2013 aNNUaL REPORT For the year ended December 31, 2013 Bear Creek apartments, Dallas, TX 1 TaBLE OF CONTENTs Letter to Our Unitholders | 01 Financial Report | 08 Management Discussion and analysis | 09 Consolidated Financial statements | 47 Management and Directors | 80 Corporate Information | 81 Oakchase, Dallas, TX 2 TO OUR UNIThOLDERs: In the words of the ineffable Charles Dickens, “It was the best of times, it was the worst of times…” 2013 truly was somewhat of a ‘Tale of Two Cities’ for Pure Multi as we saw solid growth of 89% in our overall portfolio size with 1,706 high quality apartments added in primary growth markets and yet we witnessed the entire Canadian REIT sector come under significant downward selling pressure that adversely impacted Pure Multi’s unit trading values. In Q2, the Us Federal Reserve announcement about the potential tapering of their stimulus program, known as quantitative easing, sent a small shockwave through the Canadian REIT sector. The announcement resulted in a reduction of approximately 15% in Canadian REIT market values as fears over rising interest rates and its potential impact on the U.s. economy created uncertainty in the marketplace. as the dust settled over the last quarter of 2013, we believe that the marketplace over-reacted to the fear of rising interest rates and the end to quantitative easing. The U.s. economy continues to show positive signs of economic growth and today we are still able to obtain very compelling interest rates of below 3.50% on 5 year mortgages for new acquisitions – equal to the pricing range we were obtaining prior to the Fed’s announcement. The potential for growing our portfolio with a very conservative level of debt financing at attractive interest rates remains very compelling. During the year Pure Multi raised Us$58 million in two public offerings and acquired $153.3 million of resort-style apartment communities consisting of 1,706 apartments. Our portfolio now has 3,614 apartments and over 3.1 million square feet of rentable space situated on over 200 acres of land. 2013 GROwTh & aCTIvITy august 7, 2013 Us$23 Million Debenture Offering • 2 public offerings • 7 property acquisitions May 8, 2014 Us$35 Million Bought Deal March 15, 2013 Us$17.5 Million +156 units Fairways at Prestonwood June 6, 2013 Us$45.4 Million +560 units vistas at hackberry Creek June 21, 2013 Us$23 Million +216 units Boulevard at Deer Park July 19, 2013 Us$16.5 Million +264 units windsong august 30, 2013 Us$45.3 Million + 468 units Livingston & Fountainwood October 1, 2013 Us$5.6 Million + 42 units san Brisas apartments 1 In-place Rents and Occupancy Trends January 2013 to December 2013 98.1% 2013 average leased occupancy $1.070 $1.060 $1.050 $1.040 $1.030 $1.020 $1.010 $1.000 97.7% 98.1% 98.6% 99.0% 99.3% 99.1% 99.6% 98.9% 98.0% 97.8% 96.7% 96.9% $1.010 $1.013 $1.015 $1.019 $1.019 $1.023 $1.041 $1.045 $1.043 $1.044 $1.049 $1.052 100.0% 98.0% 96.0% 94.0% 92.0% 90.0% 88.0% 86.0% 84.0% 82.0% 80.0% Avg rent per sq.ft. Avg leased occupancy Financial highlights ($000’s) except per unit amounts Revenue Property NOI Income for the year Funds from Operations FFO Per Class a Unit Distributions per unit FFO payout Ratio Year ended December 31, 2013 From the date of formation on May 8, 2012 to December 31, 2012 $31,583 $16,357 $14,202 $8,437 $0.370 $0.365 99.2% $6,071 $3,096 $1,700 $1,731 $0.118 $0.171 150.2% As at December 31, 2013 As at December 31, 2012 Total assets Mortgages Payable Total Debt to Gross Book value $351,007 $196,333 64.0% weighted average Interest Rate on mortgages payable 4.12% $194,636 $111,665 57.4% 4.23% Bear Creek apartments, Euless, TX Resort style swimming Pools at san Brisas Outdoor Lounge area at Livingston however, what continues to separate Pure Multi from its competitors is the quality of our apartment communities, which we believe are unparalleled in the Canadian REIT universe. with a weighted average year of construction of 1993, our properties can be classified as newer construction, class “a” assets. Our communities offer luxurious amenities such as resort-style swimming pools, outdoor kitchens and lounge areas, tennis courts, sand volley-ball courts, gated dog parks, clubhouses with 