Pure Multi Family REIT LP Annual Report 2015

Plain-text annual report

Park At West Ave, San Antonio, TX 2015 ANNUAL REPORT For the year ended December 31, 2015 TABLE OF CONTENTS Letter to Our Unitholders | 01 2015 Financial Report | 10 Management Discussion and Analysis | 11 Consolidated Financial Statements | 48 Management and Directors | Corporate Information | 81 80 * All amounts disclosed in this report are expressed in U.S. dollars Livingston, Dallas, TX TO OUR UNITHOLDERS, “Strong performance equals strong results” summarizes 2015 for Pure Multi-Family REIT LP (“Pure Multi-Family”). Throughout the year we increased our revenues, improved and increased our NOI and increased the quality and quantity of our apartment portfolio. We achieved these successes through diligent, pro-active management resulting in very strong, same-property rental rate growth, operating expense rationalization and strategic asset management wherein we executed our “value-add/asset recycling program”, which renewed our portfolio age significantly. From an acquisition perspective, we continued to demonstrate our disciplined, targeted and accretive acquisition strategy acquiring three new, Class A apartment communities in two of our target markets, Dallas and San Antonio. We successfully completed these acquisitions using a combination of new equity issuances and the net proceeds from the disposition of three of our oldest assets. With these proceeds we acquired $173 million of apartment communities, consisting of 1,037 individual apartment units. The Park at West Ave and Brackenridge Apartments were two of the three properties acquired in 2015 and both communities are located in San Antonio and represent our initial acquisitions in this market. The properties were built in 2014 and each offers a luxury amenities package to the residents. Amalfi at Stonebriar was the third property we acquired and the community is very well located in the heart of the incredible job growth currently taking place in the Plano and Frisco sub-markets of Dallas. Amalfi was built in 2014 and offers our residents a luxury, urban-lifestyle by providing easy access to work, shops and entertainment. With the addition of the three new properties, we increased our total number of units from 4,308 at the end of 2014 to 4,437 at the end of 2015. Pure View, San Antonio, TX 1 Recycling Capital into New Acquisitions As previously discussed, a key component to our acquisition strategy is to recycle capital by profitably selling our older (by age of construction) assets and redeploying the net proceeds into new construction, Class A properties. In 2015, we executed the disposition of three of our oldest properties that were more capital intensive and had lower operating margins than our newly constructed properties: Sunset Point Apartments, Oakchase Apartments and Windsong Apartments. We acquired Sunset Point in September 2012 for $24.6 million and it was originally acquired as two separate but neighbouring properties. We combined the property operations on acquisition in order to achieve almost immediate operational efficiencies and executed our value- add strategy that we have implemented at other properties in our portfolio. We sold the property for $27.95 million representing an annualized gain on equity of over 22%. The net proceeds from this sale were combined with other equity to acquire Park at West Ave, located in San Antonio. A similar value-add approach was followed at Oakchase Apartments. This property was acquired in July 2012 for $13.6 million and successfully sold in September 2015 for $17.85 million. The sale represented an annualized gain on equity of approximately 27%. The net cash proceeds were used to acquire Brackenridge Apartments. In December 2015, Pure Multi-Family announced the sale of Windsong Apartments. Acquired in July 2013 for a purchase price of $16.5 million, we profitably sold Windsong for $22.0 million, representing an annualized gain on equity of approximately 26%. With the net proceeds from the sale of Windsong, together with the proceeds from the equity raise in December, we completed the acquisition of two Class A properties in San Antonio subsequent to year end. Pure Estates at TPC and Pure View at TPC were acquired on March 1, 2016. Pure Estates at TPC was constructed in 2007 and consists of 344 luxury residential units averaging 1,135 square feet. The 34.8 acre Class A community is located in the San Antonio sub-market of Cibolo Canyons and features a luxurious 13,000 square foot clubhouse, a 3,500 square foot fitness centre, an onsite European Grand Spa, townhome buildings with attached garages, a resort style swimming pool and barbeque areas with grills for outdoor entertaining. Pure View at TPC was constructed in 2014 and consists of 416 brand-new luxury residential units averaging 943 square feet. The 19.4 acre Class A community is also located in the San Antonio sub-market of Cibolo Canyons and sits on top of the highest hilltop in San Antonio, giving expansive views of downtown San Antonio and the neighbouring TPC golf courses. Pure Multi-Family’s portfolio now consists of 5,197 apartments (4,308 apartments in 2014) and over 4.8 million square feet of rentable space situated on over 298 acres of land (236 acres of land in 2014). DISPOSITION OF SUNSET POINT $27.95M JANUARY Livingston, Dallas, TX DISPOSITION OF OAKCHASE $17.85M SEPTEMBER 2 SEPTEMBER ACQUISITION OF BRACKENRIDGE $51.0M EQUITY OFFERING DECEMBER $39.2M Our resulTs Prairie Creek Villas, Dallas, TX PURE RESULTS Pure Multi-Family achieved strong financial results in 2015: • • • • 5.7% same property total rental revenue growth (2015 vs 2014) Total rental revenues increased 21.5% over 2014 - $58.9 million in 2015 compared to $48.5 million in 2014 2015 net operating income margin of 55.5%, an increase from 53.9% in 2014 7.2% same property net operating income (“NOI”) growth (2015 vs. 2014) We believe that not only is it important to highlight Pure Multi-Family’s strong 2015 operating results, but also that Pure Multi-Family is unique in that we provide investors with a truly aligned management structure. As a reminder to our unitholders, Pure Multi-Family does not permit external asset management or transaction fees to be paid to management. We have established a structure, through the issuance of our Class B units that is success driven. Management is not remunerated in any other manner until we reach a $300 million market capitalization, at which point Pure Multi-Family will internalize asset management at no cost to the REIT. As management of Pure Multi-Family we remain committed to fully aligning our interests with those of our unitholders. MAY ACQUISITION OF PARK WEST $54.25M EQUITY OFFERING MAY $35.2M AUGUST ACQUISITION OF AMALFI STONEBRIAR $67.5M DISPOSITION OF WINDSONG $22.0M DECEMBER Fairways at Prestonwood, Dallas, TX 3 OUR LOCATIONS - LEADERS IN POPULATION PURE STRATEGY Pure Multi-Family’s core strategy remains unchanged since IPO, focusing on Class A, high quality multi-family apartment communities in primary markets that produce a steady, sustainable yield while offering investors significant annual organic growth. It has been our experience that newer construction, Class A properties have stronger operating efficiencies, lower maintenance and capital expenses and benefit from the ability to generate stronger rental rate growth as the residents generally have higher disposable incomes. The stable and growing income produced by these high quality properties stems from the strong demand in the multi-family real estate sector. This demand continues to be driven by employment and population growth, lifestyle choices and limited new supply in our target markets. We believe our operational focus on increasing revenues and maintaining strong NOI margins will continue to drive shareholder value. PURE APARTMENTS By way of a summary, 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; Favourable debt financing terms. These drivers are evident across Pure Multi-Family’s portfolio. The current portfolio has a leased occupancy rate of 97.3% which remains in-line with our 2014 occupancy rate of 98.2% and has minimal capex requirements. It is important to note that our occupancy takes into account our 2015 acquisitions that were in the final stages of lease up during this period. Our portfolio produces an attractive, sustainable yield and allows us to maintain conservative leverage with a targeted debt to gross book value ratio of 55% - 60%. However, we believe that, as in previous years, what continues to differentiate Pure Multi-Family from its competitors is the quality of our apartment communities. With a weighted average year of construction of 2003 at year end, compared to 1996 at year-end 2014, our properties can be classified as newer construction. As highlighted above, and as further supported by our results, we continue to believe that that there is a clear advantage to acquiring and managing a Class A portfolio of assets. Our communities offer luxurious amenities such as resort-style swimming pools, outdoor kitchens and lounge areas, tennis courts, sand volleyball courts, gated dog parks, clubhouses with 24-hour fitness centres, private function and meeting facilities, business centres, movie theatres and ample lush green space. The units offer high-end condominium style finishes as well as attached and detached garages. Our current core markets, Dallas-Fort Worth, Houston, Phoenix and San Antontio, have been consistently ranked in the top performing metropolitan areas in the U.S. for both employment and population growth. The concern regarding the Houston market is still present. Pure Multi- Family currently owns two properties in the greater Houston area, which represent approximately 13% of our total revenues and units. While we have not experienced any weakness that can be attributed to the layoffs in the oil and gas sectors of the economy, we will continue to monitor the market closely. Houston is a more diversified economy than in previous downturns and our two properties are in sub-markets with employers that have benefitted from lower oil prices including agriculture, manufacturing and 4 Pure Estates, San Antonio, TX AND EMPLOYMENT GROWTH transportation industries as well as the significant expansion of the Port of Houston. We do expect that moderate rental rate growth will continue at our properties and the general consensus is that job growth should continue in our Houston sub-markets in 2016, albeit at slower levels than in 2015. is also continuing to Phoenix experience job and population growth. Current unemployment rates remain lower than the national average and Phoenix is expected to achieve higher than average population growth throughout 2016. Businesses continue to be drawn to Phoenix not only as a hub in the southwestern region of the United States, but also due to its close proximity to Los Angeles and Las Vegas, low taxes and affordable operating costs. its In 2015, Pure Multi-Family expanded fourth metroplex. San into Antonio has a strong, diversified economy anchored by five key industries: healthcare, biotechnology, tourism and government/military, energy. Located at the crossroads of several major interstate highways and railroads serving both coasts, as well as the NAFTA corridor San Antonio is considered to be an international trade centre, as more than half of the trade flow between Mexico and the United States travels through San Antonio. Considered to be one of the five least expensive metros in the U.S. to do business, the City of San Antonio has been actively encouraging startups and corporate relocations to the metro area. As a result the city continues to attract Millenials and young families drawn to the lower cost of living, and easy lifestyle that the city affords. Both Park at West and Brackenridge were in the final stages of lease up on acquisition and we anticipate that as we move into 2016 both properties will stabilize as we implement our tenant, management and leasing standards. in the north-Dallas The majority of our portfolio is located within the Dallas-Forth Worth specifically metroplex, and more in sub-markets which continue to experience very strong job and population growth. DFW has one of the most diversified economies the United States. DFW has benefited from increasing concentrations of technology firms, corporate headquarters, distribution and warehouses, health centres, related manufacturing businesses and construction industry to is expected operations. DFW continue experiencing strong job and population growth which will further contribute to above average performance at our multi-family properties in 2016. infrastructure DALLAS HOUSTON SAN ANTONIO PHOENIX We believe that strong returns can be achieved by continuing to target high quality properties in these markets and other leading markets that are strong economic also displaying fundamentals. The U.S. multi-family features an large and market is abundant acquisition supply of opportunities at attractive price levels, permitting Pure Multi-Family to execute our growth strategy with discipline. Pure lIVING It is our goal at Pure Multi-Family to offer the best experience for our residents, who are as varied as our properties. Amalfi, Frisco, TX 5 LOOKING FORWARD Our residents range from single professionals to young families and retirees; our larger overall average unit size allows us to attract a varied group of residents that enables us to diversify our income stream. But across our entire portfolio of properties, the common thread is quality of service, the quality of our amenities and units, and the pride our on-site teams take in creating a happy, safe and vibrant apartment community. One of the key drivers of the strong demand for U.S. multi-family apartments continues to be the Millenials. Just as their parents (the Baby Boomers) drove dramatic long term growth in certain areas of the economy, this demographic is estimated to be between 72-80 million strong in the United States and they have a very high propensity to rent. 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. Millenials 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. This generation tends to prefer to live in close proximity to their jobs, shops and entertainment, as well as public transportation. As in past years, negative sentiment continues to cloud home ownership and when combined with the lifestyle choices of the Millenials, most analysts anticipate that this generation will continue to put upward pressure on rental rates which will in turn to drive profitability and values in the apartment sector for several years to come. lOOKING FOrWArD In summary, we continue to build a Class A apartment portfolio spread across the strongest growth markets in the U.S. sunbelt, and we have repeatedly demonstrated that we can rework our portfolio to enhance its value by recycling our equity through profitable sales of our oldest assets. 6 Pure Estates, San Antonio, TX San Brisas, Phoenix, AZ Management’s calculated net asset value is US$6.24 and trending upwards with our most recent acquisition announcement located in San Antonio, Texas. We are among the leaders in the Canadian REIT sector, with operational results that drive shareholder value including: • • • Very robust same-store NOI growth of 7.2% year over year Strong and consistent occupancy levels A trend of decreasing our payout ratio on a run rate basis Despite these strong results, delivered quarter after quarter, and our net asset value of US$6.24, there has been, and in fact still continues to be, a valuation disconnect in terms of our current trading range which offers investors an exciting growth prospect in what is generally considered to be the most conservative sector of commercial real estate. Our same property revenue growth, year over year, was a very robust 5.7%. With our solid rental rate growth, combined with long term, fixed mortgage interest rates, our very low cost structure and improving net operating income margins, we believe that Pure Multi-Family will continue to position itself as a leader in our asset class. Our goals remain unchanged - build the best Class A portfolio across key markets in the U.S. sunbelt, while enhancing shareholder value through our unique structure, hands-on management, capital recycling and strategic, disciplined acquisitions. We are looking forward to an exciting and busy 2016. We would like to sincerely thank all of our unitholders for their continued support and our Board of Directors and the Pure Multi- Family team for their continued commitment to our goals. Yours truly, Steve Evans, CEO and Unitholder 7 PORTFOLIO SUMMARY Deer Park, Houston, TX IN-PLACE RENTS AND OCCUPANCY TRENDS JANUARY 2015 TO DECEMBER 2015 98.2% 98.5% 98.5% 98.6% 98.5% 99.2% 99.5% 99.0% 98.4% 97.1% 97.2% 97.5% 97.0% 96.6% 97.4% 97.6% 97.4% 97.4% 97.3% 97.1% 97.2% 96.1% 95.9% 96.2% $1.169 $1.180 $1.187 $1.230 $1.207 $1.258 $1.261 $1.265 $1.131 $1.143 $1.148 $1.153 January February March April May June July August September October November December Avg rent per sq.ft. Avg physical occupancy Avg leased occupancy 2015 AVERAGE LEASED OCCUPANCY 98.3% 8 Preserve at Arbor hills, Dallas, TX SAME PROPERTY NOI GROWTH 2015 7.2% Bear Creek, Dallas, Texas Park at West, San Antonio, TX TOTAL REVENUE GROWTH 2015 21.5% FINANCIAL HIGHLIGHTS ($000’s except per unit amounts) Year ended December 31, 2015 Year ended December 31, 2014 Revenue Property NOI NOI margin Income for the year Funds from operations FFO per class A unit Distributions per unit FFO payout ratio $58,876 $32,696 55.5% $51,179 $18,363 $0.439 $0.375 