additional 54 thousand square feet of retail space at completion. The total estimated costs for the developments and redevelopments (noted in the chart on the previous page) are between $100 million and $110 million, of which approximately $63 million has already been spent (at Plaza’s ownership percentage). The unspent amount has not been fully or specifically budgeted or committed at this time. For the projects in construction, remaining costs to complete are between $4 million and $5 million. For the projects in planning or in development that are expected to be completed by the end of 2018, remaining costs to complete are between $3 million and $4 million. Acquisitions/Dispositions During the year ended December 31, 2017, the Trust purchased the following (all including closing costs): land adjacent to an existing property in Picton, ON for $217 thousand; land in Fredericton, NB for $287 thousand; land in Dunnville, ON for $279 thousand; land in Gatineau, QC for $1.1 million; a 50% interest in development lands in Mississauga, ON for $6.1 million; a 50% interest in an existing property for redevelopment in Saguenay, QC for $3.3 million; and development lands in Liverpool, NS for $168 thousand. In January 2018, the Trust increased its interest in the Northwest Centre, Moncton, NB and Shediac West Plaza, Shediac, NB, from 10% to 50%, with a Canadian pension fund buying the other 50% interest on a co-ownership basis. Both properties were previously co-owned with the Trust through two retail syndications. The Trust’s incremental gross investment is approximately $17.0 million, and its incremental net investment is approximately $5.6 million. The previous syndications for these two properties, whose interests were bought out as a result of these transactions, included certain related parties of the Trust – namely; Earl Brewer, Michael Zakuta, Edouard Babineau and Denis Losier. A Special Committee of Independent Trustees of the Trust was formed to review and approve the related party transactions. In January 2018, the Trust acquired a property for redevelopment in Brockville, ON for $14.0 million. The Trust satisfied the purchase price through $4.9 million in cash and a new $9.1 million borrowing facility at a cost of prime plus 1.25%. Development/construction expenses will be financed through the expansion of this facility. Subsequent to year end the Trust purchased lands in Oshawa, ON for $2.5 million. During the year ended December 31, 2017, the Trust disposed of surplus land in Kenora, ON for net proceeds of $92 thousand which was recorded as investment properties held for sale at December 31, 2016. The Trust also disposed of land in Calgary, AB and in Miramichi, NB for net proceeds of $78 thousand and $272 thousand, respectively. The Trust disposed of properties in North Sydney, NS, for net proceeds of $215 thousand, in Oshawa, ON for net proceeds of $662 thousand, in Hamilton, ON for net proceeds of $577 thousand and in Niagara Falls, ON for net proceeds of $287 thousand. The Trust also disposed of a 50% non-managing interest in eight properties in Edmundston, NB, Woodstock, NB, Grand Falls, NB, Yarmouth, NS and Sydney, NS for net proceeds of $17.3 million ($7.3 million after assumption of 50% of the existing mortgages). Subsequent to year end conditions were waived by the purchaser to buy land and building in Perth, ON and Ottawa, ON from the Trust for net proceeds of $0.6 million. The sale by the Trust is set to close on February 28, 2018. Page 6 of 74 Plaza Retail REIT SUMMARY OF SELECTED YEAR TO DATE INFORMATION (000s, except as otherwise noted) Property rental revenue Total revenue NOI(1) Same-asset NOI(1) FFO(1) AFFO(1) EBITDA(1) Profit and total comprehensive income Total assets Total non-current liabilities Total mortgages, mortgage bonds, notes payable, bank credit facilities Total debentures Weighted average units outstanding (2) Amounts on a Per Unit Basis FFO(1) AFFO(1) Distributions Financial Ratios Weighted average interest rate – fixed rate mortgages Debt to gross assets (excluding converts) Debt to gross assets (including converts) Interest coverage ratio(1) Debt coverage ratio(1) Distributions as a % of FFO Distributions as a % of AFFO Leasing Information Square footage leased during the period (total portfolio) Committed occupancy(4) Same-asset committed occupancy(4) Mix of Tenancy Based on Square Footage(4) National Regional Local Non retail Other Average term to maturity - mortgages Average term to maturity - leases(4) IFRS capitalization rate Property Type Breakdown Strip Enclosed Single Use – Quick Service Restaurant Single Use – Retail Total Number of Properties December 31, 2017 106 5 125 62 298 12 Months Ended December 31, 2017 (unaudited) $ 102,887 $ 105,963 $ 64,358 $ 58,117 $ 35,888 $ 33,288 $ 60,016 $ 23,447 $ 1,031,335 $ 450,020 $ 490,305 $ 49,773 102,385 $ 0.351 $ 0.325 $ 0.270 12 Months Ended 12 Months Ended December 31, 2015 (unaudited) $ 96,050 $ 101,854 $ 60,898 December 31, 2016 (unaudited) $ 100,215 $ 108,029 $ 62,672 $ 58,073 $ 32,650 $ 29,259 $ 58,661 $ 32,758 $ 38,595 $ 1,029,892 $ 484,587 $ 31,314 $ 27,250 $ 57,568 $ 1,023,887 $ 483,824 N/A(3) $ 488,344 $ 60,172 98,100 $ 0.333 $ 0.298 $ 0.260 $ 514,466 $ 64,490 94,014 $ 0.333 $ 0.290 $ 0.250 4.39% 48.4% 52.2% 2.36x 1.68x 77.1% 83.1% 1,111,025 95.2% 95.1% 90.4% 3.9% 4.1% 1.6% 6.0 Years 5.8 Years 7.02% Square Footage (000s) 5,403 971 434 1,026 7,834 4.46% 47.7% 53.0% 2.18x 1.58x 78.5% 87.6% 1,049,545 96.1% 96.3% 90.7% 4.0% 4.2% 1.1% 6.4 years 6.2 years 7.03% Number of Properties December 31, 2016 103 5 128 62 298 4.59% 50.5% 56.4% 2.08x 1.55x 75.1% 86.3% 922,065 96.1% N/A(3) 90.5% 4.1% 4.2% 1.2% 6.5 years 6.5 years 7.04% Square Footage (000s) 5,332 1,036 377 1,024 7,769 (1) Refer to Part VII under the headings “Explanation of Non-IFRS Measures used in this Document” and “Explanation of Additional IFRS Measures used in this Document” for further explanations. Includes Class B exchangeable limited partnership (“LP”) units. (2) (3) Not applicable as the same-asset calculation relates to assets owned since January 1, 2016. (4) Excludes properties under development and non-consolidated investments. Page 7 of 74 Plaza Retail REIT PART II STRATEGY Plaza’s principal goal is to deliver a reliable and growing yield to unitholders from a diversified portfolio of retail properties. To achieve this goal the Trust’s Board of Trustees has set development criteria of a minimum cash yield (unlevered yield) equal to 100 basis points above the mortgage constant for a 10 year mortgage at prevailing rates and assuming a 25 year amortization period. The Trust strives to: maintain access to cost effective sources of debt and equity capital to finance acquisitions and new developments; acquire or develop properties at a cost that is consistent with the Trust’s targeted returns on investment; maintain high occupancy rates on existing properties while sourcing tenants for properties under development and future acquisitions; and diligently manage its properties to ensure tenants are able to focus on their businesses. The Trust invests in the following property types: new properties developed on behalf of existing clients or in response to demand; well located but significantly depreciated shopping malls and strip plazas to be redeveloped; and existing properties that will provide stable recurring cash flows with opportunity for growth. Management intends to achieve Plaza’s goals by: focusing on property leasing, operations and delivering superior services to tenants; acquiring or developing high quality properties with the potential for increases in future cash flows; managing properties to maintain high occupancies and staggering lease maturities appropriately; achieving appropriate pre-leasing prior to commencing construction; managing debt to obtain both a low cost of debt and a staggered debt maturity profile; matching, as closely as practical, the weighted average term to maturity of mortgages to the weighted average lease increasing rental rates when market conditions permit; term; retaining sufficient capital to fund capital expenditures required to maintain the properties well; raising capital where required in the most cost-effective manner; properly integrating new properties acquired; using internal expertise to ensure that value is surfaced from all of the properties; and periodically reviewing the portfolio to determine if opportunities exist to re-deploy equity from slow growth properties into higher growth investments. Page 8 of 74 Plaza Retail REIT KEY PERFORMANCE DRIVERS AND INDICATORS There are numerous performance drivers, many beyond management’s control, that affect Plaza’s ability to achieve its above- stated goals. These key drivers can be divided into internal and external factors. Management believes that the key internal performance drivers are: occupancy rates; rental rates; tenant service; and maintaining competitive operating costs. Management believes that the key external performance drivers are: the availability of new properties for acquisition and development; the availability and cost of equity and debt capital; and The key performance indicators by which management measures Plaza’s performance are as follows: a stable retail market. FFO; AFFO; debt service ratios; debt to gross assets; same-asset NOI; weighted average effective cost of debt; and occupancy levels. The key performance indicators discussed throughout the MD&A are summarized in the table that follows. Management believes that its key performance indicators allow it to track progress towards the achievement of Plaza’s primary goal of providing a steady and increasing cash flow to unitholders. The following chart discusses the key performance indicators for the twelve months ended December 31, 2017 compared to the twelve months ended December 31, 2016. Page 9 of 74 Plaza Retail REIT FFO(1) AFFO(1) Debt Service Ratios(1) Debt to Gross Assets FFO FFO per unit Distributions as a % of FFO YTD Q4 2017 $35,888 $0.351 77.1% YTD Q4 2016 $32,650 $0.333 78.5% The increase in FFO and FFO per unit was mainly due to growth in NOI from developments/redevelopments/acquisitions of $2.0 million, an increase in non- recurring lease buyout revenues of $1.4 million and a decrease in finance costs of $1.7 million mainly due to lower debenture interest due to the redemption of Series B and Series C convertible debentures. Even excluding the impact of lease buyouts, FFO and FFO per unit would have increased by 3.5% and 7.0%, respectively. AFFO AFFO per unit Distributions as a % of AFFO YTD Q4 2017 $33,288 $0.325 83.1% YTD Q4 2016 $29,259 $0.298 87.6% The principal factors influencing AFFO are consistent with those impacting FFO. Interest coverage ratio Debt coverage ratio YTD Q4 2017 2.36x 1.68x YTD Q4 2016 2.18x 1.58x The increase mainly reflects: (i) lower finance costs mainly due to lower debenture interest due to the redemption of Series B and Series C convertible debentures; and (ii) higher EBITDA due to higher NOI, mainly as a result of growth from developments/redevelopments as well as the lease buyout revenues. Debt to gross assets (excluding converts) Debt to gross assets (including converts) Q4 2017 48.4% 52.2% Q4 2016 47.7% 53.0% The increase excluding converts is mainly due to the issuance of $6.0 million in Series II unsecured non-convertible debentures in February 2017, as well as an increase in the operating line balance. Including convertible debentures, the current year ratio was also impacted by the redemption of the Series B and C convertible debentures. Same-Asset NOI(1) Same-asset NOI YTD Q4 2017 $58,117 YTD Q4 2016 $58,073 Same-asset NOI increased 0.1% over the prior year. Rent steps in the portfolio more than offset vacancies and two significant lease buyouts concluded during 2017. The two lease buyouts decreased same-asset NOI by $445 thousand. Weighted Average Interest Rate – Fixed Rate Mortgages Occupancy Levels Q4 2017 Q4 2016 Weighted average interest rate – fixed rate mortgages 4.39% The decrease was a result of continued financings at low rates. Committed occupancy Same-asset committed occupancy Q4 2017 95.2% 95.1% The two lease buyouts negatively impacted occupancy by 0.6%. 4.46% Q4 2016 96.1% 96.3% (1) Refer to Part VII under the headings “Explanation of Non-IFRS Measures used in this Document” and “Explanation of Additional IFRS Measures used in this Document” for further explanations. Page 10 of 74 Plaza Retail REIT PROPERTY AND CORPORATE FINANCIAL PERFORMANCE 2017 AND 2016 Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO) Plaza’s summary of FFO and AFFO for the three and twelve months ended December 31, 2017, compared to the three and twelve months ended December 31, 2016 is presented below: 3 Months Ended 3 Months Ended December 31, 2017 (unaudited) December 31, 2016 (unaudited) 12 Months Ended December 31, 2017 12 Months Ended December 31, 2016 $ 9,431 $ 9,535 $ 23,232 $ 32,631 382 321 1,727 1,502 87 207 (5) (2,124) 600 (152) 94 - (23) 11 $ 8,508 56 (424) (287) 9 $ 7,862 102,685 $ 0.083 $ 0.077 $ 6,937 81.5% 88.2% 86 179 (2) 1,570 (1,233) (316) (1,274) (137) (66) (44) $ 8,619 3 (454) (546) 36 $ 7,658 99,515 $ 0.087 $ 0.077 $ 6,472 75.1% 84.5% $ 8,508 489 $ 8,997 108,598 $ 7,862 - $ 7,862 102,685 $ 0.083 $ 0.077 $ 8,619 569 $ 9,188 106,338 $ 7,658 - $ 7,658 99,515 $ 0.086 $ 0.077 354 (64) (17) 10,392 1,876 (970) (339) 343 1,252 2 (1,648) (2,916) 396 1,256 - (138) (165) 154 (104) (218) $ 35,888 $ 32,650 239 (1,783) (1,098) 42 (412) (1,827) (1,219) 67 $ 33,288 $ 29,259 98,100 $ 0.351 $ 0.333 $ 0.325 $ 0.298 $ 25,621 $ 27,674 78.5% 77.1% 87.6% 83.1% 102,385 2,258 $ 35,888 $ 32,650 2,120 $ 38,146 $ 34,770 104,509 $ 29,259 109,209 $ 33,288 - $ 33,288 102,385 - $ 29,259 98,100 $ 0.349 $ 0.333 $ 0.325 $ 0.298 (000s – except per unit amounts and percentage data) Profit and total comprehensive income for the period attributable to unitholders Add (deduct): Incremental leasing costs included in administrative expenses Distributions on Class B exchangeable LP units included in finance costs Deferred income taxes Fair value adjustment to restricted share units Fair value adjustment to investment properties Fair value adjustment to investments Fair value adjustment to Class B exchangeable LP units Fair value adjustment to convertible debentures Fair value adjustment to interest rate swap and bond forward Equity accounting adjustment Non-controlling interest adjustment Basic FFO Add (deduct): Non-cash revenue – straight-line rent Leasing costs – existing properties(1) Maintenance capital expenditures – existing properties(1) Non-controlling interest adjustment Basic AFFO Basic weighted average units outstanding (2) Basic FFO per unit Basic AFFO per unit Gross distributions to unitholders (3) Distributions as a percentage of basic FFO Distributions as a percentage of basic AFFO Basic FFO Interest on dilutive convertible debentures Diluted FFO Diluted weighted average units outstanding (2) Basic AFFO Interest on dilutive convertible debentures Diluted AFFO Diluted weighted average units outstanding (2) Diluted FFO per unit Diluted AFFO per unit (1) Based on actuals. (2) (3) Includes Class B exchangeable LP units. Includes distributions on Class B exchangeable LP units. Page 11 of 74 Plaza Retail REIT Basic FFO for the three months ended December 31, 2017 decreased by $111 thousand, or 1.3% over the prior year. Basic FFO per unit for the three months ended December 31, 2017 decreased 4.6% over the prior year. More specifically, impacting FFO was: (i) (ii) (iii) (iv) (v) growth in NOI of $330 thousand from developments/redevelopments/acquisitions; a decrease in same-asset NOI of $196 thousand, impacted by the vacancies caused by two significant non-recurring lease buyouts concluded during 2017, accounting for $180 thousand of the decrease; an increase in administrative expenses charged to NOI of $214 thousand, mainly due to an increase in head count and salary increases; an increase in administrative expenses of $233 thousand; and a decrease in finance costs of $221 thousand mainly due to lower debenture interest due to the redemption of Series C convertible debentures. For the three months ended December 31, 2017, AFFO increased by $204 thousand, or 2.7% over the prior year, and AFFO per unit was consistent with the prior year. The increase in AFFO was mainly due to the decrease in maintenance capital expenditures. The per unit amounts for the quarter were impacted by a larger number of units outstanding due to the conversion of $14.6 million in Series C convertible debentures into 2.8 million units in late 2016 and January 2017, upon the issuance of a redemption notice for the Series C convertible debentures in November 2016. Basic FFO for the twelve months ended December 31, 2017 increased by $3.2 million, or 9.9% over the prior year. Basic FFO per unit for the twelve months ended December 31, 2017 increased 5.4% over the prior year. The increase was mainly due to net development and redevelopment activity and lease buyout revenues received. More specifically, impacting FFO was: (i) (ii) (iii) (iv) (v) (vi) growth in NOI of $2.0 million from developments/redevelopments/acquisitions; a decrease in NOI of $485 thousand due to the sale of properties; a decrease in NOI of $651 thousand from non-cash straight-line rent; an increase in administrative expenses charged to NOI of $631 thousand, mainly due to an increase in head count and salary increases; an increase in lease buyout revenues received of $1.4 million, mainly from two significant lease buyouts concluded during 2017; and a decrease in finance costs of $1.7 million mainly due to lower debenture interest due to the redemption of Series B and Series C convertible debentures. For the twelve months ended December 31, 2017, AFFO increased by $4.0 million, or 13.8% over the prior year, and AFFO per unit increased by 9.1% over the prior year. The increase in AFFO was mainly due to the same factors impacting FFO. Even excluding the impact of lease buyouts, for the twelve months ended December 31, 2017 FFO and AFFO increased by 8.0% and 11.7%, respectively, and FFO and AFFO per unit increased by 3.5% and 7.0%, respectively. The per unit amounts for the twelve months ended December 31, 2017 were impacted by the conversion of the Series C convertible debentures. Profit and Total Comprehensive Income for the Period The Trust recorded profit and total comprehensive income for the three months ended December 31, 2017 of $9.5 million compared to $9.6 million for the same period in the prior year. Profit was impacted by the same factors mentioned in the discussion of FFO above, as well as: (i) (ii) (iii) (iv) a decrease in share of profit of associates of $1.8 million mainly relating to the non-cash fair value adjustment to the underlying investment properties; a net gain from the non-cash fair value adjustment to the Class B exchangeable LP units of $152 thousand compared to a net gain of $316 thousand in the prior year; a net loss from the non-cash fair value adjustment to the convertible debentures of $94 thousand compared to a net gain of $1.2 million in the prior year; and a net gain from non-cash fair value adjustments to investment properties of $2.1 million compared to a net loss of $1.6 million in the prior year. Page 12 of 74 Plaza Retail REIT The Trust recorded profit and total comprehensive income for the twelve months ended December 31, 2017 of $23.4 million compared to $32.8 million for the same period in the prior year. Profit was impacted by the same factors mentioned in the discussion of FFO above, as well as: (i) (ii) (iii) (iv) a decrease in share of profit of associates of $4.6 million mainly relating to the non-cash fair value adjustment to the underlying investment properties; a net gain from the non-cash fair value adjustment to convertible debentures of $339 thousand compared to a net loss of $1.3 million in the prior year; a net gain from the non-cash fair value adjustment to the Class B exchangeable LP units of $970 thousand compared to a net loss of $396 thousand in the prior year; and a net loss from non-cash fair value adjustments to investment properties of $10.4 million compared to a net gain of $1.6 million in the prior year. Same-Asset Net Property Operating Income (Same-Asset NOI) Same-asset categorization refers to those properties which were owned and operated by Plaza for the twelve months ended December 31, 2017 and the entire year ended December 31, 2016 and excludes partial year results from certain assets due to timing of acquisition, development, redevelopment or disposition. Significant portions of the Trust’s leases have common cost recoveries from tenants linked to the consumer price index (CPI). At December 31, 2017, approximately 52.4% of the Trust’s leased area is tied to a CPI cost recovery formula. As well, certain anchor tenant leases may restrict recovery of common costs. As a result, certain costs such as snow removal and utility costs may not be completely offset by cost recoveries in a period, or recovery revenues may exceed costs. Municipal taxes are generally net and fully recoverable from all tenants. Most tenants in strip plazas and single use properties are responsible for their own utilities, and changes to these costs do not materially impact NOI. (000s) Same-asset rental revenue Same-asset operating expenses Same-asset realty tax expense Same-asset NOI 3 Months Ended December 31, 2017 (unaudited) $ 21,879 (3,653) (4,029) $ 14,197 3 Months Ended December 31, 2016 (unaudited) $ 21,722 (3,411) (3,918) $ 14,393 12 Months Ended December 31, 2017 (unaudited) $ 87,922 (13,208) (16,597) $ 58,117 12 Months Ended December 31, 2016 (unaudited) $ 87,844 (13,334) (16,437) $ 58,073 As noted in the chart above, the same-asset NOI for the three months ended December 31, 2017 decreased by $196 thousand or 1.4% over the same period in the prior year, mainly due to vacancies from two significant lease buyouts concluded during the year, accounting for $180 thousand of the decrease, as well as vacancies incurred in Q4 in the portfolio, mainly from the Village Shopping Centre, the Trust’s enclosed mall in St. John’s, NL, where a 40 thousand square foot second floor office tenant vacated. These were partly offset by rent steps in the portfolio. Same-asset NOI for the twelve months ended December 31, 2017 increased by $44 thousand or 0.1% over the same period in the prior year. Rent steps in the portfolio more than offset vacancies and the vacancies caused by the two significant lease buyouts. The vacancies from the two lease buyouts decreased same-asset NOI by $445 thousand for the twelve months ended December 31, 2017. Page 13 of 74 Plaza Retail REIT The following table shows a breakdown of same-asset NOI by province. (000s except percentage data) New Brunswick Nova Scotia Quebec Alberta Manitoba Ontario Newfoundland and Labrador Prince Edward Island Same-asset NOI Percentage increase (decrease) over prior period Net Property Operating Income (NOI) 3 Months Ended December 31, 2017 (unaudited) $ 3,187 2,633 3,330 218 191 2,108 1,143 1,387 $ 14,197 (1.4%) 3 Months Ended December 31, 2016 (unaudited) $ 3,327 2,805 3,260 222 191 2,145 1,249 1,194 $ 14,393 12 Months Ended December 31, 2017 (unaudited) $ 13,377 11,353 13,110 887 752 8,486 4,989 5,163 $ 58,117 0.1% 12 Months Ended December 31, 2016 (unaudited) $ 13,685 11,802 12,777 889 762 8,468 4,840 4,850 $ 58,073 The following table shows the breakdown of total NOI and relevant variances from the prior year. (000s) Same-asset NOI Developments and redevelopments transferred to income producing in 2016 Developments and redevelopments transferred to income producing in 2017 ($2.2 million annualized NOI) NOI from properties currently under redevelopment ($5.0 million annualized NOI) Straight-line rent Administrative expenses charged to NOI Lease buyout revenue Property disposals Other Total NOI 3 Months Ended December 31, 2017 (unaudited) $ 14,197 3 Months Ended December 31, 2016 (unaudited) $ 14,393 12 Months Ended December 31, 2017 12 Months Ended December 31, 2016 $ 58,117 $ 58,073 787 559 586 (56) (837) 119 117 17 $15,489 669 307 626 (4) (623) 105 205 (22) $ 15,656 3,107 1,774 2,674 (239) (2,984) 1,676 144 89 $ 64,358 1,978 1,177 2,443 412 (2,353) 316 629 (3) $ 62,672 Plaza concluded two significant lease buyout transactions during the year in order to bring on other, more stable tenants. The lease buyout revenues received more than offset the loss in NOI from the transactions. New tenants will not be in place until 2018. Page 14 of 74 Plaza Retail REIT Share of Profit of Associates Share of profit of associates consists of income from equity and fair value-accounted investments as well as fair value changes in the underlying investment properties included within equity-accounted investments and other changes to the equity position of the equity-accounted investments that would impact the residual returns on wind-up (such as debt financing incurred). The following schedule shows Plaza’s ownership position, rates of preferred returns on investment and Plaza’s interest in cash on capital appreciation beyond the preferred returns. Equity Accounted Investments(1) Centennial Plaza Limited Partnership Trois Rivières Limited Partnership Plazacorp – Shediac Limited Partnership(3) Plazacorp Ontario1 Limited Partnership Plazacorp Ontario2 Limited Partnership Plazacorp Ontario3 Limited Partnership Plazacorp Ontario4 Limited Partnership RBEG Limited Partnership CPRDL Limited Partnership Fundy Retail Ltd. VGH Limited Partnership(2) Ste. Hyacinthe Limited Partnership 144 Denison East Limited Partnership(2) The Shoppes at Galway Limited Partnership(2) Fair Value Accounted Investments(1) Northwest Plaza Commercial Trust(3) Ownership Position Preferred Return Residual Return 10% 15% 10% 25% 50% 50% 50% 50% 50% 50% 20% 25% 25% 50% 10% 10% 8% 4% n/a n/a n/a n/a n/a