24-hour fitness centres, private function & meeting facilities, business centres, movie theatres and ample lush green space. Our apartment units offer high-end finishings such as high ceilings with crown mouldings, large windows, individual central air conditioning, private patios & sun decks, in-suite laundry, built-in work centres and high quality appliances, as well as attached and detached garages. Our same property revenue growth, year over year, was an impressive 5.3%. with this healthy rental rate growth combined with long term, fixed mortgage interest rates, a very low REIT cost structure and improving net operating income margins, we believe that Pure Multi will continue to position itself as the leader in its asset class. Clubhouse at Prairie Creek Fitness Facilities at valley Ranch 3 Our Strategy Pure Multi’s core strategy is to invest in high quality multi-family apartment communities in primary markets that produce a steady, sustainable yield while off ering investors signifi cant annual organic growth. The stable and growing income produced by these high quality properties stems from the very strong demand in the multi-family real estate sector. This demand is driven by employment and population growth. EMPLOYMENT GROWTH RANKINGS (2011-2016) PHOENIX #7 DALLAS #4 HOUSTON #2 STRATEGIC SUNBELT FOCUS • U.S. GDP forecasted to increase 2.4% vs. U.S. sunbelt GDP forecasted at 4.7% for 2014 • Houston, Dallas and Phoenix ranked in the top 10 in the U.S. for employment growth Two of our current core markets, Dallas-Fort Worth and Houston, are consistently in the top 5 performing metropolitan areas for both employment and population growth. Employment gains in Houston are coming from growth and expansion in the energy, health and distribution industries, as well as construction and related manufacturing and professional services. Dallas- Fort Worth has benefi tted from increasing concentrations of technology, corporate headquarters, distribution networks, health and related manufacturing and constructions industries. Our third core market, Phoenix, also continues to experience job and population growth. Current unemployment rates remain lower than the national average and Phoenix is expected to continue to experience higher than average population growth throughout 2014. Throughout 2013 and into 2014, new supply in our targeted markets will not be able to keep up with the current demand for rental units. With construction costs increasing 40% over the last 5 years on a national level, it is unclear whether projected rental rate growth can support the cost of construction. We believe that strong returns can be achieved by continuing to target high quality properties in these markets and other similar markets that are displaying strong economic fundamentals. The U.S. multi-family market is large and features an abundant supply of acquisition opportunities at attractive price levels, permitting us to execute our growth strategy with discipline. Fairways at Prestonwood, Dallas, TX 4 Our Residents Our residents are as varied as our properties and range from single professionals, and young families to retirees. Our larger overall average unit size allows us to attract a varied group of residents that enables us to diversify our income stream. however, over the last few years one of the key drivers of the strong demand for U.s. multi-family apartments has been the Echo Boom Generation or “Gen y”. Just as their parents (the Baby Boomers) drove dramatic long term growth in certain areas of the economy over the past 25 years, this demographic, aged 20-34, is estimated to be between 72-80 million strong in the United states and they have a very high (almost 70%) propensity to rent. This generation tends to prefer to live in close proximity to their jobs, shops and entertainment as well as public transportation. Lifestyle amenities continue to be a priority for many of this generation and luxury amenities like those found at our properties serve as additional draws to attract this group of renters. Echo Boomers generally choose to rent rather than own during their career-building years as renting affords a great low-maintenance standard of living with the flexibility