86.1% $48,475 $26,111 53.9% $41,949 $14,399 $0.463 $0.375 82.8% As at December 31, 2015 As at December 31, 2014 Total assets Mortgages payable $691,153 $354,202 Total debt to gross book value 54.6% Weighted average interest rate on mortgages payable 3.72% $492,791 $256,735 57.9% 3.86% PORTFOLIO HIGHLIGHTS* • Number of units: 4,437 • Number of acres: 243 • • • Rentable square feet: 4.1 million Portfolio employs only property level debt Target loan to gross book value range: 50% to 60% (to a maximum of 70%) • Loan to portfolio value: 58.2% * As at December 31, 2015 Walker Commons, League City, TX 9 2015 FINANCIAL REPORT Management’s Discussion and Analysis Consolidated Financial Statements For the year ended December 31, 2015 10 Brackenridge at Midtown, San Antonio, TX PURE MULTI-FAMILY REIT LP Management’s Discussion and Analysis For the year ended December 31, 2015 Dated: March 10, 2016 Pure View, San Antonio, TX 11 Pure Multi-Family REIT LP MD&A – December 31, 2015 SECTION I FORWARD-LOOKING DISCLAIMER The following management’s discussion and analysis (“MD&A”) of the results of operations and the financial condition of Pure Multi-Family REIT LP (“Pure Multi”) for the year ended December 31, 2015 should be read in conjunction with Pure Multi’s audited consolidated financial statements for the year ended December 31, 2015, available on SEDAR at www.sedar.com and on Pure Multi’s website at www.puremultifamily.com. Historical results, including trends which might appear, should not be taken as indicative of future operations or results. Certain information in this MD&A contains forward-looking information within the meaning of applicable securities laws (also known as forward-looking statements) including, among others, statements made or implied under the headings “Outlook”, “Results of Operations”, “Financial Condition”, “Liquidity and Capital Resources” and “Risks and Uncertainties” relating to Pure Multi’s objectives, strategies to achieve those objectives, beliefs, plans, estimates, projections and intentions; and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Forward-looking statements generally can be identified by words such as “outlook”, “believe”, “expect”, “may”, “anticipate”, “should”, “intend”, “estimates” and similar expressions. In particular, certain statements in this MD&A discuss Pure Multi’s anticipated future events. These statements include, but are not limited to: (i) Pure Multi’s growth strategy, including the accretive acquisition of properties and the anticipated extent of the accretion of any acquisitions, which could be impacted by demand for properties and the effect that demand has on acquisition capitalization rates and changes in the cost of capital; (ii) maintaining occupancy levels and rental revenue, which could be impacted by changes in demand for Pure Multi’s properties, financial circumstances of tenants, including tenant defaults, the effects of general economic conditions and supply of competitors’ properties in proximity to Pure Multi’s properties; (iii) overall indebtedness levels, which could be impacted by the level of acquisition activity Pure Multi is able to (iv) (v) achieve, fair value of its properties and future financing opportunities; tax status of Pure US Apartments REIT Inc., which can be impacted by regulatory changes enacted by governmental authorities; anticipated distributions and payout ratios, which could be impacted by capital expenditures, results of operations and capital resource allocation decisions; (vi) obtaining and maintaining adequate insurance for Pure Multi’s properties; and (vii) anticipated interest rates and exchange rates. Forward-looking statements are provided for the purpose of presenting information about management’s current expectations and plans relating to the future and readers are cautioned that such statements may not be appropriate for other purposes. Forward-looking statements involve significant risks and uncertainties and should not be read as guarantees of future performance or results. Those risks and uncertainties include, among other things, risks related to: unit prices; liquidity; credit risk and tenant concentration; interest rate and other debt related risk; tax risk; ability to access capital markets; lease rollover risk; competition for real property investments; environmental matters; changes in legislation; and indebtedness of Pure Multi. Management believes that the expectations reflected in forward-looking statements are based upon reasonable assumptions and information currently available, which include, management’s current expectations, estimates and assumptions that: proposed acquisitions will be completed on the terms and basis agreed to by Pure Multi, property acquisition and disposition prospects and opportunities will be consistent with Pure Multi’s experience over the past 12 months, the multi-family residential real estate market in the “Sunbelt” region in the United States will remain strong, the global economic environment will remain stable, interest rates will remain at current levels, and Pure Multi’s business strategy, plans, outlook, projections, targets and operating costs will be consistent with Pure Multi’s 12 Pure Multi-Family REIT LP MD&A – December 31, 2015 experience over the past 12 months, Pure Multi will be able to maintain occupancy at current levels, tenants will not default on lease terms, governmental regulations and taxation will not change to adversely affect Pure Multi’s business and financial results, and Pure Multi will be able to obtain adequate insurance and financing; however, management can give no assurance that actual results will be consistent with these forward-looking statements. Readers are cautioned that the foregoing list of factors that may affect future results is not exhaustive. When relying on forward-looking statements to make decisions with respect to Pure Multi, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. These forward-looking statements are made as of March 10, 2016 and Pure Multi assumes no obligation to update or revise them to reflect new events or circumstances, except as required by law. BASIS OF PRESENTATION Unless otherwise noted, all financial information has been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The financial information included in this MD&A for the year ended December 31, 2015 includes material information up to March 10, 2016. Except as otherwise stated in this MD&A, all dollar amounts in this MD&A, including per unit amounts, are stated in U.S. dollars. All references herein to “consolidated” refer to amounts as reported under IFRS. All references to “Pure Multi’s interest” refer to a non-IFRS measure presented on a proportionally consolidated basis and assumes Pure Multi prorates and accrues property tax liability and expense based on the time period of ownership throughout a given reporting year. For a reconciliation of Pure Multi’s results of operations, see “Results of Operations Reconciliation”. Certain figures in this MD&A are non-IFRS measures, including, Pure Multi’s interest, Funds from Operations or FFO, Adjusted Funds from Operations or AFFO, Distributable Income or DI, same property net rental income, same property revenue, same property average monthly rent per occupied unit, rental revenue - same property, rental revenue - properties acquired/sold, net rental income - same property and net rental income - properties acquired/sold. For an IFRS to non-IFRS reconciliation, see “Results of Operations Reconciliation”, “Distributable Income” and “Liquidity and Capital Resources – Funds from Operations and Adjusted Funds from Operations”. OVERVIEW About Pure Multi Pure Multi is a Canadian-based publically traded vehicle which offers investors exclusive exposure to U.S. multi- family real estate assets. It offers investors the ability to participate in monthly distributions, with potential for capital appreciation, stemming from ownership of quality apartment assets located in core cities within the Southwestern and Southeastern portions of the U.S., including states such as Texas, Arizona, Georgia and Nevada (collectively, the “Sunbelt”). 13Pure Multi-Family REIT LP MD&A – December 31, 2015 Pure Multi is a limited partnership formed under the Limited Partnership Act (Ontario) to indirectly invest in multi- family real estate properties in the United States. Pure Multi was established by Pure Multi-Family Management Limited Partnership (the “Managing GP”), its managing general partner, and Pure Multi-Family REIT (GP) Inc. (the “Governing GP”), its governing general partner, pursuant to the terms of a Limited Partnership Agreement (the “LP Agreement”), as may be amended from time to time. Pure Multi’s head office and address for service is located at 910 – 925 West Georgia Street, Vancouver, British Columbia, V6C 3L2. A copy of the LP Agreement can be obtained from the Chief Financial Officer of Pure Multi or on SEDAR at www.sedar.com. Pure Multi, through Pure US Apartments REIT Inc. (the “US REIT”), was established for, among other things, the purposes of acquiring, owning and operating multi-family real estate properties in the United States. Operational and Financial Highlights (all metrics stated at Pure Multi’s interest (1)) During the year ended December 31, 2015, Pure Multi acquired three investment properties, each completing construction in 2014, for a combined purchase price of $112,100,000 and profitably sold three of its oldest assets, each being constructed during the mid-1980’s, for combined proceeds of $67,800,000. This resulted in Pure Multi renewing its portfolio average year of construction to 2003, at December 31, 2015, compared to 1996, at December 31, 2014. During the fourth quarter of 2015, Pure Multi increased total revenues by 18.2% compared to the same period in 2014, and realized an increase of 6.6% in same property net rental income growth(2), an increase of 5.7% in same property revenue growth(3) and an increase of 5.7% in same property average monthly rent per occupied unit(4), compared to the same period in 2014. During the year ended December 31, 2015, Pure Multi increased total revenues by 21.5% compared to the same period in 2014, and realized an increase of 7.2% in same property net rental income growth(2), an increase of 5.7% in same property revenue growth(3) and an increase of 5.8% in same property average monthly rent per occupied unit (4), compared to the same period in 2014. Pure Multi earned an average monthly rent per occupied unit of $1,131, or $1.257 per square foot, on its entire portfolio during the three months ended December 31, 2015 (three months ended December 31, 2014 - $989 and $1.117, respectively), representing an increase of 14.4% per occupied unit over the same period in the prior year. For the year ended December 31, 2015, Pure Multi earned average monthly rent per occupied unit of $1,078, or $1.194 per square foot, on its entire portfolio (year ended December 31, 2014 - $958 and $1.090, respectively), representing an increase of 12.5% per occupied over the same period in the prior year. At December 31, 2015, Pure Multi had mortgages payable of $354.2 million, with a weighted average interest rate of 3.72% and a weighted average term remaining until maturity of 9.4 years (December 31, 2014 - $256.7 million, 3.86% and 6.8 years, respectively). Pure Multi had a loan to gross book value of 54.6% as at December 31, 2015 (December 31, 2014 – 57.9%), well below the maximum indebtedness level of 70% stipulated in the LP Agreement. See “Capital Structure”. Notes: (1) Pure Multi’s interest (non-IFRS measure); (1) represents the proportionate share of all assets, liabilities, revenues and expenses of all its portfolio investments, and (2) prorates and accrues property tax liability and expense on all portfolio investments, based on the time period of ownership throughout the given reporting year. Same property net rental income growth (non-IFRS measure) represents property net rental income for properties owned during the entire comparative periods. Same property revenue growth (non-IFRS measure) represents total property revenues, including other income, for properties owned during the entire comparative periods. Same property average monthly rent per occupied unit (non-IFRS measure) represents average monthly rental income for occupied units, net of concessions and discounts, for properties owned during the entire comparative periods. (2) (3) (4) 14 Pure Multi-Family REIT LP MD&A – December 31, 2015 Pure Multi’s interest Number of properties Number of residential units Physical Occupancy Leased Occupancy Investment properties (000’s) Mortgages payable (000’s) Weighted average effective interest rate on mortgages payable Loan to gross book value As at December 31, 2015 As at December 31, 2014 14 4,308 97.6% 98.2% $ 468,518 $ 256,735 3.86% 57.9% 14 4,437 96.2% 97.3% $ 613,682 $ 354,202 3.72% 54.6% Pure Multi’s interest ($000s, except per unit basis) (all per unit amounts based on basic weighted average number of units outstanding) Rental revenue - same property(1) Rental revenue - properties acquired/sold(2) Total rental revenue - Pure Multi’s interest(3) Net rental income - same property(4) Net rental income - properties acquired/sold(5) Total net rental income - Pure Multi’s interest(3) Net rental income margin Basic weighted average number of units outstanding Class A units Class B units Distributions per Class A unit per Class B unit Distributable income(3) per Class A unit per Class B unit Payout ratio Funds from operations(3) per Class A unit per Class B unit Payout ratio Adjusted funds from operations(3) per Class A unit per Class B unit Payout ratio $ For the year ended December 31, 2015 35,124 23,752 58,876 19,408 13,288 32,696 55.5% $ For the year ended December 31, 2014 33,235 15,240 48,475 18,105 8,007 26,112 53.9% $ For the three months ended December 31, 2015 12,093 4,454 16,547 6,827 2,283 9,110 55.1% $ For the three months ended December 31, 2014 11,440 2,556 13,996 6,402 1,258 7,660 54.7% 39,761,071 200,000 15,810 0.38 3.95 18,652 0.45 4.66 84.8% 18,364 0.44 4.59 86.1% 17,363 0.42 4.34 91.1% 29,512,727 200,000 11,919 0.38 2.98 14,467 0.47 3.62 82.4% 14,399 0.46 3.60 82.8% 13,280 0.43 3.32 89.8% 43,429,172 200,000 4,362 0.10 1.09 4,959 0.11 1.24 88.0% 4,885 0.11 1.22 89.3% 4,607 0.10 1.15 94.7% 34,834,824 200,000 3,438 0.09 0.86 4,413 0.12 1.10 77.9% 4,345 0.12 1.09 79.1% 4,080 0.11 1.02 84.3% Notes: (1) Rental revenue - same property (non-IFRS measure) represents total property revenues, including other income, for properties owned during the entire comparative periods. (2) Rental revenue - properties acquired/sold (non-IFRS measure) represents total property revenues, including other income, for (3) properties which were acquired or sold, therefore not owned during the entire comparative periods. For an IFRS to non-IFRS reconciliation, see “Results of Operations Reconciliation”, “Distributable Income”, and “Liquidity and Capital Resources – Funds from Operations and Adjusted Funds from Operations”. (4) Net rental income - same property (non-IFRS measure) represents property net rental income for properties owned during the entire comparative periods. (5) Net rental income - properties acquired/sold (non-IFRS measure) represents property net rental income for properties which were acquired or sold, therefore not owned during the entire comparative periods. 