n/a 8% n/a n/a n/a 20% 30% 50% 25% n/a n/a n/a n/a n/a n/a 27% n/a n/a n/a 10% (1) Equity and fair value accounted investments consist of the following properties: 3550 Sources, Centennial Plaza, Place Du Marche, BPK Levis and 100 Saint-Jude Nord (Centennial Plaza Limited Partnership); Plaza des Recollets (Trois Rivières Limited Partnership); Shediac West (Plazacorp – Shediac Limited Partnership); Ottawa Street Almonte, Hastings Street Bancroft and Main Street Alexandria (Plazacorp Ontario1 Limited Partnership); Amherstview and Scugog Street Port Perry (Plazacorp Ontario2 Limited Partnership); King & Mill (Plazacorp Ontario3 Limited Partnership); Manotick (Plazacorp Ontario4 Limited Partnership); Bureau en Gros (RBEG Limited Partnership); CPRDL (CPRDL Limited Partnership); Gateway Mall (Fundy Retail Ltd.); St. Jerome (VGH Limited Partnership); 5400 Laurier Ouest (Ste. Hyacinthe Limited Partnership); 144 Denison (144 Denison East Limited Partnership); the Shoppes at Galway (The Shoppes at Galway Limited Partnership) and Northwest Centre (Northwest Plaza Commercial Trust). n/a n/a (2) The land within this partnership is currently in development. (3) See Part I of this MD&A under the heading “Development Pipeline and Acquisitions/Dispositions” for subsequent event on these assets. Share of profit of associates for the three months ended December 31, 2017 includes Plaza’s share of NOI of approximately $844 thousand. Share of profit of associates decreased by $1.8 million for the three months ended December 31, 2017 compared to the three months ended December 31, 2016. The decrease was mainly due to non-cash fair value adjustments. Share of profit of associates for the twelve months ended December 31, 2017 includes Plaza’s share of NOI of approximately $3.8 million. Share of profit of associates decreased by $4.6 million mainly due to non-cash fair value adjustments. Overall committed occupancy for non-consolidated investments was 97.9% at December 31, 2017, compared to 97.6% at December 31, 2016. Distributions received from associates for the three months ended December 31, 2017 were $313 thousand compared to $188 thousand for the three months ended December 31, 2016. Distributions received from associates for the twelve months ended December 31, 2017 were $1.4 million compared to $1.2 million for the twelve months ended December 31, 2016. Page 15 of 74 Plaza Retail REIT Finance Costs Finance costs for the three months ended December 31, 2017 were $6.4 million, compared to $6.6 million for the same period in the prior year. Finance costs were impacted by: (i) (ii) lower debenture interest of $296 thousand due to the redemption of Series C convertible debentures; and lower mortgage interest due to refinancings at lower interest rates and due to the sale of properties. These were partly offset by: (i) (ii) higher debenture interest expense of $75 thousand due to the Series II unsecured debentures issued in February 2017; and higher interest on the operating line of $266 thousand due to a higher balance outstanding. Finance costs for the twelve months ended December 31, 2017 were $25.6 million, compared to $27.4 million for the same period in the prior year. Finance costs were impacted by: (i) (ii) (iii) lower debenture interest of $1.4 million due to the redemption of Series B and Series C convertible debentures; prior year early mortgage discharge fees incurred of $462 thousand compared to $56 thousand in the current year; and lower mortgage interest due to refinancings at lower interest rates and due to the sale of properties. These were partly offset by: (i) (ii) higher debenture interest expense of $389 thousand due to the Series VII debentures issued in June 2016 and the Series II unsecured debentures issued in February 2017; and higher interest on the operating line of $542 thousand due to a higher balance outstanding. Administrative Expenses Administrative expenses for the three and twelve months ended December 31, 2017 increased by $233 thousand and $332 thousand, respectively, over the prior year. Both were impacted by higher salaries due to staffing increases, IT costs and various consulting fees. Plaza maintains a fully internalized and integrated structure and therefore incurs certain costs related to development and redevelopment activity that is not capitalizable for accounting purposes or for AFFO purposes, but that in Plaza’s view is not indicative of regular income producing activities. Plaza carries between $700 and $900 thousand per year in these costs included in administrative expenses. Other real estate entities that are not development-oriented or not fully internalized for their development activities would not incur this level of expenses, or they might otherwise be able to capitalize these costs for accounting purposes. Change in Fair Value of Investment Properties Investment properties are recorded at fair value based on a combination of external appraisals and internal valuations, whereby appropriate capitalization rates (supplied by independent appraisers) are applied to budgeted normalized net operating income (property revenue less property operating expenses). The Trust recorded a fair value increase to investment properties of $2.1 million for the three months ended December 31, 2017 compared to a fair value decrease of $1.6 million for the three months ended December 31, 2016. The Trust recorded a fair value decrease to investment properties of $10.4 million for the twelve months ended December 31, 2017 compared to a fair value increase of $1.6 million for the twelve months ended December 31, 2016. The weighted average capitalization rate at December 31, 2017 was 7.02% which is one basis point lower than December 31, 2016. The fair value changes compared to the prior year were largely due to changes in NOI as well as cost overruns on current development projects (development projects are measured at fair value less costs to complete). Page 16 of 74 Plaza Retail REIT Change in Fair Value of Convertible Debentures The majority of the convertible debentures are publicly traded with their fair values based on their traded prices. The fair value adjustment to convertible debentures for the three and twelve months ended December 31, 2017 was a net loss of $94 thousand and a net gain of $339 thousand, respectively, compared to a net gain of $1.3 million and a net loss of $1.3 million, respectively, for the three and twelve months ended December 31, 2016. Change in Fair Value of Class B Exchangeable LP Units The Class B exchangeable LP units were issued effective January 1, 2015 in connection with the purchase by Plaza of the interests of certain equity partners in eight properties located in New Brunswick and Prince Edward Island. Distributions paid on these exchangeable units are based on the distributions paid to Plaza unitholders. The exchangeable LP units are exchangeable on a one-for-one basis into Plaza units at the option of the holders. The fair value of these exchangeable LP units is based on the trading price of Plaza’s units. The fair value adjustment to Class B exchangeable LP units for the three and twelve months ended December 31, 2017 was a net gain of $152 thousand and $970 thousand, respectively, compared to a net gain of $316 thousand and a net loss of $396 thousand, respectively, in the prior year. In November 2017, 53,000 Class B exchangeable LP units were exchanged for 53,000 Plaza units. LEASING AND OCCUPANCY The following table represents leases expiring for the next 5 years and thereafter for Plaza’s property portfolio at December 31, 2017 (excluding developments, redevelopments and non-consolidated investments). Year 2018 2019 2020 2021 2022 Thereafter Subtotal Vacant Total Weighted average lease term Strip Plazas % 6.4 7.2 15.2 14.0 11.9 45.3 100.0 Sq Ft(1) 223,247 251,101 530,379 489,529 414,741 1,580,609 3,489,606 184,774 3,674,380 Enclosed Malls Single-User Retail Sq Ft(1) % 3.1 65,447 2.2 65,567 12.6 147,608 4.4 37,522 11.9 32,703 65.8 262,286 611,133 100.0 101,222 712,355 Sq Ft(1) 27,484 19,504 109,776 38,537 103,739 575,142 874,182 - 874,182 % 10.7 10.7 24.2 6.1 5.4 42.9 100.0 Single-User QSR (2) Sq Ft(1) % 57.2 164,122 3.1 8,764 2.6 7,436 1.7 5,000 16,029 5.6 29.8 85,593 286,944 100.0 - 286,944 3.9 years % 9.1 6.6 15.1 10.8 10.8 47.6 100.0 Total Sq Ft(1) 480,300 344,936 795,199 570,588 567,212 2,503,630 5,261,865 285,996 5,547,861 5.8 years 7.4 years (1) At 100%, regardless of the Trust’s ownership interest in the properties. (2) QSR refers to quick service restaurants. 3.4 years 6.1 years At December 31, 2017, overall committed occupancy for the portfolio (excluding properties under development, redevelopment and non-consolidated investments) was 95.2% compared to 96.1% at December 31, 2016. Same-asset committed occupancy was 95.1% at December 31, 2017, compared to 96.3% at December 31, 2016. The two significant lease buyouts completed in 2017 negatively impacted occupancy by 0.6%. Committed occupancy for the portfolio over the last eight quarters is as follows: Page 17 of 74 Plaza Retail REIT Occupancy % 100 95 90 85 80 75 F16Q1 F16Q2 F16Q3 F16Q4 F17Q1 F17Q2 F17Q3 F17Q4 The weighted average contractual base rent per square foot on renewals/new leasing in 2017 versus expiries (excluding developments, redevelopments and non-consolidated investments) is outlined in the following table: Strip Plazas Enclosed Malls Single-User Retail Single-User QSR 2017 Leasing renewals (sq. ft.) Weighted average rent ($/sq. ft.) 257,522 $16.12 110,718 $14.96 Change in weighted average rent 6.1% 5.4% Expiries that renewed (sq. ft.) Weighted average rent ($/sq. ft.) 257,522 $15.19 110,718 $14.19 New leasing (sq. ft.) Weighted average rent ($/sq. ft.) Expiries not renewed (sq. ft.) Weighted average rent ($/sq. ft.) 2018 Expiries (sq. ft.) Weighted average rent ($/sq. ft.) 98,165 $16.89 121,899 $14.64 223,247 $13.43 11,616 $17.59 60,285 $12.92 14,296 $28.00 4.7% 14,296 $26.75 6,636 $29.68 8,426 $28.05 52,527 $31.62 6.0% 52,527 $29.82 1,790 $25.00 4,038 $25.06 65,447 $15.89 27,484 $12.72 164,122 $26.03 In addition, for the twelve months ended December 31, 2017, the Trust completed 329 thousand square feet of new and renewal leasing deals on developments and redevelopments at market rates and 231 thousand square feet of new and renewal leasing deals at market rates at non-consolidated investments. Subsequent to year end, the Trust finalized lease renewals on 150,000 square feet or 62 sites with its two primary KFC operators. Most of these leases were set to expire in 2018. Stand-alone KFC restaurants make up approximately 218,000 square feet. The two KFC operators have 81 sites and represent 90% of Plaza’s total KFC square footage. The renewals have an average rental increase in the first year of approximately 5% and an average lease term of approximately 7 years. For the remaining 19 sites, Plaza is planning (i) the immediate redevelopment of seven of the sites representing approximately 17,000 square feet, one for another national restaurant chain and the rest as new KFC stores for the two KFC operators; (ii) the immediate sale of three sites representing approximately 6,000 square feet, all of which are currently firm and awaiting closing; and (iii) the future redevelopment of nine sites representing approximately 22,000 square feet. Page 18 of 74 Plaza Retail REIT Plaza’s financial exposure to vacancies and lease roll-overs differs among the different retail asset types, as gross rental rates differ by asset class. Committed occupancy by asset class (excluding non-consolidated investments) was as follows: Committed occupancy in the strip plazas was 95.6% at December 31, 2017, compared to 96.0% at December 31, 2016. Committed occupancy for enclosed malls was 85.8% at December 31, 2017, compared to 92.2% at December 31, 2016. Committed occupancy for single use assets was 100.0% at December 31, 2017, compared to 99.4% at December 31, 2016. Pre-leased space in active properties under development was 79.9% at December 31, 2017. Plaza has built a portfolio with a high quality revenue stream. Plaza’s ten largest tenants based upon current monthly base rents at December 31, 2017 represent approximately 56.9% of total base rent revenues in place. 1. Shoppers Drug Mart 2. KFC(1) 3. Dollarama 4. Sobeys Group(2) 5. Canadian Tire Group(3) % of Base Rent Revenue(5) 25.7 8.5 4.7 3.7 3.2 6. Staples 7. TJX Group(4) 8. Rexall Pharma Plus 9. Bulk Barn 10. Tim Hortons % of Base Rent Revenue(5) 3.0 2.8 2.2 1.7 1.4 (1) The majority is represented by 3 tenants. (2) Sobeys Group represents the following stores: Sobeys, IGA, Sobeys Fast Fuel and Lawtons. (3) Canadian Tire Group represents the following stores: Canadian Tire, Mark’s Work Wearhouse, Paderno and Sport Chek. (4) TJX Group represents the following stores: Winners, HomeSense, and Marshalls. (5) Excluding developments, redevelopments and non-consolidated investments The Trust’s mix of tenancies, based on square footage, is primarily made up of national tenants. The graphs below exclude developments, redevelopments and non-consolidated investments. Local 4.1% Regional 3.9% Mix of Tenancy Mix by Property Type Non-Retail 1.6% National 90.4% Single - Retail 13.1% Single - QSR 5.5% Enclosed 12.4% Strip 69.0% PART III OPERATING LIQUIDITY AND WORKING CAPITAL Cash flow, in the form of recurring rent generated from the portfolio, represents the primary source of liquidity to service debt, to pay operating, leasing and property tax costs, and to fund distributions. Costs of development activities, which form a large portion of accounts payable and accrued liabilities, are generally funded by a combination of debt and equity. Cash flow from operations is dependent upon occupancy levels of properties owned, rental rates achieved, effective collection of rents, and efficiencies in operations as well as other factors. Page 19 of 74 Plaza Retail REIT Plaza maintains a prudent cash distribution policy, in order to retain sufficient funds to manage the business, including ongoing maintenance capital expenditures and debt service. New debt or equity capital raised is generally directed to acquisitions or continuing development activities, which are discretionary, based on the availability of such capital. In setting the annual distributions to unitholders, Plaza reviews budgets and forecasts and considers future growth prospects for the business, including developments/redevelopments and leasing within the portfolio and considers maintenance capital expenditures and leasing costs, among other things. Plaza does not consider temporary fluctuations in cash flow due to working capital items such as the timing of property tax installments and semi-annual debenture interest payments, in determining the level of distributions to be paid in any given time period. Profit under IFRS is not used by Plaza when setting the annual distribution, as profit reflects, among other things, non-cash fair value adjustments relating to the Trust’s income producing property and debt – items that are not reflective of Plaza’s ability to pay distributions and outside of Plaza’s control. For 2017, Plaza’s annual distributions were $0.27 per unit. For 2018, Plaza’s distributions have been set at $0.28 per unit. 12 Months Ended December 31, 2017 12 Months Ended December 31, 2016 3 Months Ended December 31, 2017 (unaudited) $ 6,937 (1,148) $ 5,789 3 Months Ended December 31, 2016 (unaudited) $ 6,472 (378) $ 6,094 (000s) Total distributions(1) Less: Distribution Reinvestment Plan proceeds(2) Cash distributions paid $ 25,621 (1,358) $ 24,263 (1) Total distributions include cash distributions paid and payable to unitholders, unit distributions under the Distribution Reinvestment $ 27,674 (2,607) $ 25,067 Plan (DRIP) and distributions on Class B exchangeable LP units classified as finance costs. (2) Plaza’s DRIP allows Canadian unitholders to acquire additional units through the reinvestment of distributions, otherwise receivable in cash, and to receive a bonus distribution in units equivalent to 3% of each distribution. Total distributions compared to cash provided by operating activities is summarized in the following table. 3 Months Ended December 31, 2017 (unaudited) $ 10,186 (6,937) 3 Months Ended December 31, 2016 (unaudited) $ 8,796 (6,472) 12 Months Ended December 31, 2017 12 Months Ended December 31, 2016 $ 35,782 (27,674) $ 32,916 (25,621) (000s) Cash provided by operating activities(1) Total distributions(2) Excess of cash provided by operating activities over total distributions $ 7,295 (1) Cash provided by operating activities is presented net of interest paid, but excludes distributions paid on Class B exchangeable LP $ 8,108 $ 2,324 $ 3,249 units classified as finance costs. (2) Total distributions include cash distributions paid and payable to unitholders, unit distributions under the DRIP and distributions on Class B exchangeable LP units classified as finance costs. Plaza believes its distributions are sustainable based on expected and historical results and cash flows. Page 20 of 74 Plaza Retail REIT CAPITAL RESOURCES, EQUITY AND DEBT ACTIVITIES Operating and Development Facilities (000s) December 31, 2016(1) Net Change December 31, 2017(1) Interest rate Maturity Security Other terms Line reservations available for letters-of-credit Issued and outstanding (1) Excludes unamortized finance charges $44.0 Million Operating $ 12,562 16,976 $ 29,538 $20.0 Million Development $ 2,825 (115) $ 2,710 $15.0 Million Development $ 4,075 517 $ 4,592 Prime + 0.75% or BA + 2.00% Prime + 0.75% or BA + 2.25% Prime + 0.75% or BA + 2.00% July 31, 2018 First charges on pledged properties Debt service, maximum leverage, occupancy & equity maintenance covenants July 31, 2018 First charges on applicable pledged development property Debt service & maximum leverage covenants July 31, 2018 First charges on applicable pledged development property Debt service, maximum leverage, occupancy & equity maintenance covenants $2.0 million $750 thousand $1.5 million - $0.5 million - Funding is secured by first mortgage charges on properties or development properties as applicable. The Trust must maintain certain financial ratios to comply with the facilities. As of December 31, 2017, all debt covenants in respect of the above facilities have been maintained. Costs of development activities are generally funded by a combination of debt and equity. Timing of development activities or whether a development project is launched at all (including those listed in Part I of this MD&A under the heading “Development Pipeline and Acquisitions/Dispositions – Development Pipeline”) is dependent on tenant demand and availability of capital, among other factors. Plaza’s operating facility is generally used to fund the equity portion of development projects (which usually consists of the actual acquisition of the development projects or land). Plaza’s existing development facilities or new construction loans entered into (generally in the case where Plaza has partners in a development) are used to fund construction costs until permanent long-term financing is placed on the finished development. Given the rotation of development projects onto, and off of, the development facilities and the availability of specific construction financing when required, Plaza’s facilities and its debt capacity are sufficient to fund ongoing planned and committed development expenditures. Mortgage Bonds Mortgage bonds are secured by either property or cash. The mortgage bonds terms are as follows: (000s) Interest rate Maturity date Amount Series X 5.00% June 25, 2020 $6,000 Series XI 5.00% July 8, 2019 $6,000 Series XII 5.50% July 15, 2022 $3,000 In February 2016, the $900 thousand 5.25% Series VI mortgage bonds matured and were repaid. In June 2016, the $1.185 million Series V 8.0% mortgage bonds matured and were repaid. In August 2016, the $3.86 million Series VII 6.0% mortgage bonds matured and were repaid. On July 8, 2016 and August 15, 2016, the Trust issued a total of $6.0 million Series XI 5.0% floating mortgage bonds. In July 2017, the $3.0 million 5.50% Series IX mortgage bonds matured and were repaid. On July 15, 2017, the Page 21 of 74 Plaza Retail REIT Trust issued the $3.0 million Series XII mortgage bonds. The Series XII mortgage bonds bear interest at 5.5% and mature July 15, 2022. The Series X, XI and XII mortgage bonds can be deployed up to 90% of the cost of a property under a first or second charge on that property. If it is a second charge, the total debt, including mortgage bonds, cannot exceed 90%. These mortgage bonds can be reallocated to different properties from time to time as required. The Trust can redeem up to one-half of the Series X, XI and XII mortgage bonds at par on the third and fourth anniversaries for the Series X mortgage bonds and the first and second anniversaries for the Series XI and XII mortgage bonds, being: June 25, 2018 and June 25, 2019 for the Series X mortgage bonds; July 8, 2018 for the Series XI mortgage bonds; and July 15, 2018 and July 15, 2019 for the Series XII mortgage bonds. Debentures Convertible and non-convertible debentures are subordinate and unsecured. Convertible debentures are recorded at fair value and changes in the fair value are recorded quarterly in profit and loss. The debenture terms are as follows: (000s) Interest rate Conversion price Par call date Maturity date Face amount Convertible Series D 5.75% $5.75 December 31, 2017 December 31, 2018 $34,000 Convertible Series VII 5.50% $6.04 June 30, 2020 June 30, 2021 $5,500 Non-convertible Series I 5.00% n/a n/a 2018(1) $4,000 Non-convertible Series II 5.00% n/a n/a February 28, 2022 $6,000 (1) Tranche A - $1.6 million - February 26, 2018; Tranche B - $2.3 million - April 15, 2018; and Tranche C - $100 thousand - May 2, 2018 On April 29, 2016, the Trust redeemed the $9.2 million outstanding 8% Series B convertible debentures. The proceeds from the public offering of 5.0 million units completed on March 31, 2016 were partly used to redeem the Series B convertible debentures. On June 15, 2016, $5.5 million in Series VII convertible debentures were issued as part of the financing to acquire a 50.0% interest in three properties. These convertible debentures are at an interest rate of 5.5% and mature on June 30, 2021. On November 30, 2016, the Trust issued a redemption notice for the 7.0% Series C convertible debentures to be redeemed on January 9, 2017. A total of $1.75 million were converted in 2016 into 333 thousand units and $198 thousand in cash, leaving a balance of $15.2 million in face value of debentures. Between January 3rd and 6th, 2017, $12.9 million were converted into 2.45 million units and $1.5 million in cash. On January 9, 2017, the remaining $2.3 million were redeemed and paid out. On February 28, 2017, the Trust issued $6.0 million in Series II unsecured debentures with an interest rate of 5.0% per annum maturing on February 28, 2022. Subsequent to year end, on February 21, 2018, the Trust completed a public offering of $45 million aggregate principal amount of 5.10% convertible unsecured subordinated debentures due March 31, 2023. The debentures are convertible at the option of the holder, into units of the Trust at $5.65 per unit. In addition, the underwriters were granted an over-allotment option, exercisable in whole or in part up to 30 days after closing, to purchase up to an additional $2.25 million debentures. The option was exercised on closing of the offering on February 21, 2018. Proceeds from the offering will be used to redeem the $34 million 5.75% Series D convertible debentures, which had a par call date of December 31, 2017, with the remainder of the proceeds to repay amounts outstanding on the Trust’s operating line of credit, to fund future and on-going development and redevelopment activities and for general trust purposes. The Trust gave notice to the Series D debenture holders on February 21, 2018 and redemption of those debentures is set to close on March 27, 2018. Mortgages During 2017 the Trust obtained new long-term financing in the amount of $30.4 million (at Plaza’s consolidated share) with a weighted average term of 8.6 years and a weighted average interest rate of 3.92%. The Trust has a $3.0 million variable rate secured construction loan/credit facility on one of its redevelopment projects. The loan bears interest at prime plus 1.25% or BAs plus 2.50% and has been renewed until May 26, 2018. At December 31, 2017, $2.8 million has been drawn on the loan. Page 22 of 74 Plaza Retail REIT The Trust also has a $907 thousand variable rate secured construction loan/credit facility on another one of its redevelopment projects. The loan bears interest at prime plus 1.00% or BAs plus 2.50% and was extended until September 15, 2018. At December 31, 2017, $712 thousand has been drawn on the loan. In November 2017, the Trust obtained a $6.6 million variable rate secured construction loan/credit facility in connection with the acquisition of a redevelopment project. The loan bears interest at prime plus 2.25% or BAs plus 3.75%, reducing to prime plus 1.25% or BAs plus 2.75% on the second draw (once construction commences), and matures on November 30, 2019. At December 31, 2017, $1.95 million has been drawn on the loan. In January 2018, the Trust closed on a short-term bridge financing related to a property acquisition in the amount of $3.0 million at 6.0% for 6 months. Subsequent to year end, the Trust closed on a loan in the amount of $5.6 million for 5 years at an interest-only rate of 5.0%. The Trust’s strategy is to balance maturities and terms on new debt with existing debt maturities to minimize maturity exposure in any one year and to reduce overall interest costs. Maintaining or improving the average cost of debt will be dependent on market conditions at the time of refinancing. Plaza’s debt strategy involves maximizing the