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
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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.
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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
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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
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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.
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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.
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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.
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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.
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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