15 Pure Multi-Family REIT LP MD&A – December 31, 2015 Portfolio Summary As at December 31, 2015, Pure Multi’s portfolio consists of 14 investment properties, with an aggregate of 4,437 residential units, located within four metropolitan areas: (i) Dallas - Fort Worth (“DFW”), Texas, (ii) Houston, Texas, (iii) San Antonio, Texas and (iv) Phoenix, Arizona. The weighted average physical occupancy rate was 96.2% and weighted average leased occupancy rate was 97.3% for all properties owned as at December 31, 2015 (December 31, 2014 – 97.6% and 98.2%, respectively). Typical residential property leases have terms between one to 12 months. Property Name Location Amalfi at Stonebriar DFW, TX Preserve at Arbor Hills DFW, TX Fairways at Prestonwood DFW, TX Vistas at Hackberry Creek DFW, TX Fountainwood Apartments DFW, TX Livingston Apartments DFW, TX Stoneleigh at Valley Ranch DFW, TX Prairie Creek Villas DFW, TX Stoneleigh at Bear Creek DFW, TX DFW, TX Walker Commons Houston, TX The Boulevard at Deer Park Houston, TX Houston, TX Brackenridge at Midtown San Antonio, TX Park at West Avenue San Antonio, TX Year of Acquisition Year of Construction Units As at December 31, 2015 Fair Market Value ($000s) Debt to Fair Market Value Cap Rate Physical Occupancy Leased Occupancy 2015 2014 2013 2013 2013 2013 2012 2012 2012 2014 2013 2015 2015 2014 395 $ 67,529 66.6% 5.00% 94.9% 95.4% 1998 1991 1984 1986 1998 1999 1997 2004 330 156 560 288 180 210 464 436 46,136 53.3% 5.50% 98.5% 99.1% 20,800 41.7% 5.50% 96.2% 97.4% 53,460 55.2% 6.00% 97.7% 98.6% 26,100 48.8% 6.00% 97.2% 99.3% 30,614 50.7% 5.50% 96.7% 97.8% 28,068 48.7% 5.50% 97.1% 97.6% 75,277 61.6% 5.65% 97.0% 98.7% 56,895 56.4% 5.50% 98.4% 99.5% 1999 3,019 404,879 56.4% 5.54% 97.2% 98.3% 2008 2000 352 216 47,954 59.4% 6.00% 98.3% 99.1% 25,731 63.6% 5.75% 98.6% 99.1% 2005 568 73,685 60.9% 5.91% 98.4% 99.1% 2014 2014 282 360 51,002 60.0% 5.00% 90.1% 91.8% 54,362 67.1% 5.20% 90.0% 91.8% San Antonio, TX 2014 642 105,364 63.7% 5.10% 90.0% 91.1% San Brisas Apartments Phoenix, AZ 2013 & 2014 1996 208 29,754 57.1% 5.35% 95.2% 97.6% Portfolio Total/Average 2003 4,437 $ 613,682 58.2% 5.50% 96.2% 97.3% 16 Pure Multi-Family REIT LP MD&A – December 31, 2015 Properties Acquired During 2015 On May 7, 2015, Pure Multi, through the US REIT, acquired Park at West Avenue, a multi-family apartment community (“Park West”), located in San Antonio, Texas, for a purchase price of $54,250,000, plus standard closing costs and adjustments. This acquisition was financed with cash and a new 15 year mortgage in the amount of $36,500,000. On August 10, 2015, Pure Multi, through the US REIT, acquired Amalfi Stonebriar, a multi-family apartment community (“Amalfi”), located in Frisco, Texas, for a purchase price of $67,500,000, plus standard closing costs and adjustments. This acquisition was financed with cash from the May 2015 Offering (as defined below) and a new 12 year mortgage in the amount of $45,000,000. On September 30, 2015, Pure Multi, through the US REIT, acquired Brackenridge at Midtown, a multi-family apartment community (“Brackenridge”), located in San Antonio, Texas, for a purchase price of $51,000,000, plus standard closing costs and adjustments. This acquisition was financed with cash May 2015 Offering and a new 12 year mortgage in the amount of $30,600,000. Properties Sold During 2015 On January 14, 2015, Pure Multi, through the US REIT, sold Sunset Point Apartments, a multi-family apartment community (“Sunset Point”), located in Arlington, Texas, for a sale price of $27,950,000, less standard closing costs and adjustments. The mortgage payable, secured by Sunset Point, was assumed by the purchaser on the same date. On September 2, 2015, Pure Multi, through the US REIT, sold Oakchase Apartments, a multi-family apartment community (“Oakchase”), located in Arlington, Texas, for a sale price of $17,850,000, less standard closing costs and adjustments. The mortgage payable, secured by Oakchase, was paid in full as of the same date. On December 30, 2015, Pure Multi, through the US REIT, sold Windsong, a multi-family apartment community, located in Dallas, Texas, for a sale price of $22,000,000, less standard closing costs and adjustments. May 2015 Class A Unit Offering On May 8, 2015, Pure Multi completed a public offering (the “May 2015 Offering”) of 6,900,000 Class A Units, at a price of $5.10 per Class A Unit, for gross proceeds of $35,190,000, less offering costs. The May 2015 Offering was completed on a “blind-pool” basis, meaning there were no properties identified for acquisition at the time of the offering. The net proceeds from the May 2015 Offering were used to fund the purchase price of Amalfi on August 10, 2015 and to partially fund the purchase price of Brackenridge on September 30, 2015. December 2015 Class A Unit Offering On December 11, 2015, Pure Multi completed a public offering (the “December 2015 Offering”) of 7,250,000 Class A Units, at a price of $5.40 per Class A Unit, for gross proceeds of $39,150,000, less offering costs. The December 2015 Offering was completed on a “blind-pool” basis, meaning there were no properties identified for acquisition at the time of the offering. The net proceeds from the December 2015 Offering were used to fund the purchase price of PURE Estates at TPC and partially fund the purchase price of PURE View at TPC, both of which were acquired on March 1, 2016, subsequent to Pure Multi’s December 31, 2015 year end (see Section VI – “Subsequent Events”). 17Pure Multi-Family REIT LP MD&A – December 31, 2015 OUTLOOK Pure Multi’s strategy is to acquire a high-quality apartment portfolio located in the strongest growth markets within the U.S. Sunbelt region. A judicious use of mortgage financing results in a conservative balance sheet that boasts one of the longest average mortgage terms in the sector at 9.4 years, with an average mortgage interest rate of 3.72%, at the end of 2015. Job and population growth are fundamental drivers of apartment demand and our core markets of DFW, San Antonio and Phoenix continue to project robust growth rates in both categories for the coming years. Although Houston has recently suffered an economic slowdown due to the collapse of oil prices, our two assets held within the Greater Houston market have been significantly insulated from this and continue to generate very solid rental rate growth, as they are located in areas that do not have significant direct exposure to oil and gas related industries. Pure Multi has a particular focus on asset selection that involves choosing assets that include unique features that inherently create a barrier-to-entry from competition, either in their unique in-fill locations, or through other locational attributes such as golf course frontages, large water features, or expansive views of neighbouring nature preserves. Such attention to detail on asset selection pays dividends in terms of top-line revenue growth and reduced tenant turnover. Our diligent and active management style includes re-positioning some assets through value-add initiatives and ultimately renewing our portfolio over time to harvest the profits of such value-add programs through the profitable divesting of non-core holdings in order to re-invest such capital into newer, higher-quality, assets thus effecting our urban-renewal approach to our overall portfolio asset management. Going forward we intend to continue our active management of Pure Multi through executing more value-add initiatives and improving the quality of our portfolio to enhance unitholder value. Our intention is to increase our portfolio holdings in our current existing strong growth markets, as well as to expand our platform operations to include additional markets that offer similar compelling demand drivers, which are highly beneficial to apartment ownership. With the robust pipeline of high-quality apartment properties available for sale in these markets, we believe Pure Multi is well positioned to continue its strong growth over the coming years, thus enhancing unitholder value even further. SECTION II RESULTS OF OPERATIONS RECONCILIATION “Pure Multi’s interest” is a non-IFRS measure representing: (1) Pure Multi’s proportionate share of the financial position and results of operations of its entire portfolio, taking into account the difference in accounting for joint ventures using proportionate consolidation versus equity accounting; and (2) the accrual of property tax liability and expense, on all portfolio investments, based on time period of ownership throughout the given reporting year. Pure Multi’s interest does not have any standardized meaning prescribed by IFRS. The following tables provide reconciliations from Pure Multi’s financial statements prepared in accordance with IFRS to Pure Multi’s interest, as described above, for the affected current and comparative periods. 18Pure Multi-Family REIT LP MD&A – December 31, 2015 Reconciliation of Consolidated Statement of Income and Comprehensive Income to Statement of Income and Comprehensive Income at Pure Multi’s Interest: Year ended December 31, 2015 ($000s) REVENUES Rental OPERATING EXPENSES Insurance Property management Property taxes Property operating expenses NET RENTAL INCOME NET FINANCE INCOME (EXPENSES) Interest income Interest expense Distributions to subsidiary’s preferred unitholders NET OTHER INCOME (EXPENSES) Other income General and administrative Fair value adjustments to investment properties Gain on disposal of investment properties Franchise taxes Consolidated(1) IFRIC 21 Property Tax Adjustment(2) Pure Multi’s Interest(3) $ 58,876 $ 1,543 1,764 8,500 13,655 25,462 33,414 14 (15,998) (16) (16,000) 13 (914) 34,519 525 (378) 33,765 - - - 718 - 718 (718) - - - - - - 718 - - 718 $ 58,876 1,543 1,764 9,218 13,655 26,180 32,696 14 (15,998) (16) (16,000) 13 (914) 35,237 525 (378) 34,483 NET INCOME AND COMPREHENSIVE INCOME $ 51,179 $ - $ 51,179 Notes: (1) Represents Pure Multi’s consolidated statement of income and comprehensive income prepared in accordance with IFRS. (2) Represents Pure Multi’s annual pro-rated portion of property tax expense, on its entire portfolio, that is accounted for under IFRIC 21. (3) Represents Pure Multi’s interest, as described herein. 19 Pure Multi-Family REIT LP MD&A – December 31, 2015 Reconciliation of Consolidated Statement of Income and Comprehensive Income to Statement of Income and Comprehensive Income at Pure Multi’s Interest: Three months ended December 31, 2015 ($000s) REVENUES Rental OPERATING EXPENSES (RECOVERIES) Insurance Property management Property taxes Property operating expenses NET RENTAL INCOME NET FINANCE INCOME (EXPENSES) Interest income Interest expense Distributions to subsidiary’s preferred unitholders NET OTHER INCOME (EXPENSES) Other income General and administrative Fair value adjustments to investment properties IFRIC 21 fair value adjustment to investment properties Gain on disposal of investment properties Franchise taxes Consolidated(1) IFRIC 21 Property Tax Adjustment(2) Pure Multi’s Interest(3) $ 16,547 $ 507 499 (66) 3,901 4,841 11,706 4 (3,981) (4) (3,981) 1 (278) 3,679 (1,912) 1,321 (121) 2,690 - - - 2,596 - 2,596 (2,596) - - - - - - 684 1,912 - - 2,596 $ 16,547 507 499 2,530 3,901 7,437 9,110 4 (3,981) (4) (3,981) 1 (278) 4,363 - 1,321 (121) 5,286 NET INCOME AND COMPREHENSIVE INCOME $ 10,415 $ - $ 10,415 Notes: (1) Represents Pure Multi’s consolidated statement of income and comprehensive income prepared in accordance with IFRS. (2) Represents Pure Multi’s annual pro-rated portion of property tax expense, on its entire portfolio, that is accounted for under IFRIC 21. (3) Represents Pure Multi’s interest, as described herein. 20 Pure Multi-Family REIT LP MD&A – December 31, 2015 Reconciliation of Consolidated Statement of Income and Comprehensive Income to Statement of Income and Comprehensive Income at Pure Multi’s Interest: Year ended December 31, 2014 ($000s) REVENUES Rental OPERATING EXPENSES Insurance Property management Property taxes Property operating expenses NET RENTAL INCOME NET FINANCE INCOME (EXPENSES) Interest income Interest expense Distributions to subsidiary’s preferred unitholders NET OTHER INCOME (EXPENSES) Other income General and administrative Fair value adjustments to investment properties Loss on disposal of investment property Franchise taxes SHARE OF PROFIT (LOSS) OF EQUITY-ACCOUNTED INVESTMENT NET INCOME AND COMPREHENSIVE INCOME Consolidated(1) Pure Multi’s Share of Equity-Accounted Investment(2) IFRIC 21 Property Tax Adjustment(3) Pure Multi’s Interest(4) $ 48,133 $ 342 $ 1,287 1,444 6,696 12,218 21,645 26,488 5 (10,343) (16) (10,354) 1 (771) 27,507 (235) (329) 26,173 4 10 28 96 138 204 - (589) - (589) - - 27 - - 27 (358) 358 $ 41,949 $ - $ - - - 580 - 580 (580) - - - - - - 580 - - 580 - - $ 48,475 1,291 1,454 7,304 12,314 22,363 26,112 5 (10,932) (16) (10,943) 1 (771) 28,114 (235) (329) 26,780 - $ 41,949 Notes: (1) Represents Pure Multi’s consolidated statement of income and comprehensive income prepared in accordance with IFRS. (2) Represents Pure Multi’s proportionate share of revenues and expenses of its joint venture that is accounted for on the equity basis of accounting. (3) Represents Pure Multi’s annual pro-rated portion of property tax expense, on its entire portfolio, that is accounted for under IFRIC 21. (4) Represents Pure Multi’s interest, as described herein. 21 Pure Multi-Family REIT LP MD&A – December 31, 2015 Reconciliation of Consolidated Statement of Income and Comprehensive Income to Statement of Income and Comprehensive Income at Pure Multi’s Interest: Consolidated(1) Pure Multi’s Share of Equity-Accounted Investment(2) IFRIC 21 Property Tax Adjustment(3) Pure Multi’s Interest(4) Three months ended December 31, 2014 ($000s) REVENUES Rental OPERATING EXPENSES (RECOVERIES) Insurance Property management Property taxes Property operating expenses NET RENTAL INCOME NET FINANCE INCOME (EXPENSES) Interest income Interest expense Distributions to subsidiary’s preferred unitholders NET OTHER INCOME (EXPENSES) Other income General and administrative Fair value adjustments to investment properties IFRIC 21 fair value adjustment to investment properties Loss on disposal of investment property Franchise taxes SHARE OF LOSS OF EQUITY-ACCOUNTED INVESTMENT $ 13,996 $ 395 420 (96) 3,566 4,285 9,711 1 (3,036) (4) (3,039) 1 (209) 14,790 (1,709) (235) (94) 12,544 - - - - (2) 2 - - - - - - - - - - - - - - - $ $ - - - 2,051 - 2,051 (2,051) - - - - - - 342 1,709 - - 2,051 - - $ 13,996 395 420 1,953 3,568 6,336 7,660 1 (3,036) (4) (3,039) 1 (209) 15,132 - (235) (94) 14,595 - $ 19,216 NET INCOME AND COMPREHENSIVE INCOME $ 19,216 $ Notes: (1) Represents Pure Multi’s consolidated statement of income and comprehensive income prepared in accordance with IFRS. (2) Represents Pure Multi’s proportionate share of revenues and expenses of its joint venture that is accounted for on the equity basis of accounting. (3) Represents Pure Multi’s annual pro-rated portion of property tax expense, on its entire portfolio, that is accounted for under IFRIC 21. (4) Represents Pure Multi’s interest, as described herein. 22 Pure Multi-Family REIT LP MD&A – December 31, 2015 RESULTS OF OPERATIONS All of the information presented below relates to Pure Multi’s interest, unless noted otherwise. Pure Multi’s interest ($000s, except per unit basis) For the year ended December 31, 2015 For the year ended December 31, 2014 For the three months ended December 31, 2015 For the three months ended December 31, 2014 $ 58,876 $ 48,475 $ 16,547 $ 13,996 Revenues Rental Operating Expenses Insurance Property management Property taxes Property operating expenses Net Rental Income Net Finance Income (Expenses) Interest income Interest expense Distributions to subsidiary’s preferred unitholders Other Income (Expenses) Other income General and administrative Fair value adjustments to investment properties Gain (loss) on disposal of investment properties Franchise taxes 1,543 1,764 9,218 13,655 26,180 32,696 14 (15,998) (16) (16,000) 13 (914) 35,237 525 (378) 34,483 1,291 1,454 7,304 12,314 22,363 26,112 5 (10,932) (16) (10,943) 1 (771) 28,114 (235) (329) 26,780 507 499 2,530 3,901 7,437 9,110 4 (3,981) (4) (3,981) 1 (278) 4,363 1,321 (121) 5,286 395 420 1,953 3,568 6,336 7,660 1 (3,036) (4) (3,039) 1 (209) 15,132 (235) (94) 14,595 19,216 0.52 Net Income and Comprehensive Income $ 51,179 Earnings per Class A unit – basic $ 1.22 $ $ 41,949 $ 10,415 1.35 $ 0.23 $ $ Weighted average number of Class A units – basic 39,761,071 29,512,727 43,429,172 34,834,824 Earnings per Class A unit – diluted $ 1.15 $ 1.23 $ 0.22 $ 0.48 Weighted average number of Class A units – diluted Earnings per Class B unit – basic and diluted Weighted average number of Class B units – basic and diluted 43,831,867 33,583,523 47,979,552 38,905,620 $ 12.79 $ 10.49 $ 2.60 $ 4.80 200,000 200,000 200,000 200,000 23 Pure Multi-Family REIT LP MD&A – December 31, 2015 During the year ended December 31, 2015, based on Pure Multi’s interest, Pure Multi recorded rental revenue of $58,875,799, net rental income of $32,695,784, fair value adjustments to investment properties of $35,237,335 and net income of $51,179,380 (year ended December 31, 2014 - $48,474,655, $26,111,241, $28,114,209 and $41,949,277, respectively). During the year ended December 31, 2015, based on Pure Multi’s interest, Pure Multi incurred $913,588 of general and administrative expenses (year ended December 31, 2014 - $769,883), incurred franchise tax expense of $378,175 (year ended December 31, 2014 - $329,145), and recorded a gain on disposal of investment properties of $525,088 (year ended December 31, 2014 – loss on disposal of $235,421). The increase in revenues, expenses and net income are primarily attributable to Pure Multi operating additional investment properties during the year ended December 31, 2015, compared to the same period in the prior year, in addition to strong organic rental revenue growth experienced from the investment properties operated during both periods. Pure Multi’s loan to gross book value ratio decreased to 54.6% at December 31, 2015 (December 31, 2014 – 57.9%) and its distribution payout ratio on Distributable Income was 84.8% for the year ended December 31, 2015 (year ended December 31, 2014 – 82.4%). The decrease in the loan to gross book value ratio and increase in the distribution payout ratio on Distributable Income, compared to prior periods, was primarily due to excess cash and cash equivalents on the balance sheet during the current period compared to the same period in the prior year. For further clarity, Pure Multi’s loan to gross book value ratio is defined as the ratio between Pure Multi’s overall borrowed money, including the face amount outstanding of any convertible debentures, and the total book value of the assets plus accumulated depreciation and amortization in respect of such assets. Pure Multi defines distribution payout ratio as the percentage of Distributable Income that is paid out to unitholders (see “Distributable Income”). For additional information, see “Liquidity and Capital Resources – Distributed Cash”. Rental Revenue Rental revenue from investment properties includes recoveries of specified operating expenses, in accordance with the terms of the lease agreements. Operating Expenses Operating expenses include costs relating to such items as cleaning, building repairs and maintenance, property repairs and maintenance, HVAC, property payroll, insurance, property taxes, utilities and property management fees among other items. The following table illustrates certain operating expenses as a percentage of total operating expenses: Pure Multi’s interest Insurance Property management Property taxes Property operating expenses Finance Income For the year ended December 31, 2015 5.9% 6.7% 35.2% For the year ended December 31, 2014 5.8% 6.5% 32.7% For the three months ended December 31, 2015 6.8% 6.7% 34.0% For the three months ended December 31, 2014 6.2% 6.6% 30.8% 52.2% 100.0% 55.0% 100.0% 52.5% 100.0% 56.4% 100.0% Finance income consists of interest income which was earned from bank deposits at Pure Multi and the property level. Finance Expenses Finance expenses consist of interest expense and distributions to subsidiary’s preferred unitholders (see “Financial Condition – Preferred Units of Subsidiary”). Pure Multi declared distributions in the amount of $15,625 to the subsidiary’s preferred unitholders during the year ended December 31, 2015 (year ended December 31, 2014 - $15,625). 