term of long-term debt available based on the tenant profiles for the assets being financed, at current market rates, in order to stabilize cash flow available for reinvestment and distribution payments. As a conservative interest rate risk management practice, the Trust’s use of floating-rate debt is generally limited to its operating line (to fund ongoing operations and acquisitions) and its development lines/construction loans (until long term fixed-rate mortgage financing is placed on the completed development projects). The following is a maturity chart of mortgages by year: l a p i c n i r P l a t o T f o % 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 3.4% 2018 Mortgage Maturities 49.1% 14.4% 17.8% 7.9% 7.4% 2019 2020 2021 2022 After 5 years $12.4M $52.3M $64.4M $28.6M $26.9M $177.9M Weighted average expiring rate on long-term fixed-rate mortgages 4.95% 3.53% 4.68% 4.77% 4.35% 4.29% The weighted average term to maturity for the long-term mortgages is 6.0 years. The average remaining repayment (amortization) period on long-term mortgage debt is 23.0 years. Page 23 of 74 Plaza Retail REIT Debt Service Ratios Plaza’s summary of EBITDA and debt service ratios for the three and twelve months ended December 31, 2017, compared to the three and twelve months ended December 31, 2016 is presented below: (000s – except debt service ratios) Profit and total comprehensive income for the period Add (deduct): Income taxes Finance costs Fair value adjustment to investment properties Fair value adjustment to investments Fair value adjustment to convertible debentures Fair value adjustment to Class B exchangeable LP units Fair value adjustment to restricted share units Fair value adjustment to interest rate swap and bond forward Equity accounting adjustment for interest rate swaps and bond forwards EBITDA Finance costs (1) Periodic mortgage principal repayments Total debt service Debt service ratios Interest coverage ratio Debt coverage ratio 3 Months Ended December 31, 2017 (unaudited) 3 Months Ended December 31, 2016 (unaudited) 12 Months Ended December 31, 2017 12 Months Ended December 31, 2016 $ 9,530 $ 9,574 $ 23,447 $ 32,758 295 6,405 (2,124) 600 94 (152) (5) - (23) $ 14,620 $ 6,348 2,606 $ 8,954 227 6,626 1,570 (1,233) (1,274) (316) (2) (137) (66) $ 14,969 $ 6,594 2,555 $ 9,149 119 25,646 10,392 1,876 (339) (970) (17) - 1,384 27,379 (1,648) (2,916) 1,256 396 2 154 (138) (104) $ 60,016 $ 58,661 $ 25,387 $ 26,934 10,185 $ 35,803 $ 37,119 10,416 2.30 times 1.63 times 2.27 times 1.64 times 2.36 times 1.68 times 2.18 times 1.58 times (1) Excludes mark-to-market adjustments, loan defeasance and early mortgage discharge fees and distributions on Class B exchangeable LP units recorded in finance costs. For the three months ended December 31, 2017, the interest and debt coverage ratios were relatively consistent with the prior year. For the twelve months ended December 31, 2017, the interest and debt coverage ratios were improved over the prior year, mainly reflecting: (i) lower finance costs mainly due to lower debenture interest due to the redemption of both the Series B and Series C convertible debentures; and (ii) higher EBITDA due to higher NOI, mainly as a result of growth from developments/redevelopments as well as the lease buyout revenues received. The debt coverage and interest coverage ratios exceed the requirements under borrowing arrangements. Debt to Gross Assets Plaza’s debt to gross assets is presented below: Debt to gross assets: Including convertible debentures (1) Excluding convertible debentures (1) Convertible debentures valued at cost. December 31, 2017 December 31, 2016 52.2% 48.4% 53.0% 47.7% The increase over the prior year excluding convertible debentures was mainly due to the issuance of $6.0 million Series II unsecured non-convertible debentures and an increase in the operating line balance. Including convertible debentures, the current year ratio was also impacted by the redemption of the Series B and C convertible debentures. The Trust’s general philosophy is Page 24 of 74 Plaza Retail REIT to maintain its leverage at no more than approximately 50% excluding convertible debentures and approximately 55% including convertible debentures. By its Declaration of Trust, Plaza is limited to an overall indebtedness ratio of 60% excluding convertible debentures and 65% including convertible debentures. Units If all rights to convert units under the provisions of convertible debt were exercised and exchangeable LP units were exchanged, the impact on units outstanding would be as follows: At February 22, 2018 (000s) (unaudited) Current outstanding units Class B exchangeable LP units Series D convertible debentures Series VII convertible debentures Series E convertible debentures Total adjusted units outstanding Land Leases Units 101,849 1,266 5,913 911 8,363 118,302 Return on invested cash or equity is a measure Plaza uses to evaluate development and strategic acquisitions. Investing in a project subject to a land lease reduces the cash equity required for an individual project and increases the number of projects which can be undertaken with available capital. This spreads risk and enhances overall unitholder return. In some instances use of a land lease will enhance project feasibility where a project might not otherwise be undertaken without use of a land lease. Currently Plaza has 26 long-term land leases (affecting 25 properties) with total annual rent of $3.2 million. One of the land leases relates to shared parking facilities. The other properties under land lease represent approximately 9.1% of the Trust’s fair value of investment properties and investments. During the year the Trust exercised an option to extend one lease that was expiring in August 2017 for an additional 5 year term. Land leases expire (excluding any non-automatic renewal periods) on dates ranging from 2022 to 2084 with an average life of 40 years, with some of the leases also containing non-automatic renewal options, extending the average life of the leases to 65 years including these non-automatic renewal options. Of the 26 land leases, 10 of the land leases have options to purchase, generally at fair market value. Page 25 of 74 Plaza Retail REIT Gross Capital Additions Including Leasing Fees: (000s) Existing properties Leasing commissions Other leasing costs Maintenance capital expenditures Total capital additions – existing properties Development/redevelopment properties Leasing commissions Other leasing costs Capital additions Total capital additions - developments/redevelopments Total gross additions per statements of cash flows Reconciliation of leasing costs for AFFO purposes Leasing costs – existing properties per above Internal leasing salaries Total leasing costs – existing properties for AFFO purposes 3 Months Ended 3 Months Ended December 31, 2017 (unaudited) December 31, 2016 (unaudited) 12 Months Ended December 31, 2017 (unaudited) 12 Months Ended December 31, 2016 (unaudited) $ 157 $ 39 157 196 287 483 $ 152 169 321 546 867 82 1,465 2,409 48 364 4,561 605 762 1,098 1,860 161 2,172 16,556 $ 354 630 984 1,219 2,203 440 1,518 13,543 3,956 $ 4,439 4,973 $ 5,840 18,889 $ 20,749 15,501 $ 17,704 $ 196 228 $ 321 133 $ 762 $ 984 843 1,021 $ 424 $ 454 $ 1,783 $ 1,827 COMMITMENTS AND CONTINGENT LIABILITIES Commitments The Trust has $8.8 million in short-term commitments in respect of development activities. Management believes that Plaza has sufficient unused bank line availability, and/or mortgage bond deployment potential, to fund these commitments. The Trust’s estimated commitments at December 31, 2017 in respect of certain projects under development and other long-term obligations are as follows: Year 1 2018 Year 2 2019 Year 3 2020 Year 4 2021 Year 5 2022 After 5 Years Face Value Total Mortgages – periodic payments Mortgages – due at maturity Development lines of credit Construction loans Bank indebtedness Mortgage bonds payable Debentures (1) Operating land leases Development activities Total contractual obligations (1) Stated at face value. $10,483 12,435 7,302 3,480 29,538 - 38,000 3,236 8,762 $7,661 28,646 - - - - 5,500 3,337 - $113,236 $73,423 $82,893 $45,144 $9,158 64,419 - - - 6,000 - 3,316 - $9,853 52,348 - 1,950 - 6,000 - 3,272 - $7,374 26,847 - - - 3,000 6,000 3,327 - $26,848 177,923 - - - - - 127,929 - $46,548 $332,700 $71,377 362,618 7,302 5,430 29,538 15,000 49,500 144,417 8,762 $693,944 Page 26 of 74 Plaza Retail REIT Contingent Liabilities The Trust has contingent liabilities as original borrower on three mortgages partially assumed by the purchasers of the underlying properties, where a 75% interest in each was sold in 2009. These commitments are subject to indemnity agreements. These sales did not relieve the Trust’s obligations as original borrower in respect of these mortgages. The debt subject to such guarantees at December 31, 2017 totals $5.3 million with a weighted average remaining term of 5.1 years. As well, the Trust has contingent liabilities as original borrower on eight mortgages partially assumed by the purchasers of the underlying properties, where a 50% interest in each was sold in November 2017. These commitments are subject to indemnity agreements. These sales did not relieve the Trust’s obligations as original borrower in respect of these mortgages. The debt subject to such guaranties at December 31, 2017 totals $10.0 million with a weighted average remaining term of 6.0 years. The Trust guarantees mortgage debt in excess of its pro-rata position in joint ventures and non-consolidated subsidiaries in the amount of $18.7 million. As well, the Trust has a guarantee in excess of its ownership percentage to the mortgagee on one property in the amount of $540 thousand. This amount is subject to cross-guarantees by the other co-owners. PART IV SUMMARY OF SELECTED QUARTERLY INFORMATION Plaza’s summary of selected quarterly information for the last eight quarters is presented below: Q1’16 $25,873 $24,466 $15,304 $4,460 6.50¢ 8.2¢ 9.6¢ 8.3¢ 8.3¢ 9.0¢ 9.0¢ $17,248 $15,489 $16,308 $16,433 $15,279 $15,656 $15,313 $279 6.75¢ $9,574 6.50¢ $9,530 6.75¢ $6,027 6.75¢ $7,611 6.75¢ $7,389 6.50¢ $11,335 6.50¢ Q2’17 $27,839 $26,755 Q3’17 $26,817 $25,113 Q2’16 $25,858 $24,923 Q4’16 $27,845 $25,241 Q3’16 $28,453 $25,585 Q1’17 $24,846 $25,340 Q4’17 $26,461 $25,679 (000s except per unit and percentage data) (unaudited) Total revenue (1) Property rental revenue Net property operating income Profit and total comprehensive income Distributions per unit Funds from operations per unit – basic Funds from operations per unit – diluted Adjusted funds from operations per unit – basic Adjusted funds from operations per unit – diluted Distributions as a percentage of basic FFO Distributions as a percentage of basic AFFO Gross Leasable Area (000s of sq. ft.) (at 100% and excluding non-consolidated investments and properties under development/redevelopment) Total income producing properties Occupancy % (at 100% and excluding non-consolidated investments and properties under development/redevelopment) Total income producing properties (1) Includes investment income, other income and share of profit of associates. 81.5% 88.2% 95.2% 82.9% 88.0% 96.2% 70.8% 74.8% 87.0% 75.1% 70.5% 82.1% 96.3% 80.9% 95.5% 96.4% 76.7% 84.5% 95.8% 96.1% 96.5% 5,516 5,547 5,480 5,475 5,412 5,525 5,542 7.7¢ 6.7¢ 7.9¢ 6.7¢ 8.4¢ 7.9¢ 8.7¢ 9.1¢ 8.4¢ 8.6¢ 9.2¢ 7.5¢ 7.5¢ 7.7¢ 7.7¢ 7.7¢ 7.7¢ 8.8¢ 9.5¢ 8.8¢ 7.7¢ 8.2¢ 7.5¢ 83.2% 88.6% 5,434 96.4% 8.0¢ 8.0¢ 7.5¢ During the last eight quarters occupancy has remained high which contributes to stability of cash flow. Significant fluctuations in profit and loss are mainly due to non-cash fair value adjustments on the Trust’s investment properties and debt instruments. Fair value adjustments are based on market parameters for which the Trust has no control or ability to predict. Some of Plaza’s leases have common cost recoveries from tenants linked to the consumer price index (CPI) or otherwise have caps on operating costs. At December 31, 2017, approximately 52.4% of the Trust’s leased area is tied to a CPI cost recovery formula. As well, anchor tenant leases may restrict common area maintenance (CAM) cost recoveries. As a result of all of these Page 27 of 74 Plaza Retail REIT factors, seasonal fluctuations in NOI, FFO and AFFO occur primarily due to winter costs as well as yearly repair and maintenance activities which typically occur in spring and early summer which may create inconsistencies in quarterly recovery revenues compared with quarterly expenses. PART V RISKS AND UNCERTAINTIES All property investments are subject to a degree of risk and uncertainty. Property investments are affected by various factors including general economic conditions and local market circumstances. Local business conditions such as oversupply of space or a reduction in demand for space particularly affect property investments. Management attempts to manage these risks through geographic and retail asset class diversification in the portfolio. At December 31, 2017, the Trust held interests in 298 properties spread geographically across Canada. Some of the more important risks are outlined below. See Financial Risk Management Note 27 to the December 31, 2017 Consolidated Financial Statements of the Trust for further details. Also see the Trust’s Annual Information Form dated March 24, 2017 for a complete list of risks and uncertainties. Interest Rate, Financing and Refinancing Risk Management attempts to lock in cash returns on assets for the longest period possible, consistent with exposure to debt maturing and leases expiring in any given year. The Trust mitigates interest rate risk by maintaining the majority of its debt at fixed rates. Floating rate debt is typically used on its operating line of credit and for development or redevelopment projects as interim financing, until the projects are completed and are then able to attract the appropriate long-term financing. The hypothetical impact of a 1% change in interest rates would be approximately $423 thousand. The Trust mitigates its exposure to fixed-rate interest risk by staggering maturities in order to avoid excessive amounts of debt maturing in any one year. If market conditions warrant, the Trust may attempt to renegotiate its existing debt to take advantage of lower interest rates. At existing financing rates, the Trust is able to obtain positive returns from debt financing. The quality of the Trust’s projects and properties makes management believe it can obtain suitable long-term financing for those projects on completion of development as well as those properties with maturing existing debt. The Trust has an ongoing requirement to access the debt markets and there is a risk that lenders will not refinance such maturing debt on terms and conditions acceptable to the Trust or on any terms at all. Management believes that all debts maturing in 2018 or properties needing long term financing in 2018 will be able to be financed or refinanced as they come due. From time to time Plaza may enter into derivative instruments to hedge the cash flow variability on future interest payments on anticipated mortgage financings from changes in interest rates until the time the mortgage interest rate is set. Credit Risk Credit risk mainly arises from the possibility that tenants may be unable to fulfill their lease commitments. Management mitigates this risk by ensuring that Plaza’s tenant mix is diversified and heavily weighted to national tenants. Plaza also maintains a portfolio that is diversified geographically so that exposure to local business is lessened. Currently one tenant, Shoppers Drug Mart, represents 25.7% of current monthly base rents in place, while franchisees of KFC represent 8.5%. The top 10 tenants collectively represent approximately 56.9% of current monthly base rents in place. National and regional tenants represent 94.3% of the tenant base, based on square footage. Lease Roll-Over and Occupancy Risk Lease roll-over risk arises from the possibility that Plaza may experience difficulty renewing leases as they expire or in re-leasing space vacated by tenants. Management attempts to stagger the lease expiry profile so that Plaza is not faced with a disproportionate amount of square footage of leases expiring in any one year. Management further mitigates this risk by maintaining a diversified portfolio mix both by retail asset type and geographic location and ensuring that the Trust maintains a well-staffed and highly skilled leasing department to deal with all leasing issues. Page 28 of 74 Plaza Retail REIT One of Plaza’s performance drivers is related to occupancy levels. The majority of Plaza’s leases in place are referred to as “net leases”, meaning tenants reimburse Plaza fully for their share of property operating costs (subject to consumer price index adjustments in many cases) and realty taxes. Many of Plaza’s operating costs and realty taxes are not reduced by vacancy. Certain costs such as utilities and janitorial costs would not decline with a decline in occupancy. The hypothetical impact to NOI of a change in occupancy of 1% would be approximately $600 thousand to $1.0 million per annum. The analysis does not identify a particular cause of such changing occupancy and as a result, it does not reflect the actions management may take in relation to the changes. Plaza’s principal management of occupancy risk is the skewing of tenancies towards national tenants, the signing of longer term leases and significant pre-leasing of development space. Development and Acquisition Risk Plaza’s external growth prospects will depend in large part on identifying suitable development, redevelopment and acquisition opportunities, pursuing such opportunities, conducting necessary due diligence, consummating acquisitions (including obtaining necessary consents) and effectively operating the properties acquired or developed by the Trust. If Plaza is unable to manage its growth and integrate its acquisitions and developments effectively, its business, operating results and financial condition could be adversely affected. Developments and acquisitions may not meet operational or financial expectations due to unexpected costs or market conditions, which could impact the Trust’s performance. Environmental Risk Plaza is subject to various laws relating to the environment which deal primarily with the costs of removal and remediation of hazardous substances such as asbestos or petroleum products. Environmental risk is relevant to Plaza’s ability to sell or finance affected assets and could potentially result in liabilities for the costs of removal and remediation of hazardous substances or claims against Plaza. Management is not aware of any material non-compliance with environmental laws or regulations with regard to Plaza’s portfolio, or of any material pending or threatened actions, investigations or claims against Plaza relating to environmental matters. Plaza manages environmental exposures in a proactive manner during every aspect of the property life cycle including extensive due diligence in respect of environmental risk before purchase or development. Status of the REIT Plaza is required to comply with specific restrictions regarding its activities and the investments held by it in order to maintain its mutual fund trust status. Should Plaza cease to qualify as a mutual fund trust, the consequences could be material and adverse. As well, Plaza conducts its affairs in order to qualify as a REIT under applicable tax statutes so that it retains its status as a flow- through vehicle for the particular year. Should Plaza not meet the conditions to qualify as a REIT in a particular year, it may be subject to tax similar to a corporation, which may have an adverse impact on it and its unitholders, on the value of the units and on its ability to undertake financings and acquisitions, and its distributable cash may be materially reduced. Management believes that it complies with both the mutual fund trust rules and the REIT rules. PART VI RELATED PARTY TRANSACTIONS Notes Payable to Related Parties The following non-interest bearing notes existed at the time of acquisition of properties in September 2000. Certain of the notes are owed to parties controlled directly or indirectly by Michael Zakuta. The notes are repayable on sale or refinancing of the related asset. (000s) Non-interest bearing notes: Entities owned (directly or indirectly), controlled or significantly influenced by Michael Zakuta, President, Chief Executive Officer and trustee of the Trust December 31, 2017 December 31, 2016 $ 261 $ 261 Page 29 of 74 Plaza Retail REIT Bonds and Debentures Held The trustees, directly or indirectly, held mortgage bonds or debentures of the Trust as follows (stated at face value): (000s) Edouard Babineau Earl Brewer Stephen Johnson Michael Zakuta Total December 31, 2017 $ 150 425 300 100 $ 975 December 31, 2016 $ 150 125 100 100 $ 475 Other key management personnel own $20 thousand in mortgage bonds of the Trust at December 31, 2017. Other Related Party Transactions TC Land LP, an entity controlled by Michael Zakuta and Earl Brewer, leases nine parcels of land to Plaza at a total annual rent of $1.1 million. The land leases expire at various times from October 2043 to November 2047, subject to options to renew. All of these land leases have options to purchase, of which one is at a fixed price and the others are at fair market value. Earl Brewer and Michael Zakuta, directly or indirectly, hold interests in common with the Trust’s 25% interest in the Gateway Mall, Sussex, NB. A subsidiary of the Trust manages the mall. There is a $7 thousand accounts receivable balance owing to the Trust for property management fees. For the twelve months ended December 31, 2017, property management and leasing fees of $96 thousand were earned by a subsidiary of the Trust from this property. At December 31, 2017 Edouard Babineau, Earl Brewer and Michael Zakuta, directly or indirectly, held interests in common with the Trust’s then 10% interest in Northwest Plaza Commercial Trust, the owner of Northwest Centre, Moncton, NB. A subsidiary of the Trust manages the centre. For the twelve months ended December 31, 2017, property management, development and leasing fees of $126 thousand were earned by a subsidiary of the Trust from this property. The Montreal office of Plaza Group Management Limited (a wholly-owned subsidiary of the Trust) shares office space with a company indirectly owned by Michael Zakuta in an office building owned by that related party. No basic minimum rent is payable for the space. Edouard Babineau, Earl Brewer and Michael Zakuta, directly or indirectly, hold interests in common with the Trust’s 20% interest in Mountainview Plaza, Midland, ON and Park Street Plaza, Kenora, ON. A subsidiary of the Trust manages the malls. At December 31, 2017 there is $6.5 million owed by the properties to the Trust which is recorded in notes and advances receivable. As well, there is a $64 thousand accounts receivable balance owing to the Trust for property management and development fees. For the twelve months ended December 31, 2017, property management, leasing and development fees of $393 thousand were earned by a subsidiary of the Trust from these properties. At December 31, 2017 Edouard Babineau, Earl Brewer, Denis Losier and Michael Zakuta, directly or indirectly, held interests in common with the Trust’s then 10% interest in Shediac West Plaza, Shediac, NB. A subsidiary of the Trust manages the property. At December 31, 2017 there is a $2 thousand accounts receivable balance owing to the Trust for property management fees. For the twelve months ended December 31, 2017, property management fees of $34 thousand were earned by a subsidiary of the Trust from these properties. See Part I of this MD&A under the heading “Development Pipeline and Acquisitions/Dispositions” for subsequent event on these assets and the related parties. Earl Brewer and Michael Zakuta, directly or indirectly, hold interests in common with the Trust’s 50% interest in two single-use properties located in Amherstview and Port Perry, ON. A subsidiary of the Trust manages the properties. For the twelve months ended December 31, 2017, property management fees of $5 thousand were earned by a subsidiary of the Trust from these properties. Edouard Babineau, Earl Brewer, James Petrie, Barbara Trenholm and Michael Zakuta, directly or indirectly, hold interests in common with the Trust’s 25% interest in KGH Plaza, Miramichi, NB, a single-use property located at 681 Mountain Road, Moncton, NB, a single-use property located at 201 Main Street, Sussex, NB and Robie Street Truro Plaza, Truro, NS. A subsidiary of the Trust manages the properties. At December 31, 2017 there is a $5 thousand accounts receivable balance owing to the Trust Page 30 of 74 Plaza Retail REIT for property management fees. For the twelve months ended December 31, 2017, property management fees of $65 thousand were earned by a subsidiary of the Trust from these properties. Edouard Babineau, Earl Brewer and Michael Zakuta, directly or indirectly, hold interests in common with the Trust’s 50% interest in Scott Street Plaza, St. Catharines, ON, and five single-use properties located at St. Joseph’s Boulevard, Orleans, ON, Dufferin and Wilson, Perth, ON, Ontario Street Port Hope, Port Hope, ON, Civic Centre Road, Petawawa, ON and 615 King Street, Gananoque, ON. A subsidiary of the Trust manages the properties. For the twelve months ended December 31, 2017, property management fees of $29 thousand were earned by a subsidiary of the Trust from these properties. Effective December 1, 2017, Edouard Babineau, Earl Brewer, and Michael Zakuta, directly or indirectly, hold interests in common with the Trust’s 50% interest in the following eight properties: Boulevard Hebert Plaza and Victoria Street