to transfer from one city to another with ease to pursue their career paths. home ownership, on the other hand, requires a significant down payment, a static career position, strong credit scores and an interest in settling down and raising a family. This generation may be the first generation that experienced a very negative sentiment towards home ownership as many saw their parents struggle with or lose their homes due to the sub-prime fallout. Gen y, in conjunction with a recovering Us economy, will continue to drive the profitability, rental growth rates and values in the apartment sector for many years to come. san Brisas apartments, Phoenix, aZ 5 Our Apartment Communities U.S. multi‐family real estate has generated strong investor returns over the last 20 years driven by: • Very diverse and thus stable income streams • Steady and predictable operating costs • Manageable capital expenditure requirements • Favorable debt fi nancing terms These drivers are evident across Pure Multi’s portfolio. Pure Multi’s current portfolio has a leased occupancy rate of 97% and has minimal capex requirements. Our portfolio produces an attractive sustainable yield and allows us to maintain a conservative leverage with a targeted debt to gross book value ratio of 55% - 65%. Pure Multi is unique in that it also provides investors with a truly aligned management structure. Our structure does not permit asset management fees of any type. We have established a fee structure that is success driven and management is remunerated in units instead of cash compensation. Building the Portfolio Leased occupancy as at December 31, 2013: 96.9% • Target loan to gross book value range: 55% to 65% (to a maximum of 70%) • • 2013 average leased occupancy: 98.1% • Number of units: 3,614 • Number of acres: 200 • Debt to gross book value: 64.0% • Loan to portfolio value: 59.7% • Weighted average interest rate: 4.12% • Weighted average mortgage term to • • • Rentable square feet: 3.15 million maturity: 8.0 years Portfolio employs only property level debt Total value of acquisitions: $324.3 million • Total property debt acquired: $200.1 million 6 Looking Ahead Pure Multi ‘s core strategy focuses on acquiring high-quality apartment communities in desirable neighbourhoods, located within strong growth cities of the U.S. sunbelt. These properties support solid organic growth rates and value-add potential within our portfolio. We will focus on acquiring multi-family apartment communities in clusters located in desirable neighbourhoods with high barriers to entry for new construction, thus creating additional and ongoing upside pressure on rental rates and occupancy. With interest rates continuing to remain at historic lows, we believe that this further enhances our position to deliver strong returns to our investors. It is worth noting, however, that as concerns over the potential for rising interest rates continue to proliferate, we believe that if the Federal Reserve’s response to a strengthening U.S. economy is to raise interest rates, our increased borrowing costs will be off set by greater tenant demand from increased job and population growth, thus resulting in higher rents. The key for Pure Multi in a rising interest rate environment will be to continue to act defensively through securing long-term mortgages at fi xed interest rates. In the near future, Pure Multi intends to expand into new property markets in the southeast and southwest regions of the United States that exhibit strong employment growth rates and ongoing strong occupancy rates, and complement the initial portfolio with the potential to create additional value. In the long term, Pure Multi’s growth strategy is to invest in quality multi-family real estate properties across all major strong-growth markets in the United States. Our portfolio has been strategically assembled and consists of very high quality class A properties in upper income sub-markets. Along with our low cost structure (among the lowest of our REIT peers), conservative balance sheet and aligned management interests, we strongly believe that Pure Multi is well positioned for future growth. So on behalf of the management team at Pure Multi-Family REIT LP, I’d