24 Pure Multi-Family REIT LP MD&A – December 31, 2015 Interest Expense Interest expense consists of mortgage interest, mortgage prepayment expense, convertible debenture interest, credit facility interest, amortization of transaction costs, amortization of mark-to-market mortgage adjustment and accretion of convertible debentures. On September 9, 2015, Pure Multi obtained new mortgage financing on Prairie Creek Villas and incurred a mortgage prepayment expense of $5,188,836, related to paying off its prior mortgage. This prepayment expense was partially offset by the write-off of the unamortized portion of the mark-to-market mortgage adjustment in the amount of $2,737,202 on the same date. The weighted average interest rate on the mortgages, based on Pure Multi’s interest, is 3.72% per annum as at December 31, 2015 (December 31, 2014 – 3.86%) and the mortgages mature between 2018 and 2030 with a weighted average mortgage term of 9.4 years remaining (December 31, 2014 – 6.8 years remaining). Pure Multi intends to refinance any mortgages which mature within six months of the maturity date. General and Administrative Expenses General and administrative expenses are primarily comprised of directors’ fees, directors’ and officers’ liability insurance, professional fees, legal fees, filing fees, and administrative expenses. Professional fees include auditing and tax fees. Administrative expenses include US REIT compliance expenditures, investor relations expenses and bank charges. For the year ended December 31, 2015, total general and administrative expenses amounted to 1.6% of rental revenue (year ended December 31, 2014 – 1.6%). Pursuant to the Asset Management Agreement with the Managing GP, as described under “Related Party Transactions”, Pure Multi will not compensate the Managing GP for its services, which include providing asset management, administrative and reporting services. The Asset Management Agreement also requires the Managing GP to provide Pure Multi with support services consisting of office space and equipment and the necessary clerical and secretarial personnel for the administration of its day-to- day activities, at no cost. The following table illustrates corporate expenses as a percentage of overall general and administrative expenses: Pure Multi’s interest Insurance Professional fees Legal and filing fees Director’s fees Administrative expenses G&A expense as a percentage of rental revenue Other Income (Expenses) For the year ended December 31, 2015 4.8% 32.6% 15.6% 23.0% 24.0% For the year ended December 31, 2014 4.4% 43.6% 17.3% 12.6% 22.1% For the three months ended December 31, 2015 4.8% 22.2% 12.5% 44.5% 16.0% For the three months ended December 31, 2014 4.8% 48.6% 18.7% 11.6% 16.3% 100.0% 1.6% 100.0% 1.6% 100.0% 1.7% 100.0% 1.5% Other income (expenses) results from transactions in foreign currency entered into by Pure Multi, as a small number of transactions occur in Canadian dollars while cash and cash equivalents are held in United States dollars. 25 Pure Multi-Family REIT LP MD&A – December 31, 2015 Fair Value Adjustments to Investment Properties Pure Multi revalues its investment properties at fair value on each reporting date and records the fair value adjustments as an income or expense item. For the year ended December 31, 2015, based on Pure Multi’s interest, Pure Multi recorded an increase in fair value of its investment properties of $35,237,335 (year ended December 31, 2014 - $28,114,209). The weighted average capitalization rate of the investment properties at December 31, 2015, based on Pure Multi’s interest, was 5.50% (December 31, 2014 – 5.90%). Gain (Loss) on Disposal of Investment Properties During the year ended December 31, 2015, Pure Multi sold Sunset Point, Oakchase and Windsong for a combined sales price of $67,800,000. Pure Multi recorded a gain on disposal of the investment properties in the amount of $525,088 (year ended December 31, 2014 – loss on disposal of $235,421). The gain or loss on disposal is calculated by taking the difference between the fair value of each investment property and its selling price, less any disposition costs associated with sale of the properties. Income Taxes Pure Multi is not subject to tax under Part I of the Income Tax Act (Canada) (the “Tax Act”). Each partner (or “unitholder”) of Pure Multi is required to include in computing the partner’s income for a particular taxation year the partner’s share of the income or loss of Pure Multi for its fiscal year ending in or on the partner’s taxation year- end, whether or not any of that income or loss is distributed to the partner in the taxation year. Accordingly, no provision has been made for Canadian income taxes under Part I of the Tax Act. Franchise Taxes Texas Franchise Tax applicable to Pure Multi, for its investment properties operated in Texas during the year ended December 31, 2015, is equal to 0.95% of the lesser of: (i) 70% of total revenue; (ii) 100% of total revenue less cost of goods sold; (iii) 100% of total revenue less compensation expense; or (iv) 100% of total revenue less $1 million. Pure Multi recorded a provision for Texas Franchise Tax of $378,175 for the year ended December 31, 2015 (year ended December 31, 2014 - $329,145). Offering Costs Offering costs are the costs incurred by Pure Multi that relate to the issuance of equity instruments, which are included in the statement of partners’ capital. During the year ended December 31, 2015, Pure Multi incurred offering costs of $3,515,918 (year ended December 31, 2014 - $2,188,921). Distributions to Limited Partners Pure Multi declared distributions in the amount of $15,019,778 to Class A unitholders and $790,515 to Class B unitholders during the year ended December 31, 2015 (year ended December 31, 2014 - $11,322,956 and $595,945, respectively). DISTRIBUTABLE INCOME Pure Multi uses Distributable Income (“DI”) to measure its ability to earn and distribute cash to unitholders. DI is a non-IFRS measurement, using Pure Multi’s interest, as described herein, and should not be construed as an alternative to net earnings determined in accordance with IFRS as an indicator of Pure Multi’s performance. DI as computed by Pure Multi may differ from similar computations as reported by other similar business entities and, accordingly, may not be comparable to DI as reported by such business entities. DI does not have any standardized meaning prescribed by IFRS. Management calculates DI by adding to or deducting the following items from net cash from operating activities: non-cash working capital items, IFRIC 21 adjustments, interest income, interest expense, mortgage prepayment expense, distributions to preferred unitholders and preferred units of subsidiary offering costs. 26Pure Multi-Family REIT LP MD&A – December 31, 2015 Pure Multi’s interest ($000s, except per unit basis) For the year ended December 31, 2015 For the year ended December 31, 2014 For the three months ended December 31, 2015 For the three months ended December 31, 2014 Net cash provided from operating activities $ 29,155 $ 26,902 $ 6,159 $ 7,545 Adjustment: Changes in non-cash operating working capital IFRIC 21 property tax liability adjustment, net Interest income Interest expense Mortgage prepayment expense Distributions to subsidiary’s preferred unitholders Distributable Income Class A units Class B units Distributions to Unitholders Class A units Class B units Total distributions paid Total distributions paid as a % of Distributable Income Weighted average number of units (000s) Class A units Class B units Diluted weighted average number of units (000s) Class A units Class B units Basic DI per unit Class A units Class B units Diluted DI per unit Class A units Class B units Distributions paid per weighted average unit Class A units Class B units 2,262 - 14 (17,952) 5,189 (16) $ 18,652 $ 17,719 933 $ 15,020 790 $ 15,810 $ $ (1,889) - 5 (10,535) - (16) 14,467 13,744 723 11,323 596 11,919 4,465 (1,912) 4 (3,753) - (4) $ 4,959 $ 4,711 248 $ 4,144 218 $ 4,362 $ $ 1,522 (1,709) 1 (2,942) - (4) 4,413 4,192 221 3,266 172 3,438 84.8% 82.4% 88.0% 77.9% $ 39,761 200 43,832 200 0.45 4.66 0.44 4.66 0.38 3.95 $ 29,513 200 33,584 200 0.47 3.62 0.45 3.62 0.38 2.98 $ 43,429 200 47,980 200 0.11 1.24 0.11 1.24 0.10 1.09 $ 34,835 200 38,906 200 0.12 1.10 0.12 1.10 0.09 0.86 Pure Multi may distribute to unitholders on each distribution date such percentage of the DI of Pure Multi for the month immediately preceding the month in which the distribution date falls, as the board of directors of the Governing GP may determine at their discretion. At the rate of current monthly distributions, on an annualized basis, unitholders would receive $0.375 per Class A Unit. Monthly distributions will be paid on the distribution date to unitholders of record on the last business day of such month. See “Financial Condition – Partners’ Capital”. 27 Pure Multi-Family REIT LP MD&A – December 31, 2015 The board of directors of the Governing GP looks beyond quarter-to-quarter fluctuations in working capital when making decisions regarding monthly distributions. As a result, management believes that the measure of DI, which excludes the impact of changes in non-cash working capital, is a better measure for determining operating performance. Management believes that the calculation of Standardized Distributable Cash, defined as cash flow from operations, distorts Pure Multi’s quarter-to-quarter distributable cash and payout ratios, as non-cash operating working capital fluctuates. For the purpose of this MD&A, management defines “Diluted DI per unit” as Distributable Income divided by the diluted weighted average number of units outstanding. STANDARDIZED DISTRIBUTABLE CASH The following is a reconciliation of Pure Multi’s DI to standardized distributable cash. Pure Multi’s interest ($000s) Distributable income IFRIC 21 property tax liability adjustment, net Interest income Interest expense Mortgage prepayment expense Distributions to subsidiary’s preferred unitholders (Increase) decrease in amounts receivable Increase in prepaid expenses Increase (decrease) in rental deposits Increase (decrease) in unearned revenue Increase (decrease) in accounts payable and accrued liabilities Standardized Distributable Cash (net cash from operating activities) SEGMENTED INFORMATION $ For the year ended December 31, 2015 18,652 - (14) 17,952 (5,189) $ For the year ended December 31, 2014 14,467 - (5) 10,535 - $ For the three months ended December 31, 2015 4,959 1,912 (4) 3,753 - $ For the three months ended December 31, 2014 4,413 1,709 (1) 2,942 - 16 (325) (369) 202 (94) (1,676) 16 (453) (129) 235 247 1,989 4 315 (451) (90) 233 (4,472) 4 (429) (365) (12) 252 (968) $ 29,155 $ 26,902 $ 6,159 $ 7,545 Pure Multi currently operates in one business segment, indirectly owning and operating of multifamily apartment properties in the Sunbelt region in the United States. The primary format for segment reporting is based on geographical region and is consistent with the internal reporting provided to the chief operating decision-maker, determined to be the general partners. FINANCIAL CONDITION Assets Investment Properties Investment properties are stated at fair value. Fair value adjustments to investment properties arising from changes in fair values are included in the statement of income and comprehensive income in the period which they arise. The investment properties are pledged as security against the mortgages payable. 28Pure Multi-Family REIT LP MD&A – December 31, 2015 Prepaid Expenses Prepaid expenses primarily consist of insurance and utility deposits. Mortgage Reserve Fund The mortgage reserve fund consists of cash on deposit requested by the lenders to be retained in escrow to pay for any repairs to the properties and certain costs. These funds will be released to pay the respective obligations once certain conditions are met, such as completion of repairs. As at December 31, 2015, the term for the current mortgage reserve fund is less than 12 months. The amortized cost of the mortgage reserve fund is $6,570,597, based on Pure Multi’s interest, as at December 31, 2015, (December 31, 2014 - $6,208,641). Liabilities The LP Agreement limits the indebtedness of Pure Multi to a maximum of 70% of the gross book value. The gross book value is defined as the total book value of the assets plus accumulated depreciation and amortization in respect of such assets. The indebtedness is 54.6% of the gross book value as at December 31, 2015 (December 31, 2014 – 57.9%). Mortgages Payable The mortgages bear interest at a weighted average effective rate of 3.72%, based on Pure Multi’s interest, as at December 31, 2015 (December 31, 2014 – 3.86%) and mature between 2018 and 2030. The scheduled principal payments, principal maturities and weighted average effective rate are as follows: Pure Multi’s interest December 31, 2015 ($000s) Weighted Average Effective Rate (on expiry) Scheduled Principal Repayments Principal Maturities Total Repayments 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Thereafter Unamortized mortgage transaction costs - - 3.51% 3.29% - 3.26% 3.51% 4.12% - - $ 1,871 $ 2,511 3,100 3,749 4,505 4,541 4,456 4,405 4,117 4,287 - - 14,615 60,550 - 37,060 13,680 33,349 - - 3.92% 15,363 144,916 3.72% $ 52,905 $ 304,170 $ 1,871 2,511 17,715 64,299 4,505 41,601 18,136 37,754 4,117 4,287 160,279 357,075 (2,873) $ 354,202 29 Pure Multi-Family REIT LP MD&A – December 31, 2015 The following chart shows the remaining scheduled principal payments and principal maturities of the mortgages due within the next 10 years and thereafter: 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 44.9% 18.0% 0.5% 0.7% 5.0% 2016 2018 Maturity 1.3% 2020 11.7% 10.5% 5.0% 1.2% 1.2% 2022 Scheduled Principal 2024 Thereafter Preferred Units of Subsidiary During the year ended December 31, 2013, the US REIT issued 125 preferred units at $1,000 per preferred unit for gross proceeds of $125,000. On consolidation, the preferred units of the US REIT are reflected as a liability of Pure Multi. The preferred units are non-voting preferred units. Unitholders holding preferred units are entitled to receive dividends from the US REIT at a per annum rate equal to 12.5%, payable on June 30 and December 31 of each year. Unitholders holding preferred units will be allocated such return in priority to any allocations or distributions to all other classes and series of units of the US REIT. However, after payment of such return to unitholders holding preferred units, preferred unitholders are not otherwise entitled to share in the income of the US REIT. The US REIT may redeem the preferred units at any time, for a price equal to $1,000 per preferred unit, plus accrued and unpaid distributions. Due to the fixed distributions and preferred treatment for preferred units, they meet the definition of a liability. In addition, the board of directors of the Governing GP does not expect to redeem any preferred units within the next year. Thus, the preferred units are classified as non-current liabilities. 30 Pure Multi-Family REIT LP MD&A – December 31, 2015 Convertible Debentures On August 7, 2013, Pure Multi issued 23,000 6.5% convertible unsecured subordinated debentures (each, a “6.5% convertible debenture”) at a price of $1,000 per 6.5% convertible debenture, for gross proceeds of $23,000,000. The 6.5% convertible debentures mature on September 30, 2020 and are convertible at the holder’s option at any time into Class A Units at a conversion price of $5.65 per Class A Unit, in accordance with the terms of the trust indenture dated August 7, 2013. On or after September 30, 2016, but prior to September 30, 2018, the 6.5% convertible debentures may be redeemed by Pure Multi, in whole or in part, at a price equal to their principal amount plus accrued and unpaid interest thereon, provided the weighted average trading price of the Class A Units for the 20 consecutive trading days, ending on the fifth trading day immediately preceding the date on which notice of redemption is given, is at least 125% of the conversion price. After September 30, 2018, the 6.5% convertible debentures may be redeemed by Pure Multi at any time. During the year ended December 31, 2015, none of the 6.5% convertible debentures were converted into Class A Units. At December 31, 2015, $23,000,000 of the face value of the 6.5% convertible debentures was outstanding (December 31, 2014 - $23,000,000). The following summarizes the face and carrying values of the 6.5% convertible debentures at December 31, 2015: Balance as at December 31, 2014 Amortization of transaction costs Accretion of liability component Convertible Debentures Face Value $ 23,000,000 - - Liability Component Carrying Value $ 19,876,109 155,350 288,431 Equity Component Carrying Value $ 1,985,429 - - Balance as at December 31, 2015 $ 23,000,000 $ 20,319,890 $ 1,985,429 Credit Facility On July 19, 2013, Pure Multi established a revolving credit facility with a lender in the amount of $9,900,000. On December 11, 2015, Pure Multi paid off its outstanding balance on the credit facility and extinguished the facility on the same date. The revolving credit facility was interest bearing at a variable interest rate based at 2.00% plus the London Interbank Offered Rate (“LIBOR”). The revolving credit facility was secured by a charge in respect of Windsong Apartments prior to its extinguishment. Partners’ Capital The capital of Pure Multi consists of an unlimited number of Class A Units and Class B Units and the interest held by the Governing GP. The Governing GP has made a capital contribution of $20 to Pure Multi and has no further obligation to contribute capital. On May 30, 2012, the Managing GP subscribed for 200,000 Class B Units of Pure Multi, at a price of $5.00 per Class B Unit, for gross proceeds to Pure Multi of $1,000,000, which entitles the Class B Unitholders, initially, to a 5% interest in Pure Multi. As of the date hereof, Pure Multi has 200,000 Class B Units outstanding. From the date of formation on May 8, 2012 to December 31, 2014, Pure Multi issued 34,834,824 Class A Units for gross proceeds of $171,446,849, less offering costs. On May 8, 2015, Pure Multi completed a public offering of 6,900,000 Class A Units, on a bought deal basis, at a price of $5.10 per Class A Unit for gross proceeds of $35,190,000, less offering costs. On October 27, 2015, 55,000 Class A Unit purchase warrants (each, a “Warrant”) were exercised for 55,000 Class A Units, at an exercise price of $5.15, for gross proceeds of $283,250. Pure Multi issued the 55,000 Class A Units from treasury. On December 11, 2015, Pure Multi completed a public offering of 7,250,000 Class A Units, on a bought deal basis, at a price of $5.40 per Class A Unit, for gross proceeds of $39,150,000, less offering costs. 