Plaza in Edmundston, NB; Grand Falls Shopping Center and Madawaska Road Plaza in Grand Falls, NB; Connell Road Plaza, Woodstock, NB; Welton Street Plaza, Sydney, NS; and Pleasant Street Plaza and Starrs Road Plaza in Yarmouth, NS. A subsidiary of the Trust manages the properties. At December 31, 2017 there is a $34 thousand accounts receivable balance owing to the Trust for property management fees. For the twelve months ended December 31, 2017, property management fees of $13 thousand were earned by a subsidiary of the Trust from these properties. PART VII DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING Disclosure controls and procedures (“DC&P”) are intended to provide reasonable assurance that material information is gathered and reported to senior management to permit timely decisions regarding public disclosure. Internal controls over financial reporting (“ICFR”) are intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Trust maintains appropriate DC&P and ICFR to ensure that information disclosed externally is complete, reliable and timely. A control system, no matter how well conceived and operated, can provide only reasonable and not absolute assurance that the objectives of the control system are met. As a result of the inherent limitations 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. These inherent limitations include, amongst other items: (i) that management’s assumptions and judgments could ultimately prove to be incorrect under varying conditions and circumstances; or (ii) the impact of isolated errors. Additionally, controls may be circumvented by the unauthorized acts of individuals, by collusion of two or more people, or by management override. The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. The Trust’s Chief Executive Officer and Chief Financial Officer evaluated, or under their supervision caused to be evaluated, the design and operating effectiveness of the Trust’s DC&P and ICFR at December 31, 2017. Based on that evaluation they determined that the Trust’s DC&P and ICFR were appropriately designed and were operating effectively based on the criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. During the twelve months ended December 31, 2017, there were no changes in the Trust’s ICFR that occurred that have materially affected, or are reasonably likely to materially affect, the Trust’s ICFR. Page 31 of 74 Plaza Retail REIT CRITICAL ACCOUNTING POLICIES Critical Accounting Estimates The preparation of the Trust’s Consolidated Financial Statements requires management to make judgments, estimates and assumptions that affect the reported amounts of certain assets and liabilities at the reporting date and the reported amounts of revenues and expenses during the reporting period. The significant estimates and judgments include the assessment of fair values, the discount rates used in the valuation of the Trust’s assets and liabilities, capitalization rates, the relative credit worthiness of the Trust to its counterparties, the determination of the accounting basis for investments and joint arrangements, the amount of borrowing costs to capitalize to properties under development and the selection of accounting policies. (i) Investment properties One significant judgment and key estimate that affects the reported amounts of assets at the date of the Consolidated Financial Statements and the reported amounts of profit or loss during the period, relates to property valuations. Investment properties, which are carried on the consolidated statements of financial position at fair value, are valued either by the Trust or by external valuators. The valuation of investment properties is one of the principal estimates and uncertainties of the financial statements. The valuations are based on a number of assumptions, such as appropriate discount rates and capitalization rates and estimates of future rental income, operating expenses and capital expenditures. These investment properties are sensitive to fluctuations in capitalization and discount rates. Specifically, the fair value of investment properties is based on a combination of external appraisals and internal valuations as noted below. Management undertakes a quarterly review of the fair value of its investment properties to assess the continuing validity of the underlying assumptions, such as cash flows and capitalization rates. Where increases or decreases are warranted, the Trust adjusts the fair values of its investment properties. Related fair value gains and losses are recorded in profit and loss in the period in which they arise. (a) External appraisals Independent appraisals are obtained in the normal course of business as refinancing activities require them, and as applicable, the fair value of various investment properties are based on these external appraisals. (b) Internal approach – direct capitalization income approach Under this approach the Trust determines the fair value based upon capitalization rates applied to budgeted normalized net operating income (property revenue less property operating expenses). Normalized net operating income adjusts net operating income for things like market property management fees, or in the case of development properties, to reflect full intended occupancy (less a normal vacancy allowance). The key assumption is the capitalization rate for each specific property. The Trust receives quarterly capitalization rate matrices from an external independent appraiser. The capitalization rate matrices provide a range of rates for various geographic regions and for various types and qualities of properties within each region. The Trust utilizes capitalization rates within the range of rates provided. To the extent that the externally provided capitalization rate ranges change from one reporting period to the next or should another rate within the provided ranges be more appropriate than the rate previously used, the fair value of the investment properties would increase or decrease accordingly. At December 31, 2017 a decrease of 0.25% in the capitalization rates used to determine the fair value of investment properties would have resulted in an increase in investment properties of approximately $35.1 million. An increase of 0.25% in the capitalization rates used would have resulted in a decrease in investment properties of approximately $32.6 million. FUTURE ACCOUNTING POLICY CHANGES The following standards, and amendments to standards and interpretations under IFRS, are not yet effective for the year ending December 31, 2017, and have not been applied in preparing the Consolidated Financial Statements. Please also refer to Note 3 to the Consolidated Financial Statements for the year ended December 31, 2017 for additional details about future accounting policy changes. Page 32 of 74 Plaza Retail REIT (i) Revenue from Contracts with Customers (“IFRS 15”) IFRS 15, Revenue from Contracts with Customers is effective for annual periods beginning on or after January 1, 2018, and will replace: IAS 11, Construction Contracts; IAS 18, Revenue; International Financial Reporting Interpretations Committee (“IFRIC”) 13, Customer Loyalty Programmes; IFRIC 15, Agreements for the Construction of Real Estate; IFRIC 18, Transfer of Assets from Customers; and SIC 31, Revenue – Barter Transactions Involving Advertising Services. IFRS 15 contains a single, control-based model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. IFRS 15 also includes additional disclosure requirements for revenue accounted for under the standard. The implementation of IFRS 15 will be applied on January 1, 2018 and is not expected to have a significant impact on the Trust. However, additional disclosure requirements may result in separate disclosure of revenue for service components that are part of a lease (i.e. a non-lease component). (ii) Financial Instruments (“IFRS 9”) The Trust will adopt IFRS 9, Financial Instruments: Classification and Measurement, which replaces IAS 39 Financial Instruments: Recognition and Measurement, in its financial statements for the annual period beginning on January 1, 2018, the mandatory effective date. IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost; fair value through other comprehensive income (“FVOCI”); and fair value through profit or loss (“FVTPL”), and eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale. IFRS 9 replaces the ‘incurred loss’ impairment model in IAS 39 with a forward-looking ‘expected credit loss’ model. The new impairment model will apply to financial assets measured at amortized cost or FVOCI, except for investments in equity instruments, and to contract assets. IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, under IAS 39 all fair value changes of liabilities designated as FVTPL are recognized in profit or loss, whereas under IFRS 9 the amount of change in fair value attributable to changes in the credit risk of the liability is presented in other comprehensive income, and the remaining amount of change in fair value is presented in profit or loss. IFRS 9 also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management. The Trust does not currently apply hedge accounting in its financial statements. The initial adoption of IFRS 9 is not expected to have a significant impact on the Trust. (iii) Leases (“IFRS 16”) In January 2016, the IASB issued IFRS 16, Leases. The new standard will replace existing lease guidance in IFRS and related interpretations, and requires lessees to bring most leases on-balance sheet. Lessor accounting remains similar to the current standard. The Trust is evaluating the identification of leases and non-lease components in accordance with the new requirements. IFRS 16 is only applicable to lease components and therefore other standards, such as IFRS 15, will apply to non-lease components of contracts. IFRS 15 requires allocation of transaction prices to relative standalone selling prices. The Trust is evaluating whether this will have a measurement impact. The new standard is effective for years beginning on January 1, 2019. The extent of the impact of adoption of the standard has not yet been determined. (iv) Classification and Measurement of Share-based Payment Transactions (Amendments to “IFRS 2”) The amendments provide requirements on the accounting for: the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; share-based payments transactions with a net settlement feature for withholding tax obligations; and a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. The Trust intends to adopt the amendments to IFRS 2 in its financial statements for the annual period beginning on January 1, 2018 prospectively. The Trust does not expect the amendments to have a material impact on the financial statements. Page 33 of 74 Plaza Retail REIT EXPLANATION OF NON-IFRS MEASURES USED IN THIS DOCUMENT The below-noted measures are not defined by IFRS, and therefore should not be considered as alternatives to profit or net income calculated in accordance with IFRS. Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) are not IFRS financial measures. FFO and AFFO are industry terms commonly used in the real estate industry and their calculations are prescribed in publications of the Real Property Association of Canada (REALpac). Plaza calculates FFO and AFFO in accordance with REALpac’s publications. In late 2016, REALpac undertook an initiative to prescribe definitions for certain non-IFRS financial measures used in the real estate industry, such as AFFO (whereas previously a prescribed definition only existed for FFO). The new guidelines were issued in March 2017 and Plaza has adopted the new definition for AFFO, as this is a non-IFRS financial measure that has always been used and reported by Plaza. Prior year comparative amounts for AFFO have been restated to reflect the new prescribed definition. FFO and AFFO as calculated by Plaza may not be comparable to similar titled measures reported by other entities. FFO is an industry standard widely used for measuring operating performance and is exclusive of unrealized changes in the fair value of investment properties, deferred income taxes and gains or losses on property dispositions. AFFO is an industry standard widely used for measuring recurring or sustainable economic operating performance and AFFO further primarily adjusts FFO for operating capital and leasing (both internal and external) requirements that must be made merely to preserve the existing rental stream. Capital expenditures which generate a new investment or revenue stream, such as the development of a new property or the construction of a new retail pad during property expansion or intensification would not be included in determining AFFO. See the reconciliation of FFO and AFFO to profit for the period attributable to unitholders in Part II of this MD&A under the heading “Property and Corporate Financial Performance”. Plaza considers FFO and AFFO meaningful additional measures as they adjust for certain non-cash and other items that do not necessarily provide an appropriate picture of the Trust’s recurring performance. They more reliably show the impact on operations of trends in occupancy levels, rental rates, net property operating income, interest costs and sustaining capital expenditures compared to profit determined in accordance with IFRS. As well, FFO and AFFO allow some comparability amongst different real estate entities using the same definition of FFO and AFFO. FFO per unit and AFFO per unit are not IFRS financial measures. Plaza calculates FFO per unit and AFFO per unit as FFO or AFFO divided by the weighted average number of units outstanding. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is not an IFRS financial measure. EBITDA, as calculated by Plaza, may not be comparable to similarly titled measures reported by other entities. EBITDA is used in calculations that measure the Trust’s ability to service debt. Its calculation is profit before finance costs, income tax expense, gains/losses on property dispositions, unrealized changes from fair value adjustments, transaction costs expensed as a result of the purchase of a business or properties, and net revaluation of interest rate swaps. See the reconciliation of EBITDA to profit for the period in Part III of this MD&A under the heading “Capital Resources, Equity and Debt Activities – Debt Service Ratios”. Same-Asset Net Property Operating Income (Same-asset NOI) is not an IFRS financial measure. Same-asset NOI, as calculated by Plaza, may not be comparable to similarly titled measures reported by other entities. Same-asset NOI is used by Plaza to evaluate the period over period performance of those properties owned by Plaza since January 1, 2016, and excludes partial year results from certain assets due to timing of acquisition, development, redevelopment or disposition. Its calculation is revenues less operating expenses for the same-asset pool of properties. The revenues or operating expenses exclude the impact of non-cash straight-line rent, administrative expenses charged to NOI, property tax settlements and lease buyout revenue. Excluding these items enables the users to better understand the period over period performance for a consistent pool of assets from contractual rental rate changes embedded in lease agreements, and the impact of leasing and occupancy on the same-asset portfolio. See the reconciliation of same-asset NOI to NOI in Part II of this MD&A under the heading “Property and Corporate Financial Performance”. EXPLANATION OF ADDITIONAL IFRS MEASURES USED IN THIS DOCUMENT Net Property Operating Income (NOI) is an industry term in widespread use. The Trust includes NOI as an additional IFRS measure in its consolidated statement of comprehensive income. NOI as calculated by Plaza may not be comparable to similar titled measures reported by other entities. Plaza considers NOI a meaningful additional measure of operating performance of property assets, prior to financing considerations. Its calculation is total revenues less total operating expenses as shown in the Page 34 of 74 Plaza Retail REIT consolidated statements of comprehensive income (property revenues less total property operating costs, including operating ground rents). ADDITIONAL INFORMATION Additional information relating to Plaza including the Management Information Circular, Material Change reports and all other continuous disclosure documents required by the securities regulators, are filed on the System for Electronic Document Analysis and Retrieval (SEDAR) and can be accessed electronically at www.sedar.com or on Plaza’s website at www.plaza.ca. PROPERTIES OF THE TRUST A chart listing the Trust’s properties at December 31, 2017 can be accessed on Plaza’s website at www.plaza.ca. Page 35 of 74 Plaza Retail REIT APPENDIX A FOURTH QUARTER 2017 INCOME RESULTS Consolidated Statements of Comprehensive Income (000s) (unaudited) Revenues Operating expenses Net property operating income Share of profit of associates Administrative expenses Investment income Other income Income before finance costs, fair value adjustments and income taxes Finance costs Finance costs – net change in fair value of convertible debentures Finance costs – net change in fair value of Class B exchangeable LP units Finance costs – net change in fair value of interest rate swap and bond forward Net change in fair value of investment properties Profit before income tax Income tax expense - Current - Deferred 3 Months Ended December 31, 2017 $ 25,679 (10,190) 15,489 3 Months Ended December 31, 2016 $ 25,241 (9,585) 15,656 17 (2,223) 163 602 14,048 (6,405) (94) 152 - 2,124 9,825 (88) (207) (295) 1,861 (1,990) 215 528 16,270 (6,626) 1,274 316 137 (1,570) 9,801 (48) (179) (227) Profit and total comprehensive income for the period $ 9,530 $ 9,574 Profit and total comprehensive income for the period attributable to: - Unitholders - Non-controlling interests $ 9,431 99 $ 9,530 $ 9,535 39 $ 9,574 Page 36 of 74 Plaza Retail REIT Management’s Statement of Responsibility for Financial Reporting The accompanying consolidated financial statements and information contained in the Annual Report have been prepared by, and are the responsibility of, the management of the Trust. The financial statements have been prepared within accepted limits of materiality and in accordance with the International Financial Reporting Standards appropriate in the circumstances. Management maintains appropriate systems of internal control. Policies and procedures are designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded and financial records are properly maintained to provide reliable information for preparation of financial statements. The Board of Trustees oversees management’s responsibilities for the preparation of the consolidated financial statements and accompanying management’s discussion and analysis (MD&A) primarily through the activities of its Audit Committee, which is comprised solely of trustees who are unrelated to, and independent of, the Trust. The Audit Committee meets regularly with management and the independent auditors to review the consolidated financial statements and MD&A and recommends approval of the annual financial statement package to the Board of Trustees. These consolidated financial statements and MD&A have been approved by the Board of Trustees for inclusion in this Annual Report. KPMG LLP, the independent auditors appointed by the unitholders based on the recommendation of the Board of Trustees, have been engaged to audit the consolidated financial statements and provide an independent professional opinion thereon. The auditors have full and independent access to the Audit Committee to discuss audit and related matters. ______________________________ Michael Zakuta President and CEO February 22, 2018 __________________________________ Floriana Cipollone Chief Financial Officer February 22, 2018 Page 37 of 74 Plaza Retail REIT KPMG LLP Chartered Accountants Frederick Square 77 Westmorland Street Fredericton NB E3B 6Z3 Telephone Fax Internet (506) 452-8000 (506) 450-0072 www.kpmg.ca One Factory Lane Place Marven’s PO Box 827 Moncton NB E1C 8N6 Telephone Fax (506) 856-4400 (506) 856-4499 Harbour Building 133 Prince William Street PO Box 2388 Stn Main Saint John NB E2L 3V6 Telephone Fax (506) 633-8828 (506) 634-1000 INDEPENDENT AUDITORS’ REPORT To the Unitholders of Plaza Retail REIT We have audited the accompanying consolidated financial statements of Plaza Retail REIT, which comprise the consolidated statements of financial position as at December 31, 2017 and December 31, 2016, the consolidated statements of comprehensive income, changes in unitholders’ equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion the appropriateness of accounting policies used and includes evaluating In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Plaza Retail REIT as at December 31, 2017 and December 31, 2016, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants February 22, 2018 Fredericton, Canada Page 38 of 74 Plaza Retail REIT Consolidated Statements of Financial Position (in thousands of Canadian dollars) December 31, 2017 December 31, 2016 Assets Non-Current Assets Investment properties (Note 4) Investments (Note 5) Tenant loans Deferred income tax asset (Note 15) Total non-current assets Current Assets Cash Receivables (Note 6) Prepaid expenses and deposits (Note 7) Investments (Note 5) Tenant loans Notes and advances receivable (Note 8) Investment properties held for sale (Note 4) Total current assets Total assets Liabilities and Unitholders’ Equity Non-Current Liabilities Debentures payable (Note 9) Mortgage bonds payable (Note 10) Mortgages payable (Note 11) Class B exchangeable LP units (Note 20) Deferred income tax liability (Note 15) Total non-current liabilities Current Liabilities Current portion of debentures payable (Note 9) Bank indebtedness (Note 12) Current portion of mortgage bonds payable (Note 10) Current portion of mortgages payable (Note 11) Accounts payable, accrued liabilities, tenant payables and tenant deposits (Note 13) Notes payable (Note 14) Total current liabilities Total liabilities Unitholders’ equity Non-controlling interests Total unitholders’ equity Total liabilities and unitholders’ equity $ 959,618 45,550 403 520 1,006,091 6,250 4,480 4,067 - 448 9,999 - 25,244 $ 1,031,335 $ 959,889 46,551 846 126 1,007,412 5,182 3,542 2,518 99 469 10,578 92 22,480 $ 1,029,892 $ 11,437 14,764 410,879 5,393 7,547 450,020 $ 44,093 11,843 414,839 6,595 7,217 484,587 38,336 29,538 - 33,700 15,222 1,424 118,220 568,240 16,079 12,562 2,905 45,005 15,821 1,190 93,562 578,149 458,864 4,231 463,095 $ 1,031,335 447,805 3,938 451,743 $ 1,029,892 Contingencies, commitments, guarantees and indemnities, litigation and provisions – see Note 26 Subsequent events – see Note 29 Barbara Trenholm, Trustee ______________________________ Earl Brewer, Trustee The notes on pages 43 to 74 are an integral part of these consolidated financial statements. Page 39 of 74 Plaza Retail REIT Consolidated Statements of Comprehensive Income (in thousands of Canadian dollars) Revenues (Note 16) Operating expenses (Note 17) Net property operating income Share of profit of associates Administrative expenses (Note 18) Investment income Other income Income before finance costs, fair value adjustments and income taxes Finance costs (Note 19) Finance costs - net change in fair value of convertible debentures (Note 9) Finance costs - net change in fair value of Class B exchangeable LP units (Note 20) Finance costs - net change in fair value of interest rate swap and bond forward (Note 11 and 27) Net change in fair value of investment properties (Note 4) Profit before income tax Income tax recovery (expense) - Current - Deferred 2017 2016 $ 102,887 (38,529) 64,358 $ 100,215 (37,543) 62,672 587 (9,139) 763 1,726 58,295 (25,646) 339 970 - (10,392) 23,566 (183) 64 (119) 5,181 (8,807) 711 1,922 61,679 (27,379) (1,256) (396) (154) 1,648 34,142 (132) (1,252) (1,384) Profit and total comprehensive income $ 23,447 $ 32,758 Profit and total comprehensive income attributable to: - Unitholders - Non-controlling interests $ 23,232 215 $ 23,447 $ 32,631 127 $ 32,758 The notes on pages 43 to 74 are an integral part of these consolidated financial statements. Page 40 of 74 Plaza Retail REIT Consolidated Statements of Changes in Unitholders’ Equity (in thousands of Canadian dollars) Trust Units (Note 20) Retained Earnings Total Attributable to Unitholders Non- Controlling Interests Total Equity Balance as at December 31, 2015 $ 233,224 $ 182,441 $ 415,665 $ 3,885 $ 419,550 Profit and total comprehensive income Transactions with unitholders, recorded directly in equity: - Contributions by unitholders – DRIP and RSU plan - Public offering, net of issue costs - Units issued through debt conversion - Distributions to unitholders (Note 22) - Distributions to non-controlling interests and changes in ownership interests in subsidiaries that do not result in loss of control Balance as at December 31, 2016 Profit and total comprehensive income Transactions with unitholders, recorded directly in equity: - Contributions by unitholders - DRIP and RSU plan - Units issued through debt conversion - Units issued from exchange of Class B exchangeable LP units - Distributions to unitholders (Note 22) - contributions from/(distributions to) non-controlling interests and changes in ownership interests in subsidiaries that do not result in loss of control Balance as at December 31, 2017 - 32,631 32,631 127 32,758 1,376 21,674 1,737 - - - - (25,278) 1,376 21,674 1,737 (25,278) - - - - 1,376 21,674 1,737 (25,278) - $ 258,011 - $ 189,794 - $ 447,805 (74) $ 3,938 (74) $ 451,743 - 23,232 23,232 215 23,447 2,702 12,213 - - 232 - - (27,320) 2,702 12,213 232 (27,320) - - - - 2,702 12,213 232 (27,320) - $ 273,158 - $ 185,706 - $ 458,864 78 $ 4,231 78 $ 463,095 The notes on pages 43 to 74 are an integral part of these consolidated financial statements. Page 41 of 74 Plaza Retail REIT Consolidated Statements of Cash Flows (in thousands of Canadian dollars) Cash obtained from (used for): Operating activities Profit and total comprehensive income Items not affecting cash: Finance costs (Note 19) Share of profit of associates Net change in fair value of investment properties Net change in fair value of convertible debentures Net change in fair value of Class B exchangeable LP units Net change in fair value of interest rate swap and bond forward (Note 11 and 27) Current and deferred income taxes Straight-line rent revenue Interest paid Income taxes paid Distributions from equity accounted investments (Note 5) Leasing commissions Change in non-cash working capital (Note 23) Financing activities Issuance of units from public offering, net of issue costs Cash paid on conversion of convertible debentures (Note 9) Cash distributions paid to unitholders (Note 22) Cash distributions paid to Class B exchangeable LP unitholders Gross proceeds of mortgage bonds and debentures Finance charges incurred for bonds and debentures Redemption/repayment of mortgage bonds and debentures Gross mortgage proceeds Fees incurred for placement of mortgages Loan defeasance expenses and early mortgage discharge fees paid Mortgages repaid Periodic mortgage principal repayments Redemptions of bonds purchased for mortgage defeasances Increase in notes payable Investing activities Acquisitions of investment properties and land (Note 4) Investment properties - additions Net proceeds from disposal of investment properties and land (Note 4(e)) Net proceeds from disposal of investment properties and land on properties previously classified as held for sale (Note 4(f)) Advances to equity accounted investments for developments (Note 5) Contributions to/(distributions from) subsidiaries from/to non-controlling interests Decrease (increase) in deposits for acquisitions and financings (Note 7) Decrease (increase) in notes and advances receivable Issuance of tenant loans Repayment of tenant loans Net increase (decrease) in cash Cash less bank indebtedness, beginning of the year Cash less bank indebtedness, end of the year 2017 2016 $ 23,447 $ 32,758 25,646 (587) 10,392 (339) (970) - 119 239 (24,345) (168) 1,376 (157) 1,129 35,782 - (1,454) (24,713) (354) 9,000 (232) (5,276) 36,933 (415) (56) (31,975) (10,416) - 234 (28,724) (11,494) (20,592) 9,282 92 (1,039) 78 (1,686) 1,929 (5) 469 (22,966) (15,908) (7,380) $ (23,288) 27,379 (5,181) (1,648) 1,256 396 154 1,384 (412) (26,158) (152) 1,180 (794) 2,754 32,916 21,674 (197) (23,920) (343) 11,500 (164) (15,100) 67,106 (672) (462) (69,077) (10,185) 19,211 15 (614) (15,122) (16,910) 21,491 1,800 (2,050) (74) 336 (5,894) (16) 499 (15,940) 16,362 (23,742) $ (7,380) The notes on pages 43 to 74 are an integral part of these consolidated financial statements. Page 42 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) 1. Reporting Entity Plaza Retail REIT (the “Trust”) is an unincorporated “open-ended” real estate investment trust established pursuant to its declaration of trust dated as of November 1, 2013 (the “Declaration of Trust”) and governed by the laws of the Province of Ontario. The address of the Trust’s head office is 98 Main Street, Fredericton, New Brunswick. The Trust operates a retail real estate ownership and development business in Canada. Management does not distinguish or group its operations by geography or any other basis, when measuring its performance or making decisions. Accordingly, the Trust has a single reportable segment for disclosure purposes. 