like to thank all of our team and our directors for their hard work and loyalty and our unitholders for their continued support. Sincerely, Steve Evans, CEO, Director and Unitholder Fairways at Prestonwood, Dallas, TX 7 2013 FINaNCIaL REPORT Management’s Discussion and analysis Consolidated Financial statements For the year ended December 31, 2013 valley Ranch, Irving, TX 8 PURE MULTI-FaMILy REIT LP Management’s Discussion and analysis For the year ended December 31, 2013 Dated: March 12, 2014 san Brisas apartments, Phoenix. aZ 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 PURE MULTI-FaMILy REIT LP Consolidated Financial statements year ended December 31, 2013 Expressed in United States dollars The Boulevard at Deer Park, houston, TX 47 KPMG LLP Chartered Accountants PO Box 10426 777 Dunsmuir Street Vancouver BC V7Y 1K3 Canada Telephone (604) 691-3000 (604) 691-3031 Fax www.kpmg.ca Internet INDEPENDENT AUDITORS' REPORT To the Directors of Pure Multi-Family REIT (GP) Inc. We have audited the accompanying consolidated financial statements of Pure Multi-Family REIT LP, which comprise the consolidated statement of financial position as at December 31, 2013 and 2012, the consolidated statements of income and comprehensive income, partners’ capital and cash flows for the year ended December 31, 2013 and for the period from formation on May 8, 2012 to December 31, 2012 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 the 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 audit. We conducted our audit 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 of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP. 48 Pure Multi-Family REIT (GP) Inc. Page 2 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Pure Multi-Family REIT LP as at December 31, 2013 and 2012, and its financial performance and its cash flows for the year ended December 31, 2013 and for the period from May 8, 2012 to December 31, 2012 in accordance with International Financial Reporting Standards. Chartered Accountants March 11, 2014 Vancouver, Canada 49 50 The accompanying notes are an integral part of these consolidated financial statements 51 The accompanying notes are an integral part of these consolidated financial statements 52 53 The accompanying notes are an integral part of these consolidated financial statements 54 55 56 57 58 59 60 61 62 63 64 65 a) 16 66 8 67 68 69 70 71 72 73 13 74 75 76 77 78 79 Management stephen Evans Director and Chief Executive Officer samantha adams vice President scott shillington, C.a. Chief Financial Officer andrew Greig Director of Investor Relations Directors Robert king Lead Independent Director James Redekop Independent Director Douglas scott, C.a. Independent Director John O’Neill Independent Director James speakman Independent Director Corporate Legal Counsel 80 Corporate Information Head Office 910-925 west Georgia street vancouver, BC Canada v6C 3L2 604-681-5959 T: E: info@puremultifamily.com www.puremultifamily.com Property Management Office suite 100 - 6529 Preston Road Plano, Texas Usa 75024 Transfer Agent Computershare Trust Company of Canada 100 University avenue, 9th Floor Toronto, ON M5J 2y1 T: TF: F: TFF: 514-982-7555 1-800-564-6253 1-866-249-7775 1-888-453-0330 Auditors kPMG LLP Chartered accountants PO Box 10426, 777 Dunsmuir street vancouver, BC v7y 1k3 604-691-3000 T: F: 604-691-3031 www.kpmg.ca Corporate Counsel Clark wilson LLP 800-885 west Georgia street vancouver, BC v6C 3h1 604-891-7767 T: 604-687-6314 F: Investor Relations andrew Greig, Director of Investor Relations T: TF: E: www.puremultifamily.com 604-681-5959 1-888-681-5959 agreig@puremultifamily.com Stock Exchange Listing TsX venture OTCQX Listing Symbol TsX-v: RUF.U, RUF.DB.U OTCQX: PMULF Annual Meeting of Shareholders 11:00 am Pacific Daylight Time wednesday, May 21, 2014 The sutton Place hotel Chateau Belair 845 Burrard street vancouver, BC v6C 3L2 windscape apartments, Dallas, TX windscape, Grand Prairie TX 81 P U R E M U LT I - Fa M I Ly R E I T L P | 9 1 0 - 9 2 5 w E s T G E O R G I a | va N C O U v E R | B C | v 6 C 3 L 2 | C a N a D a 6 0 4 - 6 8 1 - 5 9 5 9 | w w w. P U R E M U LT I Fa M I Ly. C O M | I N F O @ P U R E M U LT I Fa M I Ly. C O M 82