31Pure Multi-Family REIT LP MD&A – December 31, 2015 As at December 31, 2015, Pure Multi had 49,039,824 Class A Units, 200,000 Class B Units and 2,142,912 Warrants outstanding. The capital of Pure Multi is divided into Class A Units and Class B Units. The Class A Units are the subject of the public offerings described in Pure Multi’s prospectuses dated July 3, 2012, October 12, 2012, May 1, 2013, July 22, 2014, May 4, 2015 and December 7, 2015, which are available on SEDAR at www.sedar.com. The Class B Units were subscribed for by the Managing GP on May 30, 2012. Except as set out in the LP Agreement, no Class A Unit or Class B Unit has any preference or priority over another. The Class A Units will share in a 95% equity interest in all distributions and all net assets of Pure Multi and the Managing GP, as the holder of the Class B Units, will share in a 5% equity interest in all distributions and all net assets of Pure Multi. These respective interests, referred to as the “Class A Unit Percentage Interest” and “Class B Unit Percentage Interest”, will remain fixed, notwithstanding the issue of further Class A Units, until the occurrence of a Determination Event, as described below. All distributions will be made to the holders of the Class A Units and the Class B Units in accordance with the Class A Unit Percentage Interest and Class B Unit Percentage Interest, respectively. As described in the LP Agreement, until a Determination Event occurs, distributions from Pure Multi will generally be made 95% to the Class A Units and 5% to the Class B Units. Subject to the terms of the LP Agreement, the Class B Unitholders as a class are entitled to convert some or all of their Class B Units into Class A Units based on the Specified Ratio (as defined in the LP Agreement). Upon the Class B Unitholders exercising their Conversion Rights, they will own that number of Class A Units which is equal to the Class B Unit Percentage Interest (initially 5%) of all Class A Units outstanding after such conversion. The Class B Unit Percentage Interest will remain fixed at 5% notwithstanding the issue of further Class A Units, until the occurrence of a Determination Event. Following the occurrence of a Determination Event, the number of Class A Units to which the Class B Unitholder is entitled upon exercising Conversion Rights becomes fixed, and future issuances of Class A Units will result in a decline in the Class B Unit Percentage Interest. A Determination Event is the earliest to occur of the following: (a) Pure Multi’s market capitalization exceeding $300,000,000 for a period of 10 consecutive trading days; (b) an arm’s length take-over bid being made for the Class A Units, provided that not less than 51% of the Class A Units not held by the offer or are taken-up in such bid; and (c) substantially all of the assets of Pure Multi being sold or Pure Multi being liquidated. The Conversion Rights may be exercised by the Managing GP at any time provided that: (a) Pure Multi is legally entitled to comply with its obligations in connection with the exercise of the Conversion Rights; and (b) the Class B Unitholder who exercises the Conversion Rights complies with all applicable securities laws. Upon the exercise of the Conversion Rights, the Class B Unitholders will receive that number of Class A Units which is equal to the Specified Ratio multiplied by the number of outstanding Class B Units. As such, pursuant to the terms of the LP Agreement, the Class B Unitholders will receive such number of Class A Units representing the same Class B Unit Percentage Interest in the net assets of Pure Multi as was previously designated in the form of Class B Units. Subject to applicable laws, Pure Multi will redesignate all the interests of Class B Unitholders into Class A Units at the Specified Ratio effective as of the date that Pure Multi receives a notice of exercise of the Conversion Rights. Upon such occurrence (and the exercise of the Conversion Rights (as defined in the LP Agreement) by the Class B Unitholders, the interests of Class B Unitholders will be redesignated as Class A Units. The Class B Units will not be required to be redeemed or cancelled. 32 Pure Multi-Family REIT LP MD&A – December 31, 2015 Pursuant to the LP Agreement, the Managing GP or any affiliate or associate of the Managing GP which is then the Class B Unitholder, has agreed that it will not dispose of more than one-third of the Class A Units received by it upon the conversion of the Class B Units in each consecutive twelve month period ending after the first anniversary of the earlier of: (i) the date a Determination Event occurs; and (ii) the date upon which the conversion is completed. This limitation will not apply where the Conversion Rights have been exercised in connection with a take-over bid or a sale of substantially all of Pure Multi’s assets. LIQUIDITY AND CAPITAL RESOURCES Funds from Operations and Adjusted Funds from Operations Funds from operations (“FFO”) is a non-IFRS measure, using Pure Multi’s interest as described herein, and should not be construed as an alternative to net earnings or cash flows, as applicable, determined in accordance with IFRS. However, FFO is an operating performance measure which is widely used by the real estate industry and Pure Multi has calculated FFO in accordance with the recommendations of the Real Property Association of Canada (“REALpac”). Pure Multi’s method of calculating FFO may differ from other companies and accordingly may not be comparable to similar measures presented by other companies. The use of FFO, combined with the required IFRS presentations, has been presented for the purpose of improving the understanding of operating results in the real estate industry by the investing public and in making comparisons of the companies operating results more meaningful. As FFO excludes fair value adjustments, amortization, IFRIC 21 adjustments, mortgage prepayment expenses, and gains or losses from property dispositions, it provides a performance measure that, when compared period over period, reflects the impact on operations of trends in occupancy levels, rental rates, operating costs and realty taxes; acquisition activities; and interest costs, and provides a perspective of financial performance that is not immediately apparent from net earnings determined in accordance with IFRS. FFO is a widely accepted supplemental measure of financial performance for real estate entities; however, it does not represent amounts available for capital programs, debt service obligations, commitments or uncertainties. FFO should not be interpreted as an indicator of cash generated from operating activities and is not indicative of cash available to fund operating expenditures, or for the payment of cash distributions. FFO is simply one of several measures of operating performance. Adjusted funds from operations (“AFFO”) is also a non-IFRS measure, using Pure Multi’s interest as described herein, and should not be construed as an alternative to net earnings or cash flows, as applicable, determined in accordance with IFRS. However, AFFO is widely accepted as a performance measurement tool in the real estate industry. AFFO is calculated by adjusting the FFO for non-cash compensation items, accretion of debentures, and maintenance capital expenditures. Pure Multi’s method of calculating AFFO may differ from other companies and accordingly may not be comparable to similar measures presented by other companies. 33Pure Multi-Family REIT LP MD&A – December 31, 2015 The following table provides the analysis of Pure Multi’s FFO and AFFO performance: Pure Multi’s interest ($000s, except per unit basis) For the year ended December 31, 2015 For the year ended December 31, 2014 For the three months ended December 31, 2015 For the three months ended December 31, 2014 Net income and comprehensive income $ 51,179 $ 41,949 $ 10,415 $ 19,216 Adjustment: Amortization of transaction costs Amortization of mark to market mortgage adjustments Fair value adjustment to investment properties (Gain) loss on disposal of investment properties Property tax adjustments on acquisition or sale Mortgage prepayment expense IFRIC 21 fair value adjustment to investment properties IFRIC 21 property tax liability adjustment, net Funds from operations Maintenance capital provision (1) Accretion of convertible debentures 967 1,219 (3,209) (34,519) (525) (718) 5,189 - - (890) (27,534) 235 (580) - - - 154 - (3,679) (1,321) (684) - 1,912 (1,912) 200 (174) (14,790) 235 (342) - 1,709 (1,709) $ 18,364 $ 14,399 $ 4,885 $ 4,345 (1,289) 288 (1,187) 68 (352) 74 (333) 68 Adjusted funds from operations $ 17,363 $ 13,280 $ 4,607 $ 4,080 Weighted average number of units (000s) Class A units Class B units Diluted weighted average number of units (000s) Class A units Class B units FFO per unit - Basic Class A units Class B units FFO per unit - Diluted Class A units Class B units Payout Ratio on FFO AFFO per unit - Basic Class A units Class B units AFFO per unit – Diluted Class A units Class B units Payout Ratio on AFFO 39,761 200 43,832 200 0.44 4.59 0.44 4.59 86.1% 0.42 4.34 0.41 4.34 91.1% $ $ $ $ 29,513 200 33,584 200 43,429 200 47,980 200 34,835 200 38,906 200 $ 0.46 $ 0.11 $ 0.12 3.60 1.22 1.09 $ 0.45 $ 0.11 $ 0.12 3.60 82.8% 1.22 89.3% 1.09 79.1% $ 0.43 $ 0.10 $ 0.11 3.32 1.15 1.02 $ 0.42 $ 0.10 $ 0.11 3.32 89.8% 1.15 94.7% 1.02 84.3% 34 Pure Multi-Family REIT LP MD&A – December 31, 2015 Notes: (1) Based on an industry estimate of $300 per residential unit per year. This maintenance capital provision is estimated to be incurred on the property portfolio as to sustain its current revenue rental income-generating potential into future periods. Pure Multi does not include capital expenditures that increase the value of the current rental revenue, or initial capital expenditures that are required to be performed upon acquisition of an investment property. The following is a reconciliation of the Pure Multi’s AFFO and FFO to cash provided by operations: Pure Multi’s interest ($000s) Adjusted funds from operations Maintenance capital provision Accretion of convertible debentures Funds from operations (Increase) decrease in accounts receivable Increase in prepaid expenses Increase (decrease) in rental deposits Increase (decrease) in accounts payable and accrued liabilities Increase (decrease) in unearned revenue IFRIC 21 property tax liability adjustment, net Accretion of convertible debentures Interest income Interest expense Mortgage prepayment expense Distributions to subsidiary’s preferred unitholders For the year ended December 31, 2015 $ 17,363 1,289 (288) 18,364 (325) (369) 202 $ For the year ended December 31, 2014 13,280 1,187 (68) 14,399 (453) (129) 235 For the three months ended December 31, 2015 $ 4,607 352 (74) 4,885 315 (451) (90) For the three months ended December 31, 2014 $ 4,080 333 (68) 4,345 (429) (365) (12) (1,676) (94) - 288 (14) 17,952 (5,189) 16 1,989 247 - 68 (5) 10,535 - 16 (4,472) 233 1,912 74 (4) 3,753 - 4 (968) 252 1,709 68 (1) 2,942 - 4 Net cash provided from operating activities $ 29,155 $ 26,902 $ 6,159 $ 7,545 Capital Resources Cash generated by investment properties represents the primary source of funds to fund total distributions to unitholders of $15,810,293 for the year ended December 31, 2015 (year ended December 31, 2014 - $11,918,901). There are no significant working capital requirements that currently exist and there are no pending items that may affect liquidity. There are no legal or practical restrictions on the ability of Pure Multi’s properties to transfer funds to Pure Multi. Proceeds from the issuance of Class A Units, Warrants, Convertible Debentures and conventional mortgage financing have been used mainly to fund property acquisitions. Pure Multi intends to refinance any mortgages which mature within six months of maturity. Management expects to be able to meet all of Pure Multi’s ongoing obligations and to finance future growth through cash generated by operations, the issuance of securities and by using conventional mortgages. Pure Multi is not in default or arrears on any of its obligations including distribution payments, interest or principal payments on debt. 35Pure Multi-Family REIT LP MD&A – December 31, 2015 Distributed Cash In accordance with National Instrument 41-201, Pure Multi is required to provide additional disclosure relating to cash distributions. For the three months and year ended December 31, 2015, cash provided from operating activities, less interest paid (“adjusted cash provided from (used by) operating activities”), was less than cash distributions declared due to the mortgage prepayment expense, a non-recurring expense, in the amount of $5,188,836, incurred by Pure Multi on the mortgage refinancing of Prairie Creek Villas and the timing of property tax payable amounts paid during the three months ended December 31, 2015. For the three months and year ended December 31, 2014, adjusted cash provided from (used by) operating activities, was more than cash distributions declared. Management expects that adjusted cash provided from operating activities, after adjusting for non-recurring items, will exceed cash distributions declared. Pure Multi’s interest ($000s) Cash provided from operating activities Less interest paid Adjusted cash provided from operating activities Actual cash distributions declared Surplus (shortfall) of cash from (used by) operating activities over cash distributions declared For the year ended December 31, 2015 29,155 (17,674) 11,481 15,810 $ For the year ended December 31, 2014 26,902 (10,605) 16,297 11,919 $ For the three months ended December 31, 2015 6,159 (3,118) 3,041 4,362 $ For the three months ended December 31, 2014 7,545 (2,576) 4,969 3,438 $ $ (4,329) $ 4,378 $ (1,321) $ 1,531 For the three months and years ended December 31, 2015 and 2014, net income was more than cash distributions declared. Management expects net income to continue to exceed cash distributions declared. Pure Multi’s interest ($000s) Net income Actual cash distributions declared Surplus of net income over cash distributions declared CAPITAL STRUCTURE For the year ended December 31, 2015 51,179 15,810 $ For the year ended December 31, 2014 41,949 11,919 $ For the three months ended December 31, 2015 10,415 4,362 $ For the three months ended December 31, 2014 19,216 3,438 $ $ 35,369 $ 30,030 $ 6,053 $ 15,778 Pure Multi defines capital as the aggregate of partners’ capital, preferred units of subsidiary and long term debt. Pure Multi’s objectives in managing capital are to maintain a level of capital that complies with investment and debt restrictions pursuant to the initial offering prospectus; complies with existing debt covenants, if any; funds its business strategies; and builds long-term unitholders’ value. Pure Multi’s capital structure is approved by the board of directors of the Governing GP through its periodic reviews. 