2. Basis of Preparation (a) Statement of Compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The consolidated financial statements were authorized for issue by the Board of Trustees of the Trust on February 22, 2018. (b) Basis of Measurement The consolidated financial statements have been prepared on a historical cost basis, except for the following items in the consolidated statements of financial position that are measured at fair value: - - - - - - - Interest rate swaps; Interest rate hedges; Unit-based payments; Convertible debentures; Investment property; Investment property included in investments; and Exchangeable units. These consolidated financial statements are presented in Canadian dollars, which is the Trust’s functional currency. (c) Use of Estimates and Judgments The preparation of the Trust’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of certain assets and liabilities at the reporting date and the reported amounts of revenues and expenses during the reporting period. The significant estimates and judgments include the assessment of fair values, the discount rates used in the valuation of the Trust’s assets and liabilities, capitalization rates, the relative credit worthiness of the Trust to its counterparties, the determination of the accounting basis for investments and joint arrangements, the amount of borrowing costs to capitalize to properties under development and the selection of accounting policies. (i) Investment property One significant judgment and key estimate that affects the reported amounts of assets at the date of the consolidated financial statements and the reported amounts of profit or loss during the year, relates to property valuations. Investment properties, which are carried on the consolidated statements of financial position at fair value, are valued either by the Trust or by external valuators. The valuation of investment properties is one of the principal estimates and uncertainties of these financial statements. The valuations are based on a number of assumptions, such as appropriate discount rates and capitalization rates and estimates of future rental income, operating expenses and capital expenditures. These investment properties are sensitive to fluctuations in capitalization and discount rates. Page 43 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) 3. Summary of Significant Accounting Policies The Trust’s accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements. (a) General and Consolidation The consolidated financial statements comprise the financial statements of the Trust and the entities that it controls. All intra- group balances, transactions, income and expenses resulting from intra-group transactions are eliminated in full. (i) Subsidiaries Subsidiaries are entities over which the Trust has control. The Trust has control over an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. When the Trust does not own all of the equity in a subsidiary, the non-controlling equity interest is disclosed in the consolidated balance sheet as a separate component of total equity. (ii) Associates and joint ventures Associates are entities over which the Trust has significant influence over the financial and operating policies of the entities and that are neither subsidiaries nor interests in joint ventures. A joint venture is a type of joint arrangement whereby the parties that share joint control have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. Investments in associates and joint ventures are accounted for using the equity method and initially recorded at cost and adjusted thereafter to recognize the Trust’s share of the profit or loss and other comprehensive income of the associate or joint venture. The Trust’s share of the associate or joint venture’s profit or loss is recognized in the Trust’s consolidated statements of comprehensive income under share of profit of associates. (iii) Joint operations A joint operation is a joint arrangement whereby the parties that have joint control have rights to the assets and obligations for the liabilities relating to the arrangement. The Trust recognizes its proportionate share of assets, liabilities, revenues and expenses of joint operations. The financial statements of the associates, joint ventures, and joint operations are prepared for the same reporting period as the Trust, using consistent accounting policies. (b) Investment Properties Investment properties consist of all of the Trust’s consolidated commercial properties, development properties, land held for future development and land parcels that become surplus after assembly and subdivision of parcels used for development. Investment properties include interests held under land leases. The Trust has adopted application of IAS 40, “Investment property”, and has chosen the fair value method of valuing its investment properties. Fair value represents the amount at which the properties could be exchanged between knowledgeable, willing parties in an arm’s length transaction at the date of valuation. The fair value of investment properties is based on a combination of external appraisals and internal valuations based on a capitalization matrix provided by independent appraisers. Management undertakes a quarterly review of the fair value of its investment properties to assess the continuing validity of the underlying assumptions, such as cash flows and capitalization rates. Where increases or decreases are warranted, the Trust adjusts the fair values of its investment properties. Related fair value gains and losses are recorded in profit and loss in the period in which they arise. Page 44 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) Development properties included in investment properties consist of properties under construction, which are recorded at fair value less costs to complete. Surplus lands are included in investment properties and are carried at fair value. The fair value of the surplus lands is based on a combination of external appraisals and internal valuations based on recent market transactions. Investment properties are classified as held for sale if their carrying amount will be recovered primarily through a sale transaction rather than through continuing use. The asset is classified as such only when management has committed to a plan to sell, when the sale is probable and is expected to qualify for recognition as a completed sale within one year. Investment properties classified as held for sale are recorded at fair value less costs of disposal. Any difference between the existing fair value and the calculated fair value less costs of disposal, at the time the asset is reclassified, is recorded through change in fair value. (c) Capitalization of Costs The Trust capitalizes investment property acquisition costs incurred at the time of purchase. For development properties, the Trust capitalizes all direct expenditures incurred in connection with their acquisition, development and construction. These expenditures consist of all direct costs and borrowing costs on both specific and general debt. Borrowing costs are offset by any interest earned by the Trust on borrowed funds prior to utilization. The development period commences when expenditures are being incurred and activities necessary to prepare the asset for its intended use are in progress. Capitalization ceases when substantially all the activities necessary to prepare the asset for its intended use are complete. (d) Revenue Recognition (i) Rental revenue Rental revenue includes rent earned from tenants under lease arrangements including, base rent, percentage rents, straight-line rents, property tax and operating cost recoveries and incidental income including lease cancellation payments. The Trust retains substantially all of the benefits and risks of ownership of its investment properties and therefore accounts for leases with its tenants as operating leases. Common area maintenance recoveries are the share of property operating costs charged to tenants under the terms of the leases. Recoveries from tenants for common area maintenance, real estate taxes and other recoverable costs are recognized as revenue in the period that services are provided. (ii) Straight-line rent Certain leases provide for (i) tenant occupancy during the period for which no rent is due (free rent period) or (ii) minimum rent increases during the term of the lease. Rental revenue from leases is recorded for the fixed term of each lease on a straight-line basis. The straight-line or free rent receivable, as applicable, is recorded as a component of investment properties for the difference between the rental revenue recorded and the contractual amount received. When a property is acquired, the term of existing leases is considered to commence as of the acquisition date for the purposes of the straight-line rent calculations. For lease renewals, the effective date of the lease is used for the purposes of the straight-line rent calculations. (e) Income Taxes The Trust is a mutual fund trust and qualifies as a real estate investment trust for Canadian income tax purposes. Under current tax legislation, a real estate investment trust is entitled to deduct distributions of taxable income such that it is not liable to pay income tax, provided that its taxable income is fully distributed to unitholders. Accordingly, income taxes, comprised of current and deferred taxes, are only recorded for the Trust’s corporate subsidiaries. The Trust intends to continue to qualify as a real estate investment trust and to make distributions not less than the amount necessary to ensure that the Trust will not be liable to pay income taxes. Page 45 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) (f) Cash Cash represents cash in bank accounts and short-term deposits with initial maturity dates of less than 90 days. The Trust’s cash balance does not include any instruments related to asset-backed securities or commercial paper programs. (g) Unit-based Payments The Trust issues unit-based awards, comprised of restricted share units, to certain officers and employees of the Trust or its affiliates. Under the restricted share unit plan, the fair value of the restricted share units granted is recognized as compensation expense over the vesting period. Fair value is determined with reference to the market price of the Trust’s units. The Trust issues unit-based awards, comprised of deferred units, to non-employee trustees. Under the deferred unit plan, the fair value of the deferred units granted is recognized as compensation expense in the period the deferred units are granted and the fair value is updated at the end of each reporting period. Fair value is determined with reference to the market price of the Trust’s units. Since the Trust’s units are redeemable at the option of the holder and are, therefore, considered puttable instruments in accordance with IAS 32, “Financial instruments: presentation”, any restricted share units or deferred units are accounted for as a liability because the participants’ rights to receive a puttable instrument is a cash-settled share-based payment under IFRS 2, “Share-based payments”. The restricted share units or deferred units liability is adjusted to reflect the change in their fair value at each reporting period with the changes in fair value recognized as compensation expense. (h) Investments Investments consist of the Trust’s associates and joint ventures accounted for using the equity method, other investments in entities not accounted for using the equity method and other held-to-maturity financial assets. For investments in entities not accounted for using the equity method, amounts received or receivable in accordance with the income distribution formula of the entity, if not capital or financing receipts, are included in income. For investments in entities accounted for using the equity method, amounts received are accounted for as a reduction of the investments and the proportionate share of the net income or loss from the investments are recorded in profit or loss for the period under share of profit of associates, and as an increase or decrease to the investments. Investment properties that are held by equity-accounted entities are measured at fair value, consistent with the Trust’s policy for its consolidated investment properties. The Trust’s pro-rata share of any fair value gain or loss is calculated based on “winding- up” the specific entity and distributing the net assets to the partners as dictated by the respective agreements. The Trust’s pro- rata share of any fair value gain or loss is recorded in profit or loss for the period within share of profit of associates. Investments in entities not accounted for using the equity method are measured at fair value. See (i) below for the accounting for held-to-maturity financial assets. (i) Financial Instruments The Trust has or has had the following non-derivative financial instruments: financial assets and financial liabilities at fair value through profit and loss, held-to-maturity financial assets, loans and receivables, other financial liabilities and trust units. Financial assets and liabilities are offset and the net amount is presented in the statement of financial position when, and only when, the Trust has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. The effective interest method is used for financial instruments measured at amortized cost and allocates interest over the relevant period. The effective interest rate used in the effective interest method (“Effective Interest Rate”), is the rate that discounts estimated future cash flows (including all fees paid or received that form an integral part of the Effective Interest Rate, transaction costs and other premiums or discounts) through the expected life of the instrument, to the net carrying amount on initial recognition. Page 46 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) Any transaction costs associated with financial instruments measured at fair value through profit and loss are expensed as incurred in the consolidated statement of comprehensive income. (i) Financial assets at fair value through profit and loss A financial asset is classified at fair value through profit and loss if it is classified as held for trading or is designated as such upon initial recognition. A financial asset is classified as held for trading if it has been acquired principally for the purpose of selling in the near term, or it is part of a portfolio of identified financial instruments that the Trust manages together and has a recent actual pattern of short-term profit-taking. Financial assets are designated at fair value through profit and loss if the Trust manages and evaluates such assets on a fair value basis in accordance with the Trust’s documented risk management or investment strategy. Upon initial recognition, certain transaction costs are recognized in profit and loss as incurred. Financial assets at fair value through profit and loss are measured at fair value, and changes therein are recognized in profit and loss. The Trust’s held for trading assets consist of cash. (ii) Financial liabilities at fair value through profit and loss Convertible debentures issued by the Trust are convertible into units at the option of the holder and the number of units to be issued does not vary with changes in their fair value. As the Trust’s units are redeemable at the option of the holder and are, therefore, considered puttable instruments in accordance with IAS 32, “Financial instruments: presentation”, the convertible debentures are considered a liability containing liability-classified embedded derivatives. The Trust has elected to record the full outstanding amount of each convertible debenture at fair value determined using either (i) a valuation methodology which considers the volatility of the unit price and current credit spreads, for non-publicly traded convertible debentures, or (ii) the closing trading price, for publicly traded convertible debentures. Changes in fair value are recognized in profit and loss. The Class B exchangeable limited partnership (“LP”) units of the Trust’s subsidiary are exchangeable into units of the Trust at the option of the holder. These exchangeable units are considered puttable instruments in accordance with IAS 32, “Financial instruments: presentation”, and are required to be classified as financial liabilities at fair value through profit or loss. The distributions paid on the exchangeable LP units are accounted for as finance costs. (iii) Held-to-maturity financial assets If the Trust has the positive intent and ability to hold certain financial assets to maturity, then such financial assets are classified as held-to-maturity. Held-to-maturity financial assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized cost using the effective interest method, less any impairment losses. Any sale or reclassification of a more than insignificant amount of held- to-maturity investments not close to their maturity would result in a reclassification of all held-to-maturity investments as available-for-sale, and prevent the Trust from classifying investment securities as held-to-maturity for the current and the following two financial years. Held-to-maturity assets are comprised of mortgage bonds, Government of Canada bonds and cash substituted for mortgage security under defeasance arrangements. (iv) Loans and receivables Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Loans and receivables comprise receivables, notes and advances receivable and tenant loans. Page 47 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) (v) Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale and that are not classified in any of the previous categories. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses, are recognized in other comprehensive income and presented within equity in the fair value reserve. When an available-for-sale financial asset is derecognized, the cumulative gain or loss in other comprehensive income is transferred to profit and loss. The Trust currently has no financial assets which are designated as available-for-sale. (vi) Other financial liabilities The Trust initially recognizes debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities are recognized on the trade date at which the Trust becomes a party to the contractual provisions of the instrument. The Trust derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. Such financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method. The Trust’s other financial liabilities consist of accounts payable and accrued liabilities, notes payable, mortgage bonds payable, bank indebtedness and mortgages payable. (vii) Trust Units The Trust’s units are redeemable at the option of the holder and, therefore, are considered puttable instruments. Puttable instruments are required to be accounted for as financial liabilities, except where certain conditions are met in accordance with IAS 32, “Financial instruments: presentation”, in which case, the puttable instruments may be presented as equity. The Trust’s units meet the conditions of IAS 32 and are, therefore, presented as equity. (j) Derivative Financial Instruments The Trust’s derivative financial instruments consist of interest rate swaps and bond forwards (that do not qualify for hedge accounting) that have been entered into in order to manage the impact of floating interest rates on certain long-term debt. The Trust’s derivatives are recognized initially at fair value. Attributable transaction costs are recognized in profit and loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are recognized in profit and loss in the reporting period. (k) Leasing Costs Payments to tenants under lease contracts are characterized as either tenant improvements, which enhance the value of the property, or lease inducements. When the obligation is determined to be a tenant improvement, the Trust is considered to have acquired an asset. Accordingly, the tenant improvements are capitalized as part of investment property. When the obligation is determined to be a lease inducement, the amount is recognized as an asset which forms a component of investment property and is deferred and amortized over the term of the lease as a reduction of revenue. (l) Finance Costs Finance costs are comprised of interest expense on borrowings, fair value changes in financial liabilities, the fair value adjustment on interest rate swap and bond forward derivatives and transaction costs associated with the issuance of financial liabilities measured at fair value though profit and loss (such as convertible debentures). Transaction costs associated with financial liabilities presented at amortized cost are presented with the related debt instrument and amortized into finance costs using the effective interest method over the anticipated life of the related debt. Page 48 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) (m) Changes in Accounting Policies (i) Disclosure Initiative (Amendments to “IAS 7”) The amendments require disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flow and non-cash changes. The amendments to IAS 7 became effective for the annual period beginning on January 1, 2017. The Trust adopted these amendments and as a result, new disclosures have been added to the Trust’s financial statements. (ii) Recognition of Deferred Tax Assets for Unrealized Losses (Amendments to “IAS 12”) The amendments clarify that the existence of a deductible temporary difference depends solely on a comparison of the carrying amount of an asset and its tax base at the end of the reporting period, and is not affected by possible future changes in the carrying amount or expected manner of recovery of the asset. The amendments also clarify the methodology to determine the future taxable profits used for assessing the utilization of deductible temporary differences. The amendments to IAS 12 became effective for the annual period beginning on January 1, 2017. The adoption of the amendments did not have a material impact on the Trust’s financial statements. (n) Future Changes in Accounting Policies (i) Revenue from Contracts with Customers (“IFRS 15”) IFRS 15, Revenue from Contracts with Customers is effective for annual periods beginning on or after January 1, 2018, and will replace: IAS 11, Construction Contracts; IAS 18, Revenue; International Financial Reporting Interpretations Committee (“IFRIC”) 13, Customer Loyalty Programmes; IFRIC 15, Agreements for the Construction of Real Estate; IFRIC 18, Transfer of Assets from Customers; and SIC 31, Revenue – Barter Transactions Involving Advertising Services. IFRS 15 contains a single, control-based model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. IFRS 15 also includes additional disclosure requirements for revenue accounted for under the standard. The implementation of IFRS 15 will be applied on January 1, 2018 and is not expected to have a significant impact on the Trust. However, additional disclosure requirements may result in separate disclosure of revenue for service components that are part of a lease (i.e. a non-lease component). (ii) Financial Instruments (“IFRS 9”) The Trust will adopt IFRS 9, Financial Instruments: Classification and Measurement, which replaces IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”), in its financial statements for the annual period beginning on January 1, 2018, the mandatory effective date. IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost; fair value through other comprehensive income (“FVOCI”); and fair value through profit or loss (“FVTPL”), and eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale. IFRS 9 replaces the ‘incurred loss’ impairment model in IAS 39 with a forward-looking ‘expected credit loss’ model. The new impairment model will apply to financial assets measured at amortized cost or FVOCI, except for investments in equity instruments, and to contract assets. IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, under IAS 39 all fair value changes of liabilities designated as FVTPL are recognized in profit or loss, whereas under IFRS 9 the amount of change in fair value attributable to changes in the credit risk of the liability is presented in other comprehensive income, and the remaining amount of change in fair value is presented in profit or loss. Page 49 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) IFRS 9 also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management. The Trust does not currently apply hedge accounting in its financial statements. The initial adoption of IFRS 9 is not expected to have a significant impact on the Trust. (iii) Leases (“IFRS 16”) In January 2016, the IASB issued IFRS 16, Leases. The new standard will replace existing lease guidance in IFRS and related interpretations, and requires lessees to bring most leases on-balance sheet. Lessor accounting remains similar to the current standard. The Trust is evaluating the identification of leases and non-lease components in accordance with the new requirements. IFRS 16 is only applicable to lease components and therefore other standards, such as IFRS 15, will apply to non-lease components of contracts. IFRS 15 requires allocation of transaction prices to relative standalone selling prices. The Trust is evaluating whether this will have a measurement impact. The new standard is effective for years beginning on January 1, 2019. The extent of the impact of adoption of the standard has not yet been determined. (iv) Classification and Measurement of Share-based Payment Transactions (Amendments to “IFRS 2”) The amendments provide requirements on the accounting for: the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; share-based payments transactions with a net settlement feature for withholding tax obligations; and a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. The Trust intends to adopt the amendments to IFRS 2 in its financial statements for the annual period beginning on January 1, 2018 prospectively. The Trust does not expect the amendments to have a material impact on the financial statements. 4. Investment Properties Balance, beginning of the year: Additions (deductions): Additions to investment properties Additions – acquisitions of investment properties and land Disposals(1) Transfers Investment properties held for sale Straight line rent receivable change Change in fair value(2) December 31, 2017 Properties under development Income producing properties $ 912,462 Income producing properties Total December 31, 2016 Properties under development $ 38,412 Total $ 945,757 $ 47,427 $ 959,889 $ 907,345 7,264 10,918 18,182 8,252 10,334 18,586 2,055 (16,884) 8,431 - (337) (7,027) 9,439 (2,433) (8,431) - 99 (3,365) 11,494 (19,317) - - (238) (10,392) 2,731 (21,491) 12,922 (92) 344 2,451 12,391 - (12,922) - 15 (803) 15,122 (21,491) - (92) 359 1,648 Balance, end of the year: $ 959,889 (1) Cash received from disposals as per the statement of cash flows of $9.3 million is net of $10.0 million of mortgages assumed by $ 905,964 $ 959,618 $ 912,462 $ 53,654 $ 47,427 purchasers. (2) The change in fair value includes a loss of $160 thousand (December 31, 2016 – $895 thousand gain) related to properties where the Trust has a 20% ownership interest and a 50% economic interest above its invested capital. The majority of the Trust’s investment properties have been pledged as security under various debt agreements. Investment properties are stated at fair value using the following methods, estimates and key assumptions: (i) External appraisals Independent appraisals are obtained in the normal course of business as refinancing activities require them, and as applicable, the fair value of various investment properties are based on these external appraisals. Of the total fair value in the chart above, $322 million of investment properties were based on such external appraisals (December 31, 2016 - $281 million). Page 50 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) (ii) Internal approach - direct capitalization income approach Under this approach the Trust determines the fair value based upon capitalization rates applied to budgeted normalized net operating income (property revenue less property operating expenses). Normalized net operating income adjusts net operating income for things like market property management fees, or in the case of development properties, to reflect full intended occupancy (less a normal vacancy allowance). The key assumption is the capitalization rate for each specific property. The Trust receives quarterly capitalization rate matrices from an external independent appraiser. The capitalization rate matrices provide a range of rates for various geographic regions and for various types and qualities of properties within each region. The Trust utilizes capitalization rates within the range of rates provided. To the extent that the externally provided capitalization rate ranges change from one reporting period to the next or should another rate within the provided ranges be more appropriate than the rate previously used, the fair value of the investment properties would increase or decrease accordingly. As at December 31, 2017 the Trust has utilized the following range of capitalization rates: Freestanding or Mini Box Quick Service Restaurant Anchored Strip – Class A Anchored Strip – Class B Unanchored Strip Enclosed Malls – Community Number of Properties(1) 72 117 13 31 38 4 275 Weighted average capitalization rates 6.44% 7.26% 7.07% 7.03% 7.61% 7.80% 7.02% Primary Market 5.50% - 8.50% 5.50% - 9.00% 6.00% - 8.25% 6.00% - 8.50% 5.75% - 9.00% 7.50% - 9.50% Secondary Market 6.00% - 9.00% 6.00% - 11.00% 6.25% - 9.00% 6.75% - 10.00% 6.00% - 11.00% 7.50% - 11.00% (1) Excludes certain properties under development and non-consolidated trusts and partnerships. Freestanding or Mini Box - defined as a freestanding retail, non-restaurant use such as a pharmacy or equivalent national box retailer. May include nominal additional gross leasable area (“GLA”) if the additional GLA is 15% or less than the total GLA or gross revenue. Quick Service Restaurant – defined as freestanding retail space for food. Anchored Strip – Class A - defined as a food or equivalent-anchored retail strip, 20,000-125,000 square feet and where the anchor tenant(s) represents 70% or more of GLA or gross revenue. Anchored Strip – Class B - defined as a food or equivalent-anchored retail strip, 20,000-200,000 square feet and where the anchor tenant(s) represents less than 70% of GLA or gross revenue. Unanchored Strip - defined as an unanchored retail strip less than 75,000 square feet. Enclosed Malls - Community - defined as an enclosed community mall with food or department/junior department store or equivalent anchors. At December 31, 2017 a decrease of 0.25% in the capitalization rates used to determine the fair value of investment properties would have resulted in an increase in investment properties of approximately $35.1 million. An increase of 0.25% in the capitalization rates used would have resulted in a decrease in investment properties of approximately $32.6 million. Page 51 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) As at December 31, 2016 the Trust utilized the following range of capitalization rates: Freestanding or Mini Box Quick Service Restaurant Anchored Strip – Class A Anchored Strip – Class B Unanchored Strip Enclosed Malls – Community Number of Properties(1) 68 121 14 30 38 4 275 Weighted average capitalization rates 6.45% 7.30% 7.11% 6.97% 7.66% 7.79% 7.03% Primary Market 5.50% - 8.50% 5.50% - 9.00% 6.00% - 8.25% 6.00% - 8.50% 6.00% - 9.00% 7.50% - 9.50% Secondary Market 6.00% - 9.00% 6.00% - 11.00% 6.25% - 9.00% 6.75% - 10.00% 6.50% - 11.00% 7.50% - 11.00% (1) Excludes certain properties under development and non-consolidated trusts and partnerships. (a) Straight-line Rent Included in investment properties at December 31, 2017 is $11.9 million (December 31, 2016 - $12.3 million) of straight line rents receivable arising from the recognition of rental revenue on a straight line basis over the lease terms in accordance with IAS 17, “Leases”. (b) Surplus Land Included in investment properties at December 31, 2017 is $1.4 million of surplus lands at fair value (December 31, 2016 - $3.6 million). (c) Borrowing Costs The total amount of borrowing costs capitalized for the year ended December 31, 2017 is $348 thousand (for the year ended December 31, 2016 - $126 thousand). (d) Acquisitions During the year ended December 31, 2017, the Trust purchased the following (all including closing costs): land adjacent to an existing property in Picton, ON for $217 thousand; land in Fredericton, NB for $287 thousand; land in Dunnville, ON for $279 thousand; land in Gatineau, QC for $1.1 million; a 50% interest in development lands in Mississauga, ON for $6.1 million; a 50% interest in an existing property for redevelopment in Saguenay, QC for $3.3 million; and development lands in Liverpool, NS for $168 thousand. During the year ended December 31, 2016, the Trust acquired an additional 5.5% interest in the Village Shopping Centre in St. John’s, NL for $2.7 million. The Trust now owns 50.0% of this property. The Trust also acquired a 50.0% interest from an arms-length party in three properties located in Miramichi, NB, Cornwall, ON and New Liskeard, ON for $11.5 million. As consideration for the acquisition the Trust paid cash of $750 thousand, issued a vendor take-back interest-only mortgage secured by one of the properties of $5.25 million bearing interest at 5.00% per annum with a seven year term, and issued $5.5 million, 5.50% Series VII convertible debentures. The vendor take-back mortgage is repayable at any time without penalty. Closing costs associated with the acquisition were $155 thousand. The Trust also acquired land for development in Saint John, NB for $757 thousand. (e) Disposals During the year ended December 31, 2017, the Trust disposed of surplus land in Kenora, ON for net proceeds of $92 thousand which was recorded as investment properties held for sale at December 31, 2016. The Trust also disposed of land in Calgary, AB and in Miramichi, NB for net proceeds of $78 thousand and $272 thousand, respectively. The Trust disposed of properties in North Sydney, NS, for net proceeds of $215 thousand, in Oshawa, ON for net proceeds of $662 thousand, in Hamilton, ON for net proceeds of $577 thousand and in Niagara Falls, ON for net proceeds $287 thousand. The Trust disposed of a 50% non- managing interest in eight properties in Edmundston, NB, Woodstock, NB, Grand Falls, NB, Yarmouth, NS and Sydney, NS for net proceeds of $17.3 million ($7.3 million after assumption of 50% of the existing mortgages). Page 52 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) During the year ended December 31, 2016, the Trust disposed of income producing properties for net proceeds of $20.5 million in Aurora, ON, Calgary, AB, London, ON, Markham, ON, Toronto, ON and Mississauga, ON. As well, the Trust disposed of income producing properties in Toronto, ON and Windsor, ON for net proceeds of $1.8 million, which were recorded as investment properties held for sale at December 31, 2015. The Trust also disposed of surplus land for net proceeds of $997 thousand in Fredericton, NB, Oromocto, NB and Coaticook, QC. (f) Investment Properties held for Sale At December 31, 2016 the Trust had segregated investment properties held for sale of $92 thousand for land located in Kenora, ON. This land was sold in January 2017. Ownership Position Preferred Return Residual Return December 31, 2017 December 31, 2016 5. Investments Investments consist of the following: Equity Accounted Investments Centennial Plaza Limited Partnership Trois Rivières Limited Partnership Plazacorp-Shediac Limited Partnership VGH Limited Partnership Plazacorp Ontario1 Limited Partnership Plazacorp Ontario2 Limited Partnership Plazacorp Ontario3 Limited Partnership Plazacorp Ontario4 Limited Partnership RBEG Limited Partnership CPRDL Limited Partnership Fundy Retail Ltd. Ste. Hyacinthe Limited Partnership 144 Denison East Limited Partnership The Shoppes at Galway Limited Partnership 10% 15% 10% 20% 25% 50% 50% 50% 50% 50% 50% 25% 25% 50% 10% 10% 8% 8% 4% - - - - - - - - - 20% 30% 50% 27% 25% - - - - - - - - - Fair Value Accounted Investments Northwest Plaza Commercial Trust 10% - - Held-to-Maturity Investments Bonds and cash – substituted for mortgage security Total investments Less: Current portion of investments Investments – long-term portion Maturity Date Weighted Average Rate Aug 1/20 7.0% $ 10,949 2,851 2,005 2,430 2,344 3,728 2,185 1,826 2,309 2,309 1,143 175 17 10,021 44,292 $ 11,853 2,775 1,557 4,128 2,221 3,495 2,119 1,951 2,716 2,258 913 174 - 9,226 45,386 1,159 45,451 1,165 46,551 99 45,550 - $ 45,550 99 46,650 (99) $ 46,551 For equity accounted investments in which the Trust has less than a 20% ownership interest, the Trust has significant influence over these entities as it has the power to participate in the financial and operating policy decisions of the entities but is not able to exercise control or joint control over those policies. The share of the profits which the equity-accounted investments noted above are entitled to, is distributed first as a preferred return on invested capital, as outlined above, with the remaining distributed as a residual return as outlined above. Held-to-maturity investments at December 31, 2017 include investments that are made up of mortgage bonds totaling $99 thousand with a yield of 7% (December 31, 2016 - $99 thousand with a yield of 7%). Page 53 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) For the year ended December 31, 2017 the Trust received $1.4 million of distributions (for the year ended December 31, 2016 - $1.2 million) from equity accounted investments. For the year ended December 31, 2017 the Trust made $1.0 million in contributions (for the year ended December 31, 2016 - $2.1 million) to its equity accounted investments. Summary financial information for equity accounted investments, not adjusted for the percentage ownership held by the Trust is as follows: Cash Current assets Long term assets Current liabilities Long term liabilities Revenues Expenses Fair value gain (loss) Profit 6. Receivables Receivables consist of the following: Tenant accounts receivable, net of allowance Excise tax Other receivables Income taxes receivable Total receivables December 31, 2017 December 31, 2016 Equity accounted investments $ 3,077 $ 921 $ 292,284 $ 2,348 $ 140,634 $ 22,458 $ (13,353) $ 1,775 $ 10,879 Fair value accounted investments $ 500 $ 63 $ 32,699 $ 153 $ 19,689 $ 3,254 $ (3,031) $ 441 $ 664 Equity accounted investments $ 3,909 $ 1,017 $ 285,293 $ 4,521 $ 140,539 $ 20,510 $ (12,089) $ 5,337 $ 13,758 Fair value accounted investments $ 495 $ 135 $ 42,353 $ 219 $ 29,789 $ 3,400 $ (3,067) $ (9) $ 324 December 31, 2017 $ 1,214 1,525 1,720 21 $ 4,480 December 31, 2016 $ 1,417 1,007 1,063 55 $ 3,542 The Trust determines its allowance for doubtful accounts on a tenant-by-tenant basis taking into consideration lease terms, industry conditions and status of the tenants’ accounts, among other factors. Accounts are written off only when all collection efforts have been exhausted. Allowance for doubtful accounts balance at December 31, 2017 is $77 thousand (December 31, 2016 - $138 thousand). This amount is deducted from tenant accounts receivable. There were no impairment losses recognized during the year ended December 31, 2017 (for the year ended December 31, 2016 – nil). 7. Prepaid Expenses and Deposits Prepaid expenses and deposits consist of the following: Prepaid expenses Deposits for acquisitions and financings Restricted deposits, primarily property tax escrows under mortgage agreements Total prepaid expenses and deposits December 31, 2017 $ 2,277 1,790 - $ 4,067 December 31, 2016 $ 2,367 104 47 $ 2,518 Page 54 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) 8. Notes and Advances Receivable The notes and advances receivable are owed by co-owners of investment properties as a result of funding requirements on a short-term basis during development of investment properties, and by minority interest shareholders of consolidated entities. The notes and advances are due on demand. 9. Debentures Payable Debentures payable consist of the following: Convertible(1) Series C Series D Series VII Total convertible debentures Maturity Date Interest Rate December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2018 June 30, 2021 7.00% 5.75% 5.50% $ - 34,336 5,554 39,890 $ 16,079 34,510 5,583 56,172 Non-convertible(2) (3) Total debentures payable Less: current portion of debentures payable Debentures payable – long-term portion 4,000 60,172 (16,079) $ 44,093 (1) Recorded at fair value based on closing market trading prices of debentures; the fair value change during 2017 was a gain of $339 9,883 49,773 (38,336) $ 11,437 Various (see below) 5.00% thousand (2016 – loss of $1.3 million) (2) Recorded at amortized cost (3) Net of unamortized finance charges of $117 thousand (December 31, 2016 - nil) Convertible and non-convertible debentures are subordinate and unsecured. Convertible debenture terms are as follows: Conversion price Trust’s first redemption date Par call date Maturity date Face value outstanding Publicly listed Non-convertible debenture maturities are as follows: Series D $5.75 December 31, 2016 December 31, 2017 December 31, 2018 $34,000 yes Series VII $6.04 June 30, 2019 June 30, 2020 June 30, 2021 $5,500 no Face value outstanding Maturity date Tranche A $1,600 February 26, 2018 Series I Tranche B $2,300 April 15, 2018 Tranche C $100 May 2, 2018 Series II $6,000 February 28, 2022 Total $10,000 Series C convertible debentures were originally assumed on the acquisition of KEYreit. As a result of the change of control of KEYreit, and pursuant to the respective trust indentures as supplemented and amended, upon the change of control, each $1,000 principal amount of the Series C debentures was convertible into $112.76 in cash and 190 units of the Trust. On November 30, 2016, the Trust issued a redemption notice for the Series C convertible debentures to be redeemed on January 9, 2017. A total of $1.75 million were converted in 2016 into 333 thousand units and $198 thousand in cash, leaving a balance of $15.2 million in face value of debentures. Between January 3rd and 6th, 2017, $12.9 million were converted into 2.45 million units and $1.5 million in cash. On January 9, 2017, the remaining $2.3 million were redeemed and paid out. On February 28, 2017, the Trust issued $6.0 million in Series II unsecured debentures with an interest rate of 5.0% per annum maturing on February 28, 2022. Page 55 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) 10. Mortgage Bonds Payable Mortgage bonds payable are secured by the following properties: Various properties, 1st mortgage – Series IX Various properties, 1st mortgage Various properties, 1st mortgage Various properties, 1st mortgage Gross mortgage bonds payable Less: unamortized finance charges Net mortgage bonds payable Less: current portion of mortgage bonds payable Net mortgage bonds payable – long-term portion Series X $ - 6,000 - - 6,000 Series XI Series XII $ - - - 3,000 3,000 $ - - 6,000 - 6,000 December 31, 2017 December 31, 2016 Total $ - 6,000 6,000 3,000 15,000 (236) 14,764 - $ 14,764 Total $ 3,000 6,000 6,000 - 15,000 (252) 14,748 (2,905) $ 11,843 Interest Rate Maturity Date Amount Series X Series XI Series XII 5.00% 5.00% 5.50% July 25, 2020 $6,000 July 8, 2019 $6,000 July 15, 2022 $3,000 The Series X, XI and XII mortgage bonds can be deployed up to 90% of the cost of a property under a first or second charge on that property. If it is a second charge, the total debt, including mortgage bonds, cannot exceed 90%. These mortgage bonds can be reallocated to different properties from time to time as required. The Trust can redeem up to one-half of the Series X, XI and XII mortgage bonds at par on the third and fourth anniversaries for the Series X mortgage bonds and the first and second anniversaries for the Series XI and XII mortgage bonds, being: June 25, 2018 and June 25, 2019 for the Series X mortgage bonds; July 8, 2018 for the Series XI mortgage bonds; and July 15, 2018 and July 15, 2019 for the Series XII mortgage bonds. On July 15, 2017, the $3.0 million 5.50% Series IX mortgage bonds matured and were repaid. On July 15, 2017, the $3.0 million 5.50% Series XII mortgage bonds were issued. Page 56 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) 11. Mortgages Payable Interest Rate Range 2.47% - 7.29% Weighted Average Effective Interest Rate Maturity Dates Up to June 2034 4.57% Fixed rate loans: Fair value of interest rate swap Revaluation of loans upon acquisition of KEYreit, net of amortization of $5,770 (December 31, 2016 - $5,619) Less: unamortized finance charges Total net fixed rate loans Variable rate loans: - $20 million development facility Prime plus 0.75% or BA plus 2.25% Prime plus 0.75% or BA plus 2.00% Prime plus 1.25% or BA plus 2.50% Prime plus 1.00% or BA plus 2.50% Prime plus 2.25% or BA plus 3.75% (1) - - - - $15 million development facility $3.0 million secured non-revolving construction credit facility $907 thousand secured non-revolving construction credit facility $6.6 million secured non-revolving construction credit facility Less: unamortized finance charges Total net variable rate loans Net mortgages payable Less: mortgages payable for investment properties held for sale Less: mortgages payable – current portion Total mortgages payable – long-term portion December 31, 2017 $ 433,995 175 December 31, 2016 $ 452,231 357 264 (2,472) 431,962 415 (3,024) 449,979 2,710 4,592 2,768 712 2,825 4,075 2,622 467 1,950 (115) 12,617 444,579 - (33,700) $ 410,879 - (124) 9,865 459,844 (742) (45,005) $ 414,839 July 31, 2018 July 31, 2018 May 26, 2018 September 15, 2018 November 30, 2019 (1) Rates reduce to prime plus 1.25% or BA plus 2.75% once construction begins and construction draws under the facility are advanced. All mortgages are secured by charges against specific assets. The unamortized finance charges are made up of fees and costs incurred to obtain the mortgage financing less accumulated amortization. To fund development activities the Trust has two revolving development facilities with Canadian chartered banks available upon pledging of specific assets. One is a $20.0 million one-year revolving facility that bears interest at prime plus 0.75% or bankers’ acceptances (“BAs”) plus 2.25%, and the other is a $15.0 million two-year revolving facility that bears interest at prime plus 0.75% or BAs plus 2.00%. In July 2017, the $20.0 million development facility was renewed with the same terms and conditions until July 31, 2018. At December 31, 2017 there is $27.7 million available on these development facilities (December 31, 2016 - $28.1 million). Funding is secured by first mortgage charges on development properties. The Trust must maintain certain financial ratios to comply with the facilities. These covenants include loan-to-value, debt coverage, interest coverage and occupancy covenants, as well as unitholder equity tests. As of December 31, 2017 the Trust is in compliance with all financial covenants. The Trust’s $3.0 million secured non-revolving construction facility was renewed until May 26, 2018 with the same terms and conditions and the $907 thousand secured non-revolving construction facility was extended until September 15, 2018 with the same terms and conditions. In November 2017, the Trust obtained a $6.6 million secured non-revolving construction credit facility (at the Trust’s percentage ownership) relating to the acquisition of a development property. In the second quarter of 2015 as part of the acquisition of a development property, the Trust assumed a $4.0 million variable rate mortgage that had an interest rate swap in place (thereby fixing the variable interest rate). The interest rate swap matures on August 13, 2023 and is recorded at fair value. Page 57 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) In July 2015, the Trust entered into an interest rate hedge in the form of a bond forward, with a Canadian chartered bank, in anticipation of long-term financing on two development properties once completed in order to hedge the 10-year Government of Canada bond rate. The hedge was for a notional amount of $6.0 million and was for a twelve month period, with a settlement date of July 29, 2016. The all-in hedged rate was 1.715%. The bond forward did not qualify for hedge accounting under IFRS, and therefore, changes in the fair value of the bond forward (based on estimated future cash flows based on observable yield curves) were recognized in profit and loss in each reporting period. On July 29, 2016, the bond forward matured and $368 thousand was paid based on the applicable Government of Canada bond rate on the maturity date. 12. Bank Indebtedness The Trust pledged additional properties to increase its operating line of credit from $30.0 million to $44.0 million (December 31, 2016 - $30.0 million) in March 2017. The operating line of credit facility is with a Canadian chartered bank at the rate of prime plus 0.75% or BAs plus 2.00%, maturing July 31, 2018. The amount available to be drawn fluctuates depending on the specific assets pledged as security. Based on the assets pledged at December 31, 2017, the available limit was $41.2 million of which $29.5 million (December 31, 2016 – $12.6 million) was drawn and therefore the maximum amount available to be drawn on the facility was $11.0 million (December 31, 2016 – $16.4 million), net of letters of credit outstanding of $750 thousand (December 31, 2016 - $1.0 million). As security, at December 31, 2017, the Trust has provided a $50.0 million demand debenture secured by a first mortgage over forty-one properties. 