36 Pure Multi-Family REIT LP MD&A – December 31, 2015 The LP Agreement provides for a maximum indebtedness (or “loan”) level of up to 70% of the gross book value. The term “indebtedness” means any obligation of Pure Multi for borrowed money (including the face amount outstanding under any convertible debentures and any outstanding liabilities of Pure Multi arising from the issuance of subordinated notes but excluding any premium in respect of indebtedness assumed by Pure Multi for which Pure Multi has the benefit of an interest rate subsidy), but excludes trade accounts payable, distributions payable to unitholders, preferred units of subsidiary, accrued liabilities arising in the ordinary course of business and short-term acquisition credit facilities. The LP Agreement defines “gross book value” as the book value of the assets of Pure Multi plus the amount of accumulated depreciation and amortization in respect of such assets (and related intangible assets), the amount of future income tax liability arising out of indirect acquisitions and excluding the amount of any receivable reflecting interest rate subsidies on any debt assumed by Pure Multi. Pure Multi’s indebtedness is 54.6% as at December 31, 2015 (December 31, 2014 – 57.9%). Maintaining a relatively low indebtedness ratio is important in current economic conditions because it allows Pure Multi to access additional financing, if necessary. The LP Agreement allows the board of directors of the Governing GP, at their discretion, to allocate to the unitholders in each year all or a portion of Pure Multi’s income for the year, as calculated in accordance with the Tax Act, after all permitted deductions under the Tax Act have been taken. The board of directors of the Governing GP also reviews the cash distribution paid to the unitholders on a regular basis. The total distributions declared to Class A unitholders during the year ended December 31, 2015 was $15,019,778 (year ended December 31, 2014 - $11,322,956). The total distributions declared to Class B unitholders during the year ended December 31, 2015 was $790,515 (year ended December 31, 2014 - $595,945). The capital structure consisted of the following components at December 31, 2015 and 2014: Pure Multi’s interest ($000s) Capital Mortgages payable Convertible debentures Preferred units of subsidiary Partners’ capital Total Capital December 31, 2015 December 31, 2014 Change $ 354,202 20,320 125 304,274 $ 678,921 $ 256,735 19,876 125 197,798 $ 474,534 $ 97,467 444 - 106,476 $ 204,387 The total capital of Pure Multi increased from December 31, 2014 to December 31, 2015 primarily due to the May 2015 Offering and the December 2015 Offering, both of which increased partners’ capital, the new mortgages obtained and net income earned from operations. This was partially offset by the repayment of mortgages payable and distributions declared to the unitholders. FINANCIAL INSTRUMENTS For certain of Pure Multi’s financial instruments, including cash and cash equivalents, amounts receivable, mortgage reserve fund, credit facility, and accounts payable and accrued liabilities, the carrying amounts approximate the fair values due to the short-term nature of the instruments. The fair values of the mortgages payable and preferred units of subsidiary have been calculated based on discounted future cash flows using discount rates that reflect current market conditions for instruments having similar terms and conditions. Discount rates are either provided by lenders or are observable in the open market. The fair value of the convertible debentures has been calculated using quoted prices in active markets. 37Pure Multi-Family REIT LP MD&A – December 31, 2015 Pure Multi’s interest ($000s) Mortgages payable Preferred units of subsidiary Convertible debentures December 31, 2015 Carrying Amount $ 354,202 125 20,320 Fair Value $ 366,040 125 23,000 December 31, 2014 Carrying Amount $ 256,735 125 19,876 Fair Value $ 262,023 125 22,885 OFF-BALANCE SHEET ITEMS Pure Multi does not have any off-balance sheet items. SECTION III SUMMARY OF SELECTED ANNUAL INFORMATION Pure Multi’s interest ($000s, except per unit basis) Rental revenue Net rental income Net income and comprehensive income Total assets Total non-current assets Total liabilities Total non-current liabilities Distributions Per Class A Unit Per Class B Unit Basic net income per Class A Unit Basic net income per Class B Unit For the year ended December 31, 2015 For the year ended December 31, 2014 For the year ended December 31, 2013 $ 58,876 $ 48,475 $ 31,583 32,696 51,179 691,153 613,682 386,879 372,776 15,810 $ 0.38 $ 3.95 $ 1.22 $ 12.79 26,112 41,949 492,791 468,518 294,993 275,128 11,919 $ $ 0.38 2.98 $ 1.35 $ 10.49 16,357 14,202 351,007 337,603 231,214 215,279 8,371 0.37 2.09 $ $ $ $ 0.62 3.55 Pure Multi’s total assets and liabilities have increased significantly during the year ended December 31, 2015 due to investment property acquisitions and their related mortgages, the issuance of equity, and fair value increases of its investment properties. As at December 31, 2015, Pure Multi held 14 investment properties comprising 4,437 residential units and 4,052,934 gross rentable square feet, compared to 14 investment properties with 4,308 residential units and 3,830,279 gross rentable square feet as at December 31, 2014. Total rental revenue from the investment properties totaled $58.9 million for the year ended December 31, 2015 compared to $48.5 million for the year ended December 31, 2014. This increase is reflective of the increase in the number of days the investment properties were operating during 2015 compared to 2014, due to the timing of acquisitions and dispositions, coupled with the organic growth in rental revenue achieved at the investment properties operated during both periods. 38Pure Multi-Family REIT LP MD&A – December 31, 2015 SUMMARY OF QUARTERLY RESULTS During the three months ended December 31, 2015, based on Pure Multi’s interest: • • • • • • • Assets increased to $691,152,766 from $654,498,958 as at September 30, 2015. This increase was primarily due to the December 2015 Offering and the fair value adjustments to investment properties, and was partially offset by the disposition of Windsong. As at December 31, 2015, Pure Multi had cash and cash equivalents of $68,632,392 and investment properties of $613,681,875, compared to $17,483,232 and $629,037,708, respectively, as at September 30, 2015. Liabilities decreased to $386,878,540 from $393,863,005 as at September 30, 2015. This decrease was primarily due to the repayment of a credit facility. Partners’ capital increased to $304,274,226 from $260,635,953 as at September 30, 2015. This increase was primarily due to the December 2015 Offering and the net income earned by Pure Multi during the period, and was partially offset by the distributions declared to unitholders. Pure Multi earned rental revenue of $16,547,369 from investment properties (three months ended December 31, 2014 - $13,995,547). These properties incurred operating expenses of $7,437,439, resulting in net rental income of $9,109,930 during the three months ended December 31, 2015 (three months ended December 31, 2014 - $6,335,869 and $7,659,678, respectively). The significant increase in rental revenue, operating expenses and net rental income was as a result of Pure Multi operating additional investment properties throughout the current period compared to the comparative period. Pure Multi incurred interest expense of $3,980,708 and distributions to subsidiary’s preferred unitholders of $3,906 (three months ended December 31, 2014 - $3,035,975 and $3,906, respectively). This resulted in net finance expenses of $3,980,477 during the three months ended December 31, 2015 (three months ended December 31, 2014 - $3,038,989). The increases in net finance expenses was primarily due to the additional mortgage interest costs during the period. Pure Multi incurred general and administrative expenses of $277,740, fair value adjustments to investment properties gain of $4,362,671, incurred franchise tax expense of $121,654 and gain on disposal of investment properties of $1,321,039 (three months ended December 31, 2014 - $208,671, $15,132,158, $93,608 and a loss on disposal of $235,421, respectively). Pure Multi had net income of $10,414,868 (three months ended December 31, 2014 - $19,215,762), as a result of the above transactions. 39 Pure Multi-Family REIT LP MD&A – December 31, 2015 Pure Multi’s interest Quarter ended ($000s, except per unit amounts) Rental revenue Operating expenses Net rental income Interest expense General and administrative expenses Fair value adjustments to investment properties Net income and comprehensive income Basic net income per unit Class A units Class B units Pure Multi’s interest Quarter ended ($000s, except per unit amounts) Rental revenue Operating expenses Net rental income Interest expense General and administrative expenses Fair value adjustments to investment properties Net income and comprehensive income Basic net income per unit Class A units Class B units Pure Multi’s interest As at ($000s) Total assets Total liabilities Partners’ capital Investment properties Mortgages payable Pure Multi’s interest As at ($000s) Total assets Total liabilities Partners’ capital Investment properties Mortgages payable December 31, 2015 September 30, 2015 $ 16,547 $ 15,378 June 30, 2015 $ 13,902 March 31, 2015 $ 13,049 7,437 9,110 (3,981) (278) 4,363 10,415 0.23 2.60 6,950 8,428 (6,117) (183) 10,340 11,583 0.26 2.90 6,087 7,815 (2,980) (261) 9,401 13,896 0.34 3.47 5,706 7,343 (2,921) (192) 11,134 15,285 0.42 3.82 December 31, 2014 September 30, 2014 $ 13,996 $ 12,953 June 30, 2014 $ 10,900 March 31, 2014 $ 10,626 6,336 7,660 (3,036) (209) 15,132 19,216 0.52 4.80 5,990 6,963 (3,213) (141) 7,117 10,637 0.31 2.66 5,118 5,782 (2,357) (226) 5,865 8,987 0.33 2.25 December 31, 2015 September 30, 2015 June 30, 2015 $ 691,153 $ 654,499 $ 565,553 386,879 304,274 613,682 354,202 393,863 260,636 629,035 354,455 312,382 253,171 517,148 276,338 December 31, 2014 September 30, 2014 June 30, 2014 $ 492,791 $ 480,830 $ 403,967 294,993 197,798 468,518 256,735 298,810 182,020 462,725 262,183 257,326 146,641 389,797 223,995 4,919 5,707 (2,326) (194) - 3,110 0.12 0.78 March 31, 2015 $ 482,813 273,168 209,645 452,568 240,577 March 31, 2014 $ 347,489 226,963 120,526 337,945 196,046 40 Pure Multi-Family REIT LP MD&A – December 31, 2015 SECTION IV CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions during the reporting period that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Pure Multi’s significant accounting policies are described in note 3 to the December 31, 2015 audited consolidated financial statements, available on SEDAR at www.sedar.com and on Pure Multi’s website at www.puremultifamily.com. The policies that are most subject to estimation and judgment are outlined below. Valuation of Investment Properties The fair value of the investment properties is determined by management, using recognized valuation techniques supported, in certain instances, by independent real estate valuation experts. The determination of the fair value of investment properties requires the use of estimates such as future cash flows from assets (based on factors such as tenant profiles, future revenue streams and overall repair and condition of the property), capitalization rates and discount rates applicable to those assets. These estimates are based on market conditions existing at the reporting date. The following approaches, either individually or in combination, are used by management, together with the appraisals, in their determination of the fair value of the investment properties: The Income Approach derives market value by estimating the future cash flows that will be generated by the property and then applying an appropriate capitalization rate or discount rate to those cash flows. This approach can utilize the direct capitalization method and/or the discounted cash flow analysis. The Direct Comparison Approach involves comparing or contrasting the recent sale, listing or optioned prices of properties comparable to the subject and adjusting for any significant differences between them. Management reviews each appraisal obtained and ensures the assumptions used by the appraisers are reasonable and the final fair value amount reflects those assumptions used in the various approaches above. Where an appraisal is not obtained at the reporting date, management uses the approaches described above to estimate the fair value of the investment properties. ACCOUNTING STANDARDS NOT YET ADOPTED Pure Multi’s significant accounting policies are described in note 3 to the December 31, 2015 audited consolidated statements, available on SEDAR at www.sedar.com and on Pure Multi’s website at financial www.puremultifamily.com. Standards issued but not yet effective (a) IFRS 9 - Financial instruments On July 24, 2014, the IASB issued the complete IFRS 9, Financial Instruments (“IFRS 9 (2014)”). The mandatory effective date of IFRS 9 (2014) is for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions. Early adoption is permitted. The restatement of prior periods is not required and is only permitted if information is available without the use of hindsight. 41 Pure Multi-Family REIT LP MD&A – December 31, 2015 IFRS 9 (2014) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2014), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. The standard introduces additional changes relating to financial liabilities. It also amends the impairment model by introducing a new ‘expected credit loss’ model for calculating impairment. IFRS 9 (2014) also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management. This new standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship. Special transitional requirements have been set for the application of the new general hedging model. Pure Multi intends to adopt IFRS 9 (2014) for the annual period beginning on January 1, 2018. The extent of the impact of adoption of the standard has not yet been determined, however it is not expected to have a material impact on Pure Multi’s consolidated financial statements. (b) IFRS 15 – Revenue from Contracts with Customers On May 28, 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers (“IFRS 15”). The new standard is effective for annual periods beginning on or after January 1, 2018. Early application is permitted. IFRS 15 will replace IAS 11, Construction Contracts, IAS 18, Revenue, 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. The standard contains a single 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. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The new standard applies to contracts with customers. It does not apply to insurance contracts, financial instruments or lease contracts, which fall in the scope of other IFRSs. Pure Multi intends to adopt IFRS 15 for the annual period beginning on January 1, 2018. Pure Multi does not expect the standard to have a material impact on the consolidated financial statements. (c) IFRS 16 – Leases On January 13, 2016, the IASB issued IFRS 16, Leases (“IFRS 16”). The new standard is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15 at or before the date of initial adoption of IFRS 16. IFRS 16 will replace IAS 17, Leases (“IAS 17”). This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. Other areas of the lease accounting model have been impacted, including the definition of a lease. Transitional provisions have been provided. Pure Multi intends to adopt IFRS 16 for the annual period beginning on January 1, 2019. The extent of the impact of adoption of the standard has not yet been determined, however it is not expected to have a material impact on Pure Multi’s consolidated financial statements. 42 Pure Multi-Family REIT LP MD&A – December 31, 2015 SECTION V RISKS AND UNCERTAINTIES All income producing property investments are subject to a degree of risk and uncertainty. They are affected by various factors including general market conditions and local market circumstances. An example of general market conditions would be the availability of long-term financing whereas local conditions would relate to factors affecting specific properties in a particular geographic location, such as changes in market lease rates as a result of an over- supply of space or a reduction in demand for real estate. Management attempts to manage these risks by acquiring investment properties in various cities with strong economic and growth indicators, and engaging property management groups with local knowledge and experience. The board of directors of the Governing GP has the overall responsibility for the establishment and oversight of Pure Multi’s risk management framework. Pure Multi’s risk management policies are established to identify and analyze the risks faced by Pure Multi, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and in response to Pure Multi’s activities. In the normal course of business, Pure Multi is exposed to a number of risks that can affect its operating performance. These risks, and the actions taken to manage them, are as follows: Interest Rate and Financial Risk Interest rate risk arises from the possibility that the value of, or cash flows related to, a financial instrument will fluctuate as a result of changes in market interest rates. Pure Multi is exposed to financial risk from the interest rate differentials between the market rate and the rates used on these financial instruments. Pure Multi manages its financial instruments and interest rate risks based on its cash flow needs. Pure Multi minimizes interest rate risk by obtaining long-term, fixed rate mortgages whenever possible. It targets a conservative ratio of debt to gross book value within the range of 55% to 65% and is restricted under the LP Agreement to a maximum of 70%. As all of the mortgages payable bear interest at fixed rates, Pure Multi does not face significant interest rate risk. The profile of Pure Multi’s interest-bearing financial instruments was: Pure Multi’s interest Fixed rate instruments Mortgages payable Convertible debentures Preferred units of subsidiary Variable rate instruments Credit facility Face Value December 31, 2015 December 31, 2014 $ 357,075,437 23,000,000 125,000 380,200,437 $ 255,573,769 23,000,000 125,000 278,698,769 - 5,546,485 43 Pure Multi-Family REIT LP MD&A – December 31, 2015 Credit Risk Credit risk is the risk of financial loss to Pure Multi if a tenant, customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from