13. Accounts Payable, Accrued Liabilities, Tenant Payables and Tenant Deposits Accounts payable, accrued liabilities, tenant payables and tenant deposits consist of the following: Accounts payable and accrued liabilities Distributions payable Excise tax payable Accrued interest payable Deferred tenant revenue and deposits Other Total accounts payable, accrued liabilities, tenant payables and tenant deposits 14. Notes Payable Notes payable consist of the following: December 31, 2017 December 31, 2016 $ 7,395 2,315 1,055 1,735 2,195 527 $ 15,222 $ 9,042 2,163 1,105 1,715 1,304 492 $ 15,821 Interest Rate December 31, 2017 December 31, 2016 Non-interest bearing notes: Entities owned (directly and indirectly), controlled or significantly influenced by Michael Zakuta, President, CEO and Trustee of the Trust (1) Unrelated parties and non-controlling interests Total notes payable (1) The notes are repayable on sale or refinancing of the related asset n/a n/a 15. Income Taxes $ 261 $ 261 1,163 $ 1,424 929 $ 1,190 The Trust qualifies as a real estate investment trust (“REIT”) for Canadian income tax purposes. The Trust expects to distribute all of its taxable income to unitholders and is entitled to deduct such distributions for income tax purposes. Accordingly, no provision for Canadian current income tax payable is required, except for amounts in its incorporated Canadian subsidiaries. Where an entity does not qualify as a REIT for Canadian income tax purposes, certain distributions will not be deductible by that entity in computing its income for Canadian tax purposes. As a result, the entity will be subject to tax at a rate substantially Page 58 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) equivalent to the general corporate income tax rate on distributed taxable income. Distributions paid in excess of taxable income will continue to be treated as a return of capital to unitholders. Undistributed taxable income is subject to the top marginal personal tax rate. The Trust consolidates certain wholly-owned incorporated entities that remain subject to tax. The current year tax disclosures and expense relate only to these entities. The components of deferred taxes on the consolidated statements of financial position are as follows: Deferred income tax assets Tax loss carry-forwards of subsidiaries Deferred income tax liabilities Income producing properties Net deferred income tax liability December 31, 2017 December 31, 2016 $ 520 $ 126 7,547 $ 7,027 7,217 $ 7,091 Distributions are declared monthly at the discretion of the Board of Trustees of the Trust, provided that the Board of Trustees intend to make distributions sufficient to reduce or eliminate the Trust’s liability for income tax under Part I of the Income Tax Act (Canada). Cash distributions declared Required cash distributions to ensure no Part I tax Total discretionary cash distributions 16. Revenues Contractual revenue Straight-line rent revenue Recovery revenue Lease buyout fees Other revenue Total property revenues 17. Operating Expenses Property taxes Recoverable expenses Non-recoverable expenses Total operating expenses 18. Administrative Expenses Salaries and benefits Professional services Office expenses Total administrative expenses 2017 $ 27,320 12,747 $ 14,573 2016 $ 25,278 14,879 $ 10,399 2017 $ 73,734 (239) 27,490 1,676 226 $ 102,887 2016 $ 72,293 412 26,923 316 271 $ 100,215 2017 $ 19,947 13,848 4,734 $ 38,529 2016 $ 19,757 12,922 4,864 $ 37,543 2017 $ 6,270 1,010 1,859 $ 9,139 2016 $ 6,154 953 1,700 $ 8,807 Total employee salaries and benefits paid by the Trust during the year were $12.1 million, of which $4.6 million is included in operating expenses, $6.2 million is included in administrative expenses and $1.3 million has been capitalized to income Page 59 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) producing properties (for the year ended December 31, 2016 - $10.4 million, of which $4.0 million is in operating expenses, $5.9 million is in administrative expenses and $0.5 million is in income producing properties). 19. Finance Costs Mortgage interest Debenture interest Mortgage bond interest Distributions paid to Class B exchangeable LP unitholders Operating line of credit interest Interest and bank charges Amortization of finance charges Loan defeasances and early mortgage discharge fees Mark to market adjustments Capitalization of interest Total finance costs 20. Unitholders’ Equity (a) Authorized 2017 $ 19,801 2,713 765 354 1,008 341 1,107 56 (151) (348) $ 25,646 2016 $ 20,833 3,735 799 343 466 281 946 462 (360) (126) $ 27,379 The Declaration of Trust authorizes the issuance of an unlimited number of units and special voting units. Special voting units are only issued in tandem with the issuance of securities exchangeable into units. Each special voting unit shall have no economic entitlement nor beneficial interest in the Trust including in the distributions or assets of the Trust, but shall entitle the holder of record thereof to a number of votes at any meeting of the unitholders equal to the number of units that may be obtained upon the exchange of the exchangeable security to which such special voting unit is attached. Special voting units may only be issued in connection with or in relation to, securities exchangeable into units, for the purpose of providing voting rights with respect to the Trust to the holders of such securities. The creation or issuance of special voting units is subject to the prior written consent of the Toronto Stock Exchange (“TSX”). In addition, preferred units may from time to time be created and issued in one or more classes (each of which may be made up of unlimited series) without requiring voting unitholder approval. Before the issuance of preferred units of a series, the Board will execute an amendment to the Declaration of Trust containing a description of such series, including the designations, rights, privileges, restrictions and conditions determined by the Board, and the class of preferred units of which such series is a part. The issuance of preferred units is also subject to the prior written consent of the TSX. (b) Issued and Outstanding (i) Class B Exchangeable LP Units The Class B exchangeable units are economically equivalent to units of the Trust and are exchangeable at any time into units of the Trust on a one-for-one basis. These units are puttable instruments where the Trust has a contractual obligation to issue Trust units to the exchangeable unitholders upon redemption. Holders of the exchangeable LP units are entitled to receive distributions per unit equal to distributions per unit provided to the unitholders of the Trust. Exchangeable LP units outstanding, beginning of the year Exchanges Fair value adjustment for the year Exchangeable LP units outstanding, end of the year December 31, 2017 December 31, 2016 Units (000s) 1,319 (53) - 1,266 Amount $ 6,595 (232) (970) $ 5,393 Units (000s) 1,319 - - 1,319 Amount $ 6,199 - 396 $ 6,595 Page 60 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) (ii) Special Voting Units At December 31, 2017, there were 1,266,000 (December 31, 2016 1,319,000) special voting units outstanding, issued in connection with 1,266,000 (December 31, 2016 - 1,319,000) Class B exchangeable LP units of a subsidiary of the Trust (see above). (iii) Units Units outstanding, beginning of the year Issuance of units: Public offering, net of issue costs Exchange of Class B exchangeable LP units Distribution reinvestment plan RSU plan Convertible debenture conversions (Note 10) - face value of convertible debentures - impact of fair value of convertible debentures Units outstanding, end of the year December 31, 2017 December 31, 2016 Trust Units (000s) 98,488 Amount $ 258,011 Trust Units (000s) 92,858 - 53 597 22 - 232 2,607 95 2,450 - 101,610 11,439 774 $ 273,158 5,003 - 290 4 333 - 98,488 Amount $ 233,224 21,674 - 1,358 18 1,554 183 $ 258,011 Unitholders have the right to redeem their units at the lesser of (i) 90% of the Market Price of the unit (Market Price is defined for this purpose in the Declaration of Trust as the weighted average trading price of the previous 10 trading days) and (ii) the most recent Closing Market Price (Closing Market Price is defined for this purpose in the Declaration of Trust as the weighted average trading price on the specified date) at the time of the redemption. The redemption price will be satisfied by cash, up to a limit of $50 thousand for all redemptions in a calendar month, or a note payable. For the year ended December 31, 2017 no unitholder had redeemed units. The Trust has a Distribution Reinvestment Plan (“DRIP”) to enable Canadian resident unitholders to acquire additional units of the Trust through the reinvestment of distributions on their units. Units issued in connection with the DRIP are issued directly from the treasury of the Trust at a price based on the weighted average daily closing price of the units on the TSX for the 5 trading days immediately preceding the relevant distribution date. Participants also receive “bonus units” in an amount equal to 3% of the distribution amount reinvested. On March 31, 2016, the Trust completed a public offering of 5.0 million units at a price of $4.60 per unit for gross proceeds of $23.0 million. Costs of the offering were $1.3 million. 21. Restricted Share Unit Plan and Deferred Unit Plan The Trust has a Restricted Share Unit Plan (“RSU Plan”) to enable the Trust to reward senior management and employees for their sustained contributions and to assist in attracting, retaining and motivating senior management and employees of the Trust. Restricted Share Units (“RSUs”) may be granted from time to time on a discretionary basis by the Administrator (the Corporate Governance and Compensation Committee of the Board of Trustees). Each RSU notionally represents a unit in the Trust. Each RSU credited to a participant shall receive a distribution of additional RSUs equal to the amount of distributions paid per unit by the Trust on its units (“Distribution RSUs”). The number of Distribution RSUs to be issued for each distribution payment will be equal to the aggregate amount of such distribution payable to a participant on his or her RSUs divided by the volume weighted average closing price of units for the five trading days immediately preceding such applicable day. The Distribution RSUs vest immediately and are redeemed by the participant in either cash or units, net of any applicable withholding taxes. The RSUs vest as follows: one-third of a given award on the first anniversary of the grant date, one-third on the second anniversary of the grant date and the balance on the third anniversary of the grant date. Upon vesting, a participant must redeem the RSUs for cash or units or a combination of both, net of any applicable withholding taxes. Currently, the maximum number of units that may be issued under the RSU Plan upon the redemption of RSUs and Distribution RSUs is 5,766,226. A total of 388,778 RSUs have been granted under the RSU Plan since inception. For the year ended December 31, 2017, compensation expense of $295 thousand (for the year ended December 31, 2016 - $67 thousand) has been recognized in respect of the RSUs. Page 61 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) Restricted share units outstanding, beginning of the year Granted Vested Forfeited Restricted share units outstanding, end of the year December 31, 2017 December 31, 2016 98,600 107,378 (33,609) (2,600) 169,769 12,732 97,400 (6,998) (4,534) 98,600 In 2015, the Trust implemented a Deferred Unit Plan (“DU Plan”) for non-employee trustees. Participants may be awarded deferred units (“DUs”) from time to time on a discretionary basis by the Corporate Governance and Compensation Committee. Each DU is economically equivalent to one unit, however, under no circumstances shall DUs be considered units nor entitle a participant to any rights as a unitholder, including, without limitation, voting rights or rights on liquidation. Participants may also elect to receive, in the form of DUs, up to 100% of their annual Board retainer, meeting fees and additional compensation paid by the Trust to a trustee in a calendar year for service on the Board or for chairing a committee of the Board. Each DU shall receive a distribution of additional DUs equal to the amount of distributions paid per unit by the Trust on its units. DUs vest immediately upon grant or issuance. The DUs shall be redeemable by the participant on or after the date on which the participant ceases to be a trustee. The DUs may be redeemed in whole or in part for units of the Trust issued from treasury or cash, as elected by the participant, net of any applicable withholding taxes. The maximum number of units that may be issued under the DU Plan upon the redemption of DUs is 750,000. A total of 67,947 DUs have been granted or issued under the DU Plan since inception and for the year ended December 31, 2017, compensation expense of $88 thousand was recorded (for the year ended December 31, 2016 - $121 thousand). Deferred units outstanding, beginning of the year Granted Trustee fees taken as deferred units Distributions paid on deferred units taken as additional deferred units Deferred units outstanding, end of the year 22. Distributions December 31, 2017 December 31, 2016 40,265 10,549 13,989 3,144 67,947 17,098 9,940 11,799 1,428 40,265 Distributions are declared monthly at the discretion of the Board of Trustees of the Trust. Distributions paid to unitholders Distribution reinvestment proceeds Cash distributions paid to unitholders 23. Additional Cash Flow Information (a) Changes in Non-Cash Working Capital Receivables Prepaid expenses and deposits Change in construction accruals removed from investing activities Accounts payable, accrued liabilities, tenant payables and tenant deposits Total cash from change in non-cash working capital 2017 $ 27,320 (2,607) $ 24,713 2016 $ 25,278 (1,358) $ 23,920 2017 2016 $ (973) $ (29) 136 2,567 709 (882) (601) $ 1,129 2,956 $ 2,754 Page 62 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) (b) Changes in Liabilities Arising from Financing Activities Current and long-term debt (1) – beginning of the year Gross proceeds from mortgage bonds and debentures Redemption/repayment of mortgage bonds and debentures Finance charges incurred Periodic mortgage principal repayments Mortgages repaid Gross mortgage proceeds Advances in notes payable Non-cash changes in long term debt: Convertible debenture conversions Mortgages assumed by the purchaser on sale of investment properties Net change in fair value of Class B exchangeable LP units Net change in fair value of bond forward Net change in fair value of convertible debentures Exchanges of Class B exchangeable LP units Amortization of finance charges Net change in fair value of interest rate swap Mark to market adjustments Current and long-term debt (1) - end of the year 2017 $ 542,549 9,000 (5,276) (647) (10,416) (31,975) 36,933 234 2016 $ 558,669 11,500 (15,100) (836) (10,185) (69,077) 67,106 15 (13,667) (1,935) (10,035) (970) - (339) (232) 1,107 (182) (151) $ 515,933 - 396 236 1,256 - 946 (82) (360) $ 542,549 (1) Long-term debt defined for this purpose as mortgage bonds, debentures, mortgages payable, notes payable and Class B exchangeable LP units. 24. Related Party Transactions The following are the related party transactions of the Trust. All related party transactions have been recorded at the exchange amount. (a) Bonds and Debentures The trustees own directly or indirectly the following mortgage bonds and debentures of the Trust (stated at face value): Edouard Babineau Earl Brewer Stephen Johnson Michael Zakuta Total December 31, 2017 $ 150 425 300 100 $ 975 December 31, 2016 $ 150 125 100 100 $ 475 Other key management personnel own $20 thousand in mortgage bonds of the Trust at December 31, 2017 (December 31, 2016 - $20 thousand). (b) Notes Payable to Related Parties The following non-interest bearing notes existed at the time of acquisition of properties in September 2000. Certain of the notes are owed to parties controlled directly or indirectly by Michael Zakuta. The notes are repayable on sale or refinancing of the related asset. Entities owned (directly or indirectly), controlled or significantly influenced by Michael Zakuta, President, Chief Executive Officer and trustee of the Trust December 31, 2017 December 31, 2016 $ 261 $ 261 Page 63 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) (c) Other Transactions with Related Parties (i) TC Land LP, an entity controlled by Michael Zakuta and Earl Brewer, leases nine parcels of land to the Trust at a total annual rent of $1.1 million. The land leases expire at various times from October 2043 to November 2047, subject to options to renew. All of these land leases have options to purchase, of which one is at a fixed price and the others are at fair market value. (ii) Earl Brewer and Michael Zakuta, directly or indirectly, hold interests in common with the Trust’s 25% interest in the Gateway Mall, Sussex, NB. A subsidiary of the Trust manages the mall. At December 31, 2017 there is nil owed by the Gateway Mall to some of the owners of the mall (December 31, 2016 - $120 thousand with the pro rata amount owed being $30 thousand). There is a $7 thousand accounts receivable balance owing to the Trust for property management fees (December 31, 2016 - $5 thousand). For the twelve months ended December 31, 2017, property management and leasing fees of $96 thousand were earned by a subsidiary of the Trust from this property (for the twelve months ended December 31, 2016 - $76 thousand). (iii) Edouard Babineau, Earl Brewer and Michael Zakuta, directly or indirectly, hold interests in common with the Trust’s 10% interest in Northwest Plaza Commercial Trust, the owner of Northwest Centre, Moncton, NB. A subsidiary of the Trust manages the centre. For the twelve months ended December 31, 2017, property management, development and leasing fees of $126 thousand were earned by a subsidiary of the Trust from this property (for the twelve months ended December 31, 2016 - $112 thousand). (iv) The Montreal office of Plaza Group Management Limited (a wholly-owned subsidiary of the Trust) shares office space with a company indirectly owned by Michael Zakuta in an office building owned by that related party. No basic minimum rent is payable for the space. (v) Edouard Babineau, Earl Brewer and Michael Zakuta, directly or indirectly, hold interests in common with the Trust’s 20% interest in Mountainview Plaza, Midland, ON and Park Street Plaza, Kenora, ON. A subsidiary of the Trust manages the malls. At December 31, 2017 there is $6.5 million owed by the properties to the Trust which is recorded in notes and advances receivable (December 31, 2016 - $5.1 million). As well, there is a $64 thousand accounts receivable balance owing to the Trust for property management and development fees (December 31, 2016 - $82 thousand). For the twelve months ended December 31, 2017, property management, leasing and development fees of $393 thousand were earned by a subsidiary of the Trust from these properties (for the twelve months ended December 31, 2016 - $609 thousand). (vi) Edouard Babineau, Earl Brewer, Denis Losier and Michael Zakuta, directly or indirectly, hold interests in common with the Trust’s 10% interest in Shediac West Plaza, Shediac, NB. A subsidiary of the Trust manages the property. At December 31, 2017 there is a $2 thousand accounts receivable balance owing to the Trust for property management fees (December 31, 2016 - $2 thousand). For the twelve months ended December 31, 2017, property management fees of $34 thousand were earned by a subsidiary of the Trust from these properties (for the twelve months ended December 31, 2016 - $34 thousand). (vii) Earl Brewer and Michael Zakuta, directly or indirectly, hold interests in common with the Trust’s 50% interest in two single-use properties located in Amherstview and Port Perry, ON. A subsidiary of the Trust manages the properties. For the twelve months ended December 31, 2017, property management fees of $5 thousand were earned by a subsidiary of the Trust from these properties (for the twelve months ended December 31, 2016 - $5 thousand). (viii) Edouard Babineau, Earl Brewer, James Petrie, Barbara Trenholm and Michael Zakuta, directly or indirectly, hold interests in common with the Trust’s 25% interest in KGH Plaza, Miramichi, NB, a single-use property located at 681 Mountain Road, Moncton, NB, a single-use property located at 201 Main Street, Sussex, NB and Robie Street Truro Plaza, Truro, NS. A subsidiary of the Trust manages the properties. At December 31, 2017 there is a $5 thousand accounts receivable balance owing to the Trust for property management fees (December 31, 2016 - $5). For the twelve months ended December 31, 2017, property management fees of $65 thousand were earned by a subsidiary of the Trust from these properties (for the twelve months ended December 31, 2016 - $73 thousand). (ix) Edouard Babineau, Earl Brewer and Michael Zakuta, directly or indirectly, hold interests in common with the Trust’s 50% interest in Scott Street Plaza, St. Catharines, ON, and five single-use properties located at St. Joseph’s Boulevard, Page 64 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) Orleans, ON, Dufferin and Wilson, Perth, ON, Ontario Street Port Hope, Port Hope, ON, Civic Centre Road, Petawawa, ON and 615 King Street, Gananoque, ON. A subsidiary of the Trust manages the properties. For the twelve months ended December 31, 2017, property management fees of $29 thousand were earned by a subsidiary of the Trust from these properties (for the twelve months ended December 31, 2016 - $29 thousand). (x) Effective December 1, 2017, Edouard Babineau, Earl Brewer, and Michael Zakuta, directly or indirectly, hold interests in common with the Trust’s 50% interest in the following eight properties: Boulevard Hebert Plaza and Victoria Street Plaza in Edmundston, NB; Grand Falls Shopping Center and Madawaska Road Plaza in Grand Falls, NB; Connell Road Plaza, Woodstock, NB; Welton Street Plaza, Sydney, NS; and Pleasant Street Plaza and Starrs Road Plaza in Yarmouth, NS. A subsidiary of the Trust manages the properties. At December 31, 2017 there is a $13 thousand accounts receivable balance owing to the Trust for property management fees (December 31, 2016 - n/a). For the twelve months ended December 31, 2017, property management fees of $13 thousand were earned by a subsidiary of the Trust from these properties (for the twelve months ended December 31, 2016 – n/a). (d) Remuneration of Key Management Personnel Key management personnel are those persons having authority and responsibility for planning, directing, and controlling the activities of the entity, directly or indirectly, including any trustee of the entity. The remuneration of trustees and other key management personnel of the Trust during the years ended December 31, 2017 and 2016 was as follows: Salaries and benefits Share-based payments – including DUs and RSUs Total key management personnel compensation 2017 $ 1,797 133 $ 1,930 2016 $ 1,741 121 $ 1,862 During the years ended December 31, 2017 and 2016 there were no amounts paid in post-employment benefits, long-term benefits or termination benefits. (e) Significant Subsidiaries Plaza Master Limited Partnership Lemarchant Property Holdings Inc. Plaza Retail Limited Partnership #1 Bedford Commons 2 Property Holdings Inc. Plaza Group Management Limited Stavanger Torbay Limited Partnership Spring Park Plaza Inc. Granville Street Properties Limited Partnership Wildan Properties Limited Partnership Exhibition Plaza Inc. Scott’s Real Estate Limited Partnership Scott’s Acquisition Inc. Riverside Emerald (Timmins) Limited Partnership Ownership Interest December 31, 2017 100% 100% 100% 100% 100% 90% 100% 90% 90% 90% 100% 100% 80% December 31, 2016 100% 100% 100% 100% 100% 90% 100% 90% 90% 90% 100% 100% 80% Page 65 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) 25. Interests in Joint Operations As described in Note 3(a), the consolidated financial statements include the Trust’s proportionate interest in its activities characterized as joint operations with other parties. The following amounts represent the total proportionate amounts consolidated for these joint operations: Cash Current assets Long term assets Current liabilities Long term liabilities Revenues Expenses Fair value gain (loss) December 31, 2017 December 31, 2016 $ 2,496 $ 1,142 $ 177,328 $ 15,528 $ 80,515 $ 18,424 $ (11,868) $ 1,365 $ 6,065 $ 1,478 $ 209,574 $ 9,032 $ 107,223 $ 20,193 $ (12,549) $ 124 Page 66 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) The chart below details the Trust’s ownership interest of direct and indirect investments and co-ownerships in real estate assets. Ownership Interest December 31, 2017 December 31, 2016 Accounting Method – Proportionate Consolidation Les Galeries Montmagny and Plaza Tache, QC Bureau en Gross, QC Plaza SP Magog, QC Carrefour des Seigneurs, QC Galeries des Cantons, QC Plaza BDP Deux Montagnes, QC Plaza Jean XXIII, QC Plaza BBRF, QC Plaza TS Magog, QC Plaza De L’Ouest, QC Plaza HDB, QC 4999 Queen Mary Road, QC 600 JP Perrault, QC 201 Chain Lake Drive Plaza, NS 209 Chain Lake Drive Plaza, NS Tacoma Centre, NS Tacoma Shoppers, NS Robie Street Truro Plaza, NS 210 Wyse Road, NS Pleasant Street Plaza, NS Starrs Road Plaza, NS Welton Street Plaza, NS Scott Street Plaza, ON St. Josephs Boulevard, ON Civic Centre Road, ON Ontario Street Port Hope, ON Dufferin and Wilson, ON 615 King Street, ON Park Street Plaza, ON Mountainview Plaza, ON Eastcourt, ON Timiskaming, ON KGH Plaza, NB 681 Mountain Road, NB 201 Main Street - Sussex, NB Northumberland Plaza, NB Boulevard Hebert Plaza, NB Victoria Street Plaza, NB Connell Road Plaza, NB Madawaska Road Plaza, NB Grand Falls Shopping Center, NB The Village Shopping Centre, NL 2006 50% 50% 50% 25% 50% 37.5% 50% 50% 50% 50% 33% 25% 50% 50% 50% 50% 50% 25% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 20% 20% 50% 50% 25% 25% 25% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 25% 50% 37.5% 50% 50% 50% 50% 33% 25% 50% 50% 50% 50% 50% 25% 50% 100% 100% 100% 50% 50% 50% 50% 50% 50% 20% 20% 50% 50% 25% 25% 25% 50% 100% 100% 100% 100% 100% 50% 26. Contingencies, Commitments, Guarantees and Indemnities, Litigation and Provisions (a) Contingencies The $20.0 million development line of credit has $1.5 million available for use in the form of letters-of-credit. At December 31, 2017, there were no letters-of-credit issued and outstanding (December 31, 2016 – nil). The $15.0 million development line of credit has $500 thousand available for use in the form of letters-of-credit. At December 31, 2016, there were no letters-of-credit issued and outstanding (December 31, 2016 – nil). Page 67 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) The $44.0 million operating line of credit has $2.0 million available for use in the form of letters-of-credit. At December 31, 2017, letters-of-credit in the amount of $750 thousand were issued and outstanding (December 31, 2016 - $1.0 million). The $3.0 million secured non-revolving construction credit facility has $100 thousand available for use in the form of letters-of- credit, at the Trust’s 20% ownership percentage. At December 31, 2017, there were no letters-of-credit issued and outstanding (December 31, 2016 – nil). (b) Commitments The Trust’s estimated commitments at December 31, 2017 in respect of certain projects under development and other long-term obligations are as follows: Year 2 2019 Year 1 2018 Year 3 2020 Mortgages – periodic payments Mortgages – due at maturity Development lines of credit Construction loans Bank indebtedness Mortgage bonds payable Debentures (1) Operating land leases (2) Development activities Total contractual obligations (1) Stated at face value. (2) Operating land leases expire on dates ranging from 2018 to 2084 (including automatic renewal periods) with non-automatic renewal Year 4 2021 $ 10,483 $ 9,853 $ 9,158 $ 7,661 28,646 - - - - 5,500 3,337 - $ 113,236 $ 73,423 $ 82,893 $ 45,144 After 5 Years $ 26,848 177,923 - - - - - 127,929 - $ 46,548 $332,700 Face Value Total $ 71,377 362,618 7,302 5,430 29,538 15,000 49,500 144,417 8,762 $ 693,944 Year 5 2022 $ 7,374 26,847 - - - 3,000 6,000 3,327 - 64,419 - - - 6,000 - 3,316 - 12,435 7,302 3,480 29,538 - 38,000 3,236 8,762 52,348 - 1,950 - 6,000 - 3,272 - options ranging from 10 to 66 years. (c) Guarantees and Indemnities The Trust continues to guarantee certain debt assumed by purchasers in connection with past dispositions of properties. These guarantees will remain until the debt is modified, refinanced or extinguished. These commitments are subject to indemnity agreements. At December 31, 2017 a $5.3 million commitment (December 31, 2016 - $5.5 million) relating to the mortgages on three assets in which the Trust sold a 75% interest in January 2009 is subject to such guarantees by the Trust. These mortgages have a weighted average remaining term of 5.1 years (December 31, 2016 - 6.1 years). As well, at December 31, 2017 a $10.0 million commitment (December 31, 2016 – n/a) relating to the mortgages on eight assets in which the Trust sold a 50% interest in November 2017 is subject to such guarantees by the Trust. These mortgages have a weighted average remaining term of 6.0 years (December 31, 2016 – n/a). The Trust is contingently liable for certain obligations of its co-venturers. The guarantee provided to the mortgagee of a free- standing property located in Granby, QC is subject to a cross-guarantee provided by the other co-owners for the full amount of the loan. At December 31, 2017 the Trust’s total exposure on the cross-guarantee is $540 thousand (December 31, 2016 - $554 thousand). As well, the Trust has guarantees in excess of its ownership percentages for six strip plazas and three free-standing properties. The excess guarantees amount to $18.7 million (December 31, 2016 - $18.4 million on nine properties). (d) Litigation The Trust believes that any liability that may arise from current or pending litigation would not have a significant adverse effect on these financial statements. (e) Provisions A provision is recognized if, as a result of a past event, the Trust has a present legal or constructive obligation that can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. The Trust has no provisions recorded at December 31, 2017 (December 31, 2016 – nil). Page 68 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) 27. Financial Instruments and Risk Management In the normal course of its business, the Trust is exposed to a number of risks that can affect its operating performance. The Trust’s Board of Trustees monitors the Trust’s risk management practices through periodic reviews. These risks and the actions taken to manage them are as follows: (a) Interest Rate Risk The Trust adopts a policy of holding floating rate debt generally only for properties under development and for those properties pledged to support the operating line of credit. All other debt is converted to fixed rate debt, when market conditions are favorable, as soon as practical after an asset attains income producing status. The Trust has classified its fixed rate financial assets and liabilities as held-to-maturity. Therefore a change in interest rates at the reporting date would not affect profit or loss on these. The Trust minimizes its exposure to fixed rate interest risk by staggering the maturities in order to avoid excessive amounts of debt maturing in any one year. If market conditions warrant, the Trust may attempt to renegotiate its existing debt to take advantage of lower interest rates. The Trust minimizes its exposure to short term interest rate risk by obtaining longer term financing as much as possible (10 years or longer). The Trust matches as closely as possible the debt term on a particular asset with its average lease term so that any interest rate increases could be offset by increases in rental rates. The Trust had entered into interest rate swap contracts with a Canadian chartered bank in connection with mortgages obtained in 2010, in order to convert the mortgages from variable rates to fixed rates. The swaps mature on July 31, 2020. As the swaps relate to debt of an equity-accounted investee, the interest rate swap contracts have been recorded at fair value in investments with changes in fair value reflected in share of profit of associates. The fair value of these contracts results in a liability, for the Trust’s share, of $118 thousand at December 31, 2017 (December 31, 2016 – $257 thousand). There is a risk that interest rates will fluctuate during the term of the mortgages. The Trust intends to hold the mortgages to maturity and therefore would not realize the fair value fluctuations. The fair value is calculated as the present value of the estimated future cash flows based on observable yield curves. As part of a property acquisition in 2015, the Trust assumed a variable rate mortgage that had an interest rate swap in place (thereby fixing the variable interest rate). The interest rate swap matures on August 13, 2023. The fair value is calculated as the present value of the estimated future cash flows based on observable yield curves. In July 2015, the Trust entered into an interest rate hedge in the form of a bond forward, with a Canadian chartered bank, in anticipation of long-term financing on two development properties once completed in order to hedge the 10-year Government of Canada bond rate. The hedge was for a notional amount of $6.0 million and was for a twelve month period, with a settlement date of July 29, 2016. The all-in hedged rate was 1.715%. The bond forward did not qualify for hedge accounting under IFRS, and therefore, changes in the fair value of the bond forward (based on estimated future cash flows based on observable yield curves) were recognized in profit and loss in each reporting period. On July 29, 2016, the bond forward matured and $368 thousand was paid based on the applicable Government of Canada bond rate on the maturity date. Trade receivables and payables (other than tenant deposits) are interest free and have settlement dates within one year. An increase of 100 basis points in interest rates at December 31, 2017 if applied to all outstanding floating rate instruments would increase interest expense and decrease pre-tax profit by $423 thousand (for the year ended December 31, 2016 – $225 thousand). (b) Lease Rollover and Occupancy Risk The Trust is exposed to the risk of not being able to replace tenants as leases expire or development space becomes available. The hypothetical impact to net property operating income of a change in occupancy of 1% would be approximately $600 thousand to $1.0 million per annum. The Trust’s principal management of occupancy risk involves the skewing of tenancies towards national tenants, the signing of longer term leases and significant preleasing of development space. As well, the Trust attempts to stagger the lease expiry profile so that the Trust is not faced with a disproportionate amount of square footage of leases expiring in any one year. The Trust further mitigates this risk by maintaining a diversified portfolio mix both by retail Page 69 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) asset type and geographic location and maintaining a well-staffed and highly skilled leasing department to deal with all leasing issues. (c) Credit Risk Credit risk arises from the possibility that tenants may experience financial difficulty and will be unable to fulfill their lease commitments. The Trust mitigates the risk of credit loss by ensuring that its tenant mix is diversified and weighted to national and regional tenants, which comprise 94.3% of the in-place tenant base (December 31, 2016 – 94.7%). As well, the Trust limits loans granted under lease arrangements to credit-worthy national tenants. The Trust minimizes its credit risk on investment bonds by having them consist generally of Government of Canada bonds. The Trust generally provides financial guarantees and advances only to wholly-owned subsidiaries, non-consolidated investments and joint arrangement partners during the development periods, subject to reciprocal indemnities, by utilizing established development lines of credit. Repayment of the advances occurs upon placing permanent financing on the related property or through cash flows generated by the related property upon completion of the development. Where lenders of first mortgages on joint arrangement properties require financial guarantees from the Trust, reciprocal indemnities are generally obtained from the Trust’s joint arrangement partners. Guarantees are generally limited to the lower of 75% of the asset cost or 65% of the fair market value. See Note 26(c) for details of guarantees. The Trust limits cash transactions to high quality financial institutions to minimize its credit risk from cash and cash equivalents. The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: Carrying Amount Held-to-maturity investments Tenant loans, receivables, and notes and advances receivable Cash Total December 31, 2017 December 31, 2016 $ 99 15,435 5,182 $ 20,716 $ 99 15,330 6,250 $ 21,679 The Trust’s most significant customer, a national retailer, accounts for $183 thousand of tenant loans at December 31, 2017 (December 31, 2016- $232 thousand). Shoppers Drug Mart represents 25.7% of monthly base rents in place at December 31, 2017, while franchisees of KFC represent 8.5% of monthly base rents in place. The top 10 tenants collectively represent approximately 56.9% of monthly base rents in place. Deposits refundable to tenants may be withheld by the Trust in part or in whole if receivables due from the tenant are not settled or in case of other breaches of contract. (d) Liquidity and Debt Market Risk Prudent liquidity risk management implies maintaining sufficient cash and an adequate amount of committed credit facilities to run the business and pay obligations as they come due. The Trust manages its cash resources and committed credit facilities based on financial forecasts and anticipated cash flows. In terms of debt, there is always the risk that lenders may tighten their lending standards, which could make it challenging for the Trust to obtain financing on favourable terms or any terms at all. If this were to occur, it could adversely impact the Trust. The Trust staggers the maturities of its long-term debt to avoid excessive amounts of debt maturing in any one year. As well, the Trust obtains longer term financing as much as possible (10 years or longer) in order to help mitigate debt market risk. Several mortgages and the development and operating lines contain material adverse change clauses which entitle the lenders to demand partial or full loan repayment when there are material adverse changes in the Trust’s financial position. The Trust has determined that circumstances that could trigger action by a lender under these clauses are unlikely. Page 70 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements. Carrying amount Contractual cash flows Year 1 Year 2 Year 3 Year 4 Year 5 More than 5 years $ 15,222 $ 15,222 $ 15,222 $ - $ - $ - $ - $ - $ 49,773 $ 1,424 $ 53,798 $ 1,424 $ 40,591 $ 1,424 $ 603 $ - $ 603 $ - $ - $ 5,951 $ 6,050 $ - $ - $ - $ 29,538 $ 30,262 $ 30,262 $ - $ - $ - $ - $ - $ 14,764 $ 16,963 $ 765 $ 6,615 $ 6,315 $ 165 $ 3,103 $ - Current liabilities (1) Debentures payable Notes payable Bank indebtedness Mortgage bonds payable Mortgages payable $554,854 (1) Balance includes accounts payable, accrued liabilities, tenant payables and tenant deposits. $ 52,605 $444,579 $ 79,029 $90,238 $47,723 $44,463 $240,796 It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts. (e) Fair Value Generally, trading values for the Trust’s financial instruments are not available. In determining estimates of the fair values of the financial instruments, the Trust must make assumptions regarding current market rates, considering the term of the instrument and its risk. Current market rates are generally selected from a range of potentially acceptable rates and accordingly, other effective rates and fair values are possible. The rates used in determining the fair value of fixed rate mortgages are corresponding term Government of Canada bonds plus credit spreads of 1.60% to 2.30% (December 31, 2016 – 1.95% to 2.65%). The rate used to determine the fair value of mortgage bonds was 5.5% (December 31, 2016 – 4.50% to 5.00%). The rate used to determine the fair value of non-convertible debentures was 5.00% (December 31, 2016 – 5.00%). The majority of the Trust’s convertible debentures are publicly traded. The fair value of the Class B exchangeable LP units is based on the trading price for the Trust’s units. The following chart shows the estimated fair value of the Trust’s financial instruments. Cash Receivables Notes and advances receivable Held-to-maturity investments Tenant loans Total Financial Assets Book Value December 31, 2017 Fair Value December 31, 2017 $ 6,250 $ 6,250 4,480 9,999 99 851 $ 21,679 4,480 9,999 99 851 $ 21,679 Book Value December 31, 2016 $ 5,182 3,542 10,578 99 1,315 $ 20,716 Fair Value December 31, 2016 $ 5,182 3,542 10,578 99 1,315 $ 20,716 Bank indebtedness Accounts payable, accrued liabilities, tenant payables and tenant deposits Total net fixed rate mortgage loans Total net variable rate mortgage loans or credit facilities Convertible debentures Non-convertible debentures Mortgage bonds payable Class B exchangeable LP units Notes payable Total Financial Liabilities $ 29,538 $ 29,538 $ 12,562 $ 12,562 15,222 431,962 12,617 39,890 9,883 14,764 5,393 1,424 $ 560,693 15,222 448,785 12,617 39,890 9,883 14,645 5,393 1,424 $ 577,397 15,821 449,979 9,865 56,172 4,000 14,748 6,595 1,190 $ 570,932 15,821 468,978 9,865 56,172 4,000 14,766 6,595 1,190 $ 589,949 Page 71 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) The fair value of the Trust’s financial assets and liabilities that represent net working capital, including cash, receivables, notes and advances receivable, income taxes receivable, bank indebtedness, accounts payable, accrued liabilities, tenant payables and tenant deposits and notes payable approximate their recorded values due to their short-term nature. In accordance with IFRS, the Trust is required to classify its financial instruments carried at fair value in the financial statements using a fair value hierarchy that exhibits the significance of the inputs used in making the measurements. Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 - Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). Level 3 - Inputs for the asset or liability that are not based on observable market data. The following table provides information on financial assets and liabilities measured at fair value. Investment properties Investment properties held for sale Class B exchangeable LP units Series B, C and D convertible debentures Series VII convertible debentures December 31, 2017 December 31, 2016 Level 1 $ - - $ - Level 2 $ - - $ - Level 3 $ 959,618 - $ 959,618 Level 1 $ - - $ - Level 2 $ - - $ - Level 3 $ 959,889 92 $ 959,981 $ 5,393 $ - $ - $ 6,595 $ - $ - 34,336 - $ 39,729 - 5,554 $ 5,554 - - $ - 50,589 - $ 57,184 - 5,583 $ 5,583 - - $ - The fair value of investment properties is based on a combination of external appraisals and internal valuations based on a capitalization matrix provided by independent appraisers (see Note 4 for a more detailed description of the Trust’s valuation approach). The significant unobservable inputs include normalized net operating income, which is supported by the terms of existing leases in place and current market rents to renew or lease up vacant or expiring space, adjusted for estimated or normalized vacancy rates based on market conditions and factoring in expected maintenance costs. 28. Capital Management The primary objective of the Trust’s capital management is to ensure that it maintains adequate capital resources in order to support its business and maximize unitholder value. The Trust manages its capital structure with the primary goal of minimizing risk and ensuring the stability of cash flow from properties. Other goals include maintaining debt service and interest coverage ratios in compliance with bank and debenture covenants. The Trust has defined its capital to include bank indebtedness, mortgages payable, debentures payable, mortgage bonds payable, notes payable and unitholders’ equity. Bank operating and development lines require maintenance of at least $150 million of unitholders’ equity; maximum leverage of 70% including convertible debentures and 65% excluding convertible debentures; maintenance of debt coverage ratios in excess of 1.5 times with the debt coverage ratios calculated exclusive of interest charged on subordinate debt and convertible debentures. The bank operating line also requires on pledged assets: 90% occupancy; 65% loan to value; and interest coverage constraints of 1.60. In addition, under a development line, the Trust must maintain a ratio of mortgages plus bank indebtedness to the book value of its gross assets less fair value adjustments of not more than 70%. The Trust has a $3.0 million construction credit facility which requires maintenance of at least $200 million of unitholders’ equity, maximum leverage of 65% including convertible debentures and debt coverage ratios in excess of 1.3 times. The Trust is in compliance with all financial debt covenants at December 31, 2017. There were no changes to the Trust’s approach to capital management for the year ended December 31, 2017. Page 72 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) The calculation of the total capital is summarized as follows: Total net fixed rate mortgage loans Total net variable rate mortgage loans Mortgage bonds payable Debentures payable Bank indebtedness Notes payable Unitholders’ equity Total 29. Subsequent Events Financings December 31, 2017 $ 431,962 12,617 14,764 49,773 29,538 1,424 540,078 463,095 $ 1,003,173 December 31, 2016 $ 449,979 9,865 14,748 60,172 12,562 1,190 548,516 451,743 $ 1,000,259 In January 2018, the Trust closed on a short-term bridge financing related to a property acquisition in the amount of $3.0 million at 6.0% for 6 months. Subsequent to year end, the Trust closed on a loan in the amount of $5.6 million for 5 years at an interest-only rate of 5.0%. On February 21, 2018, the Trust completed a public offering of $45 million aggregate principal amount of 5.10% convertible unsecured subordinated debentures due March 31, 2023. The debentures are convertible at the option of the holder, into units of the Trust at $5.65 per unit. In addition, the underwriters were granted an over-allotment option, exercisable in whole or in part up to 30 days after closing, to purchase up to an additional $2.25 million debentures. The option was exercised on closing of the offering on February 21, 2018. Proceeds from the offering will be used to redeem the $34 million 5.75% Series D convertible unsecured subordinated debentures, which had a par call date of December 31, 2017, with the remainder of the proceeds to repay amounts outstanding on the Trust’s operating line of credit, to fund future and on-going development and redevelopment activities and for general trust purposes. The Trust gave notice to the Series D debenture holders on February 21, 2018 and redemption of those debentures is set to close on March 27, 2018. Investment properties In January 2018, the Trust acquired a property for redevelopment in Brockville, ON for $14.0 million. The Trust satisfied the purchase price through $4.9 million in cash and a new $9.1 million borrowing facility at a cost of prime plus 1.25%. Development/construction expenses will be financed through the expansion of this facility. Subsequent to year end the Trust purchased lands in Oshawa, ON for $2.5 million. Subsequent to year end conditions were waived by the purchaser to buy land and building in Perth, ON and Ottawa, ON from the Trust for net proceeds of $0.6 million. The sale by the Trust is set to close on February 28, 2018. Investments In January 2018, the Trust increased its interest in the Northwest Centre, Moncton, NB and Shediac West Plaza, Shediac, NB, from 10% to 50%, with a Canadian pension fund buying the other 50% interest on a co-ownership basis. Both properties were previously co-owned with the Trust through two retail syndications. The Trust’s incremental gross investment is approximately $17.0 million, and its incremental net investment is approximately $5.6 million. The previous syndications for these two properties, whose interests were bought out as a result of these transactions, included certain related parties of the Trust – namely; Earl Brewer, Michael Zakuta, Edouard Babineau and Denis Losier. A Special Committee of Independent Trustees of the Trust was formed to review and approve the related party transactions. Page 73 of 74 Plaza Retail REIT Notes to the Consolidated Financial Statements December 31, 2017 (tabular amounts in thousands of Canadian dollars, except per unit amounts and as otherwise indicated) Distributions and Distribution Reinvestment Plan The Trust paid a cash distribution of $0.0225 per unit for a total of $1.8 million on January 15, 2018 and 113 thousand units were issued at a purchase price of $4.17 per unit for a total of $469 thousand under the Distribution Reinvestment Plan. The Trust paid a cash distribution of $0.0233 per unit for a total of $1.9 million on February 15, 2018 and 125 thousand units were issued at a purchase price of $3.91 per unit for a total of $489 thousand under the Distribution Reinvestment Plan. Page 74 of 74 Plaza Retail REIT 98 Main Street Fredericton, NB E3A 9N6 506-451-1826 506-451-1802 Email: info@plaza.ca www.plaza.ca
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