Pure Multi’s receivables from tenants. Pure Multi’s exposure to credit risk is influenced mainly by the individual characteristics of each tenant. Pure Multi, through the US REIT, minimizes the risk by checking tenants’ credit histories, requesting security deposits and initiating a prompt collection process. In addition, there is no concentration of credit risk due to the large number of individual tenants. Currency Risk Pure Multi is exposed to minimal currency risk as a relatively small portion of the expenses are in Canadian dollars. Lease Rollover Risk Lease rollover risk arises from the possibility that Pure Multi may experience difficulty renewing leases as they expire or in re-leasing space vacated by tenants upon lease expiry. All leases of Pure Multi’s investment properties have lease terms of one year or less. Typically, Pure Multi instructs its property managers to initiate the renewal process before the existing leases expire. For any vacant spaces, Pure Multi uses qualified leasing agents to actively market the spaces. Class A Unit Prices It is not possible to predict the price at which units will trade and there can be no assurance that an active trading market for the Class A Units will be sustained. The Class A Units will not necessarily trade at values determined solely by reference to the value of the investment properties of Pure Multi. Accordingly, the Class A Units may trade at a premium or discount to the value implied by the value of Pure Multi’s investment properties. The market price for the Class A Units may be affected by changes in general market conditions, fluctuations in the markets for equity securities and numerous other factors beyond Pure Multi’s control. Environmental Risk As an owner of real property, Pure Multi is subject to various federal, state and municipal laws relating to environmental matters. Management carries out environmental inspections, by qualified environmental consultants, before a property is purchased. Management is not aware of any material non-compliance with environmental laws with respect to the current portfolio and is not aware of any pending or threatened investigations or actions by environmental regulatory authorities in connection with the current portfolio. Liquidity Risk Real property investments tend to be relatively illiquid, with the degree of liquidity generally fluctuating in relation to demand for and the perceived desirability of such investments. Such illiquidity may tend to limit Pure Multi’s ability to vary its portfolio promptly in response to changing economic or investment conditions. If Pure Multi were required to liquidate a real property investment, the proceeds to Pure Multi might be significantly less than the aggregate carrying value of such property. Liquidity risk is the risk that Pure Multi will not be able to meet its financial obligations as they fall due. Pure Multi’s approach to managing liquidity is to ensure that it will have sufficient cash available to meet its liabilities when due. In addition, Pure Multi intends to refinance any mortgages which mature within six months. 44Pure Multi-Family REIT LP MD&A – December 31, 2015 The following table provides the future non-discounted scheduled payments of financial liabilities, including estimated interest payments: Year ended December 31, 2016 2017 2018 2019 2020 and thereafter Mortgages payable (principal and interest) Convertible debentures payable (principal and interest) Preferred units of subsidiary (principal and interest) Accounts payable and accrued liabilities Total Tax Risk $ 15,219,689 $ 15,756,027 $ 30,685,613 $ 76,152,422 $ 337,941,459 1,495,000 1,495,000 1,495,000 1,495,000 24,122,274 15,625 15,625 15,625 15,625 140,625 10,409,972 - - - - $ 27,140,286 $ 17,266,652 $ 32,196,238 $ 77,663,047 $ 362,204,358 The US REIT currently qualifies as a real estate investment trust for U.S. federal income tax purposes. Thus, the US REIT is not subject to U.S. federal income tax. If the US REIT does not qualify or ceases to qualify as a REIT under the REIT exception, adverse consequences could arise including a material reduction of distributions to unitholders and Pure Multi. There can be no assurance that Canadian or U.S. federal income tax laws regarding the treatment of REITs will not be changed, or that administrative and assessment practices of the Canada Revenue Agency or IRS will not develop in a manner which adversely affects Pure Multi or its unitholders. RELATED PARTY TRANSACTIONS Managing GP Pure Multi is related to the Managing GP, by virtue of having an officer and director in common (Stephen Evans). During the year ended December 31, 2015, Pure Multi declared distributions to the Managing GP in the amount of $790,515 (year ended December 31, 2014 - $595,945). Included in accounts payable and accrued liabilities at December 31, 2015 was $nil (December 31, 2014 - $495,630). Sunstone U.S. Opportunity (No. 2) Realty Trust Pure Multi is related to Sunstone U.S. Opportunity (No. 2) Realty Trust, by virtue of having officers and directors in common (Stephen Evans, Robert King and James Redekop). There have been no related party transactions between Pure Multi and Sunstone U.S. Opportunity (No. 2) Realty Trust during the year ended December 31, 2015. During the year ended December 31, 2014, Pure Multi acquired the following investment properties from Sunstone U.S. Opportunity (No. 2) Realty Trust: • Walker Commons acquired on June 27, 2014 for a purchase price of $43,800,000; • • 50% interest in Preserve acquired on August 28, 2014 for a purchase price of $20,500,000; and 80% interest in San Brisas acquired on August 28, 2014 for a purchase price of $22,640,000. 45 Pure Multi-Family REIT LP MD&A – December 31, 2015 Pure Multi negotiated the purchase price of the properties above with reference to independently prepared third party appraisals. As part of the closing adjustments on the acquisitions of Walker Commons and the 80% interest in San Brisas, Pure Multi paid to Sunstone U.S. Opportunity (No. 2) Realty Trust an amount equal to the fair market value adjustment that Pure Multi would have incurred if it had assumed the mortgage as part of the acquisition. The total amount paid, related to these adjustments, to Sunstone U.S. Opportunity (No. 2) Realty Trust during the year ended December 31, 2014 was $2,926,438. Sunstone U.S. Opportunity (No. 3) Realty Trust Pure Multi is related to Sunstone U.S. Opportunity (No. 3) Realty Trust, by virtue of having officers and directors in common (Stephen Evans, Robert King and James Redekop). There have been no related party transactions between Pure Multi and Sunstone U.S. Opportunity (No. 3) Realty Trust during the year ended December 31, 2015. During the year ended December 31, 2014, Pure Multi acquired the following investment property from Sunstone U.S. Opportunity (No. 3) Realty Trust: • 50% interest in Preserve acquired on August 28, 2014 for a purchase price of $20,500,000. Pure Multi negotiated the purchase price of the property above with reference to an independently prepared third party appraisal. Tipton Asset Group, Inc. Sunstone Multi-Family Management Inc. provides property management services to the US REIT pursuant to a Property Management Agreement, dated May 9, 2012, as amended July 9, 2012. Sunstone Multi-Family Management Inc. subcontracted Tipton Asset Group, Inc. (“Tipton”) as the property manager for Pure Multi. Pure Multi is related to Tipton by virtue of having an officer and director in common with a subsidiary of Pure Multi (Bryan Kerns). Tipton charged $1,764,027 in property management fees during the year ended December 31, 2015 (year ended December 31, 2014 - $1,454,305). Included in accounts payable and accrued liabilities at December 31, 2015 was $nil (December 31, 2014 - $nil). Compensation Currently, the directors of the Governing GP who are not affiliated with or employees of the Managing GP receive annual compensation, in addition to fees for attending meetings of the directors or any committee, and acting as committee chairs and members. As well, the Governing GP will indirectly reimburse such directors for any out of pocket expenses, including out of pocket expenses for attending meetings. Pure Multi will reimburse the Governing GP for such amounts. In addition, Pure Multi will obtain insurance coverage for such directors. Compensation will be reviewed on an annual basis, giving consideration to Pure Multi’s growth and the extent of its portfolio. The amount incurred during the year ended December 31, 2015 was $210,293 (year ended December 31, 2014 - $96,797). Asset Management Agreement The Managing GP, pursuant to the Asset Management Agreement, provides asset management, administrative and reporting services to Pure Multi as its managing general partner. The Asset Management Agreement also requires the Managing GP to provide Pure Multi, at no cost, with support services consisting of office space and equipment and the necessary clerical and secretarial personnel for the administration of its day-to-day activities. The Asset Management Agreement may be terminated by Pure Multi at any time upon the occurrence of certain events of default and at any other time, without bonus or penalty, upon not less than 60 days notice. In lieu of the fees typically associated with a third party asset management agreement, the Managing GP will only be entitled to a reimbursement of any reasonable costs and expenses (including legal and audit costs but excluding personnel costs) that it incurs providing asset management services to Pure Multi and will not be entitled to any other remuneration or compensation for its services. 46Pure Multi-Family REIT LP MD&A – December 31, 2015 OUTSTANDING UNIT DATA Except as set out in the LP Agreement, no Class A Unit or Class B Unit has any preference or priority over another. The Class A Units and the Class B Units have voting rights as set out in the LP Agreement. Upon completion of the offerings and exercise of the over-allotment option, holders of Class A Units share in a 95% equity interest in all distributions and all net assets of Pure Multi, and the Managing GP, as the holder of Class B Units, shares in a 5% equity interest in all distributions and all net assets of Pure Multi. As at March 10, 2016, the following of Pure Multi’s securities were outstanding: (a) 200,000 Class B Units. Pursuant to the LP Agreement, the Class B Unitholders as a class are entitled to convert some or all of their Class B Units into Class A Units based on the Specified Ratio. See “Financial Condition – Partners’ Capital”; (b) 49,039,824 Class A Units; (c) 2,142,912 Warrants; and (d) 23,000 Convertible Debentures. The Convertible Debentures are convertible at the option of the holder and redeemable by Pure Multi in accordance with the terms of the trust indenture dated August 7, 2013. See “Financial Condition – Convertible Debentures”. SECTION VI SUBSEQUENT EVENTS Pure View at TPC (“Pure View”) On March 1, 2016, Pure Multi, through the US REIT, acquired Pure View, a multi-family apartment community located in San Antonio, Texas, for a purchase price of $61,000,000, plus standard closing costs and adjustments. This acquisition was financed with cash on hand and proceeds from a new mortgage financing. Pure Estates at TPC (“Pure Estates”) On March 1, 2016, Pure Multi, through the US REIT, acquired Pure Estates, a multi-family apartment community located in San Antonio, Texas, for a purchase price of $56,500,000, plus standard closing costs and adjustments. This acquisition was financed with cash on hand and proceeds from a new mortgage financing. ADDITIONAL INFORMATION Additional information relating to Pure Multi is available on SEDAR at www.sedar.com and on Pure Multi’s website at www.puremultifamily.com. TRADING SYMBOLS TSX Venture Exchange: RUF.U, RUF.UN, RUF.DB.U OTCQX: PMULF 47PURE MULTI-FAMILY REIT LP Consolidated Financial Statements Year ended December 31, 2015 Expressed in United States dollars 48 Brackenridge at Midtown, San Antonio, TX KPMG LLP Chartered Professional 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 statements of financial position as at December 31, 2015 and 2014, the consolidated statements of partners’ capital, income and comprehensive income, 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 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 in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Pure Multi-Family REIT LP as at December 31, 2015 and 2014, 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 March 9, 2016 Vancouver, Canada 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. 49ASSETS Non-current assets Investment properties (note 4) Current assets Prepaid expenses Mortgage reserve fund (note 6) Amounts receivable Cash and cash equivalents (note 7) TOTAL ASSETS LIABILITIES Non-current liabilities Mortgages payable (note 8) Convertible debentures (note 9) Preferred units of subsidiary (note 10) Current liabilities Mortgages payable – current portion (note 8) Credit facility (note 11) Rental deposits Unearned revenue Accounts payable and accrued liabilities Pure Multi-Family REIT LP Consolidated Statement of Financial Position Expressed in United States dollars December 31, 2015 December 31, 2014 $ 613,681,875 $ 468,518,077 1,456,482 6,570,597 811,420 68,632,392 77,470,891 1,087,631 6,208,641 486,118 16,490,085 24,272,475 $ 691,152,766 $ 492,790,552 $ 352,331,209 20,319,890 125,000 372,776,099 $ 255,126,917 19,876,109 125,000 275,128,026 1,870,858 - 1,004,731 816,880 10,409,972 14,102,441 1,608,076 5,474,301 802,296 910,674 11,069,372 19,864,719 TOTAL LIABILITIES 386,878,540 294,992,745 PARTNERS’ CAPITAL (note 12) 304,274,226 197,797,807 TOTAL LIABILITIES AND PARTNERS’ CAPITAL $ 691,152,766 $ 492,790,552 Nature of business and basis of presentation (notes 1 and 2) Subsequent events (note 21) Approved on behalf of the Board of Directors of the General Partner, Pure Multi-Family REIT (GP) Inc.: “Robert W. King” Robert W. King Director “Stephen J. Evans” Stephen J. Evans Director The accompanying notes are an integral part of these consolidated financial statements 50Pure Multi-Family REIT LP Consolidated Statement of Partners’ Capital Expressed in United States dollars Limited Partners Class A Limited Partners Class B General Partner Other Equity Items (note 12) Accumulated Earnings Total Balance, December 31, 2014 $ 159,153,127 $ 1,000,000 $ 20 $ 2,683,024 $ 34,961,636 $ 197,797,807 Issuance of units 74,623,250 Conversion of warrants, net of offering costs Offering costs Distributions to limited partners Net income for the year Balance, December 31, 2015 17,456 (3,515,918) - - - - - - - - - - - - - (17,456) - - - - - - 74,623,250 - (3,515,918) (15,810,293) (15,810,293) 51,179,380 51,179,380 $ 230,277,915 $ 1,000,000 $ 20 $ 2,665,568 $ 70,330,723 $ 304,274,226 Limited Partners Class A Limited Partners Class B General Partner Other Equity Items (note 12) Accumulated Earnings (Deficit) Total Balance, December 31, 2013 $ 111,876,144 $ 1,000,000 $ 20 $ 1,985,429 $ 4,931,260 $ 119,792,853 Issuance of units 49,460,167 Issuance of warrants Offering costs Distributions to limited partners Net income for the year Balance, December 31, 2014 - (2,183,184) - - - - - - - - - - - - - 703,332 (5,737) - - - - - 49,460,167 703,332 (2,188,921) (11,918,901) (11,918,901) 41,949,277 41,949,277 $ 159,153,127 $ 1,000,000 $ 20 $ 2,683,024 $ 34,961,636 $ 197,797,807 The accompanying notes are an integral part of these consolidated financial statements 51Pure Multi-Family REIT LP Consolidated Statement of Income and Comprehensive Income Expressed in United States dollars December 31, 2015 December 31, 2014 $ 58,875,799 $ 48,132,585 Year ended REVENUES Rental OPERATING EXPENSES Insurance Property management Property taxes Property operating expenses NET RENTAL INCOME NET FINANCE INCOME (EXPENSES) Interest income Interest expense (note 13) Distributions to subsidiary’s preferred unitholders NET OTHER INCOME (EXPENSES) Other income General and administrative Fair value adjustments to investment properties (note 4) Gain (loss) on disposal of investment properties (note 4) Franchise taxes 1,542,422 1,764,027 8,500,250 13,655,094 25,461,793 33,414,006 14,202 (15,998,065) (15,625) (15,999,488) 12,424 (913,588) 34,519,113 525,088 (378,175) 33,764,862 1,286,961 1,443,890 6,696,196 12,217,725 21,644,772 26,487,813 4,851 (10,343,424) (15,625) (10,354,198) 1,263 (769,883) 27,506,544 (235,421) (329,145) 26,173,358 SHARE OF LOSS OF EQUITY-ACCOUNTED INVESTMENT (note 5) - (357,696) NET INCOME AND COMPREHENSIVE INCOME $ 51,179,380 $ 41,949,277 Earnings per Class A unit Basic Diluted (note 20) Weighted average number of Class A units Basic Diluted (note 20) Earnings per Class B unit Basic and diluted Weighted average number of Class B units Basic and diluted $ $ 1.22 1.15 $ 1.35 $ 1.23 39,761,071 43,831,867 29,512,727 33,583,523 $ 12.79 $ 10.49 200,000 200,000 The accompanying notes are an integral part of these consolidated financial statements 52 Pure Multi-Family REIT LP Consolidated Statement of Cash Flows Expressed in United States dollars December 31, 2015 December 31, 2014 $ 51,179,380 $ 41,949,277 1,255,192 (3,209,439) (34,519,113) (1,479,908) 761,686 - (525,088) (14,202) 17,952,312 15,625 (2,261,582) 29,154,863 586,744 (687,895) (27,506,544) (587,949) 7,453 357,696 235,421 (4,851) 10,444,575 15,625 1,923,977 26,733,529 (172,850,553) (110,625,439) (2,920,095) 51,901,950 (1,430,727) - - 14,202 (2,157,679) 10,500,000 (720,522) (5,660,000) 2,473,013 4,851 (125,285,223) (106,185,776) (15,625) (15,071,502) (17,674,432) 158,600,000 (361,956) (1,564,383) 74,623,250 (41,200,282) (5,546,485) (3,515,918) - - 148,272,667 (15,625) (11,348,066) (10,501,496) 70,050,000 (551,622) (600,966) 49,460,167 (5,887,852) - (2,188,921) 150,000 703,332 89,268,951 Year ended Cash provided by (used in) OPERATIONS Net income Items not involving cash: Amortization of transaction costs and accretion of convertible debentures Amortization and write-off of mark to market mortgage adjustment Fair value adjustments to investment properties (note 4) Property tax adjustments on acquisition Property tax adjustments on sale Share of loss of equity-accounted investee (note 5) (Gain) loss on disposal of investment properties (note 4) Interest income Interest expense Distributions to subsidiary’s preferred unitholders Net change in non-cash working capital items (note 14) INVESTING Acquisitions of investment properties Capital additions to investment properties Proceeds received on disposal of investment properties Disposition costs on disposal of investment properties Transfer of investment property from equity-accounted investment Investments from equity-accounted investment Interest received FINANCING Distributions paid to subsidiary’s preferred unitholders Distributions paid to limited partners Interest paid Mortgage proceeds received Funds to mortgage reserve fund Payment of finance transaction costs Proceeds from the issuance of limited partner units Repayment of mortgages payable Repayment of bank credit facility Unit offering costs Credit facility proceeds received Proceeds from the issuance of warrants The accompanying notes are an integral part of these consolidated financial statements 53Pure Multi-Family REIT LP Consolidated Statement of Cash Flows (continued) Expressed in United States dollars Net change in cash and cash equivalents Cash and cash equivalents, beginning of year 52,142,307 16,490,085 9,816,704 6,673,381 CASH AND CASH EQUIVALENTS, END OF YEAR $ 68,632,392 $ 16,490,085 Supplemental cash flow information: Non-cash financing and investing activity: Cash distributions to the limited partners included in accounts payable and accrued liabilities $ 1,532,495 $ 1,584,218 The accompanying notes are an integral part of these consolidated financial statements 54Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars 1) PURE MULTI-FAMILY REIT LP INFORMATION Pure Multi-Family REIT LP (“Pure Multi”) is a limited partnership formed under the Limited Partnership Act (Ontario) to invest in multi-family real estate properties in the United States. Pure Multi was established by Pure Multi-Family Management Limited Partnership (the “Managing GP”), its managing general partner, and Pure Multi-Family REIT (GP) Inc. (the “Governing GP”), its governing general partner, pursuant to the terms of the Limited Partnership Agreement (“LP Agreement”). Pure Multi’s head office and address for service is located at 910 – 925 West Georgia Street, Vancouver, British Columbia, V6C 3L2. A copy of the Limited Partnership Agreement can be obtained from Pure Multi or on SEDAR at www.sedar.com. Pure Multi was established for, among other things, the purposes of: a) b) c) acquiring Common Shares and a Series A Preferred Share of Pure US Apartments REIT Inc. (the “US REIT”); temporarily holding cash and investments for the purposes of paying the expenses and liabilities of Pure Multi and making distributions to Unitholders; in connection with the undertaking set out above, reinvesting income and gains of Pure Multi and taking other actions besides the mere protection and preservation of Pure Multi property. The US REIT was established for, among other things, the purposes of acquiring, owning and operating multi- family real estate properties in the United States. These consolidated financial statements for the year ended December 31, 2015 were authorized for issue by the Board of Directors of the Governing GP (the “Board”) on March 9, 2016. 2) BASIS OF PRESENTATION AND STATEMENT OF COMPLIANCE a. Statement of compliance and basis of presentation These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) incorporating interpretations issued by the IFRS Interpretations Committee (“IFRICs”). b. Basis of measurement These consolidated financial statements have been prepared on a historical cost basis, except for investment properties which have been measured at fair value. The preparation of these consolidated financial statements requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying Pure Multi’s accounting policies. Areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 3(P). c. Functional and presentation currency These consolidated financial statements are presented in United States dollars, which is Pure Multi’s functional currency. 55 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars d. Presentation of financial statements Pure Multi uses a classified statement of financial position. The consolidated statement of financial position distinguishes between current and non-current assets and liabilities. Current assets and liabilities are those expected to be recovered or settled within twelve months from the reporting date and non-current assets and liabilities are those where the recovery or settlement is expected to occur more than twelve months from the reporting date. Pure Multi classifies the statements of income and comprehensive income using the function of expense method, which classifies expenses according to their functions, such as costs of operations or administrative activities. 3) SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies applied in the preparation of these consolidated financial statements are set out below. The accounting policies have been applied consistently by group entities unless otherwise stated. A. Basis of consolidation The consolidated financial statements comprise the financial statements of Pure Multi and its subsidiaries, over which Pure Multi has control. Control exists when Pure Multi has the power to govern the financial and operating policies of an entity so as to obtain benefit from its activities. The financial statements of subsidiaries are consolidated from the date that control commences and continue to be consolidated until the date that control ceases. On October 1, 2013, Pure Multi entered into a co-ownership agreement with another party in the form of a limited partnership. The entity operated in the same way as other entities, except that contractual arrangements between the two partners established joint control over the economic activities of the entity. Each partner did not have rights to individual assets or liabilities of the entities, but was entitled to a share of the outcome of activities of the arrangement. Pure Multi accounted for its interest in the jointly controlled entity using the equity method. Under the equity method, the interest in the joint venture is carried in the consolidated statement of financial position at purchase price plus any post acquisition changes in Pure Multi`s share of the net assets. On August 28, 2014, Pure Multi acquired the remaining ownership interest in the jointly controlled entity, giving it 100% control of the entity and its underlying investment property. As of August 28, 2014, the date control was established, Pure Multi began accounting for this investment property using the consolidation method. Intra-group transactions and balances are eliminated in preparing the consolidated financial statements. The consolidated financial statements reflect the financial position, results of operations and cash flows of Pure Multi and its subsidiaries. B. Property acquisitions and business combinations Where property is acquired, management considers the substance of the agreement in determining whether the acquisition represents the acquisition of a property or a business combination. The basis of the judgment is set out in note 3(P). Where such acquisitions are not judged to be a business combination, they are treated as asset acquisitions. The cost to acquire the property, including transaction costs, is allocated between the identifiable assets acquired and liabilities assumed based on their relative fair values at the acquisition date. Otherwise, acquisitions are accounted for as a business combination. 56 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars C. Investment properties Investment properties are comprised of properties held to earn rental revenue or for capital appreciation or both. Investment properties are measured initially at cost including transaction costs. Transaction costs include transfer taxes, professional fees for legal services and initial leasing commissions to bring the property to the condition necessary for it to be capable of operating. Subsequent to initial recognition, investment properties are measured at fair value and related gains or losses on the disposal of an investment property are determined as the difference between net disposal proceeds and the carrying value of the asset on the date the transaction occurred. Pure Multi defines fair value to be the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Therefore, the fair value of recently acquired investment property would be the purchase price. Any subsequent valuations performed on an investment property, after the acquisition date, would be the new basis for the fair value recorded on the investment property. Gains or losses arising from changes in fair values are included in the statement of income and comprehensive income in the period in which they arise. An investment property is derecognized when it has been disposed of or permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the statement of income and comprehensive income in the period of retirement or disposal. D. Leases Leases are classified according to the substance of the transaction. Leases that transfer substantially all the risks and benefits of ownership from Pure Multi to the lessees are accounted for as finance leases. All current leases of Pure Multi are operating leases. E. Convertible debentures Convertible debentures issued by Pure Multi are converted into Class A units (each a “Class A Unit”) of Pure Multi at the option of the holder, and the number of Class A units to be issued does not vary with changes in their fair value. Upon issuance, convertible debentures are separated into their debt and conversion feature components. The debt component of the convertible debenture is recognized initially at fair value of a similar debt instrument without a conversion feature. Subsequent to initial recognition, the debt component of a compound financial instrument is measured at amortized cost using the effective interest method. The conversion feature of the convertible debentures is initially recognized at fair value. The convertible debentures are convertible into Class A Units at the holder’s option. As a result of this obligation, the convertible debentures are exchangeable into equity (the Class A Units are equity by definition) and accordingly the conversion feature component of the convertible debentures is also equity. Accordingly, the conversion feature component of the convertible debentures is recorded in the consolidated statement of partners’ capital. Any directly attributable transaction costs are allocated to the debt and conversion components of the convertible debentures in proportion to their initial carrying amounts. 57 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars F. Revenue recognition Rental revenue is recognized on a straight line basis over the term of the lease subject to ultimate collection being reasonably assured. Revenue includes recoveries of specified operating expenses, in accordance with the terms of the lease agreements. Recoveries are recognized in the period in which the related operating expense was incurred and collectability is reasonably assured. G. Finance income (expenses) Finance income (expenses) consists of interest income, mortgage interest, credit facility interest, convertible debenture interest, distributions to preferred unitholders and preferred unit offering costs. Finance income is recognized in the period in which it is earned, while finance expenses are recognized in the period in which they are incurred. H. Translation of foreign currency The functional and reporting currency of Pure Multi is United States dollars. Pure Multi has certain transactions in Canadian dollars. Monetary items are translated at the exchange rate in effect at the statement of financial position date and non-monetary items are translated at historical exchange rates. Revenue and expense items are translated at the exchange rate in effect on the dates they occur. Realized and unrealized exchange gains and losses are included in earnings. I. Financial instruments Non-derivative financial assets and non-derivative financial liabilities are initially recognized at fair value, and their subsequent measurement is dependent on their classification as described below. The classification depends on the purpose for which the financial instruments were acquired or issued, their characteristics and Pure Multi’s designation of such instruments. Pure Multi classifies its financial instruments as follows: Cash and cash equivalents Amounts receivable Mortgage reserve fund Accounts payable and accrued liabilities Credit facility Convertible debentures Preferred units of subsidiary Mortgages payable Loans and receivables Loans and receivables Loans and receivables Other financial liabilities Other financial liabilities Other financial liabilities Other financial liabilities Other financial liabilities Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. These assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are accounted for at amortized cost, using the effective interest rate method, less any impairment losses. Non-derivative financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are accounted for at amortized cost, using the effective interest rate method. 58 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars J. Fair value Pure Multi measures investment properties at fair value at each balance sheet date. The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. In certain circumstances, the initial fair value may be based on other observable current market transactions, without modification or on a valuation technique using market based inputs. Fair value measurements recognized in the statement of financial position are categorized in accordance with the following levels: • Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: Quoted prices in active markets for similar assets or liabilities or valuation techniques where significant inputs are based on observable market data. • Level 3: Valuation techniques for which any significant input is not based on observable market data. K. Impairment of financial assets At each reporting date, Pure Multi assesses whether there is objective evidence that a financial asset is impaired. If a financial asset carried at amortized cost is impaired, the amount of the loss is measured as the difference between the amortized cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument’s original effective interest rate. The loss is recognized in impairment expense. L. Cash and cash equivalents Cash and cash equivalents consist of cash on hand, and cash held at banks or other financial institutions where cash is readily available to access. M. Earnings per unit Basic and diluted earnings per Class A and Class B unit have been calculated based on the proportion of the earnings allocated to the respective class of units, and the respective weighted average number of Class A units and Class B units outstanding. N. Taxes a. Income Taxes Pure Multi is not subject to tax under Part I of the Income Tax Act (Canada) (the “Tax Act”). Each partner of Pure Multi is required to include in computing the partner’s income for a particular taxation year the partner’s share of the income or loss of Pure Multi for its fiscal year ending in or on the partner’s taxation year-end, whether or not any of that income or loss is distributed to the partner in the taxation year. Accordingly, no provision has been made for Canadian income taxes under Part I of the Tax Act. 59 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars The Tax Act contains rules regarding the taxation of certain types of publicly listed or traded trusts and partnerships and their investors (the “SIFT Measures”). A specified investment flow-through partnership (a “SIFT partnership”, as defined in the Tax Act) will be subject to SIFT tax on its “taxable non-portfolio earnings” (as defined in the Tax Act) at a rate that is substantially equivalent to the general income tax rate applicable to Canadian corporations. The “taxable non-portfolio earnings” of a SIFT partnership less SIFT tax payable by a SIFT partnership is deemed to be a taxable dividend received by the SIFT partnership from a taxable Canadian corporation, subject to the detailed provisions of the Tax Act. Any such deemed taxable dividend would be allocated to the partners of a SIFT partnership and be taxable as taxable dividends in their hand. The SIFT Measures do not apply to a partnership that does not hold any “non-portfolio property” throughout the taxation year of the partnership. Management believes that the Pure Multi does not hold any “non-portfolio property” and should not be a SIFT partnership and therefore not subject to the SIFT Measures. Accordingly, no provision has been made for tax under the SIFT Measures. Management intends to continue to operate Pure Multi in such a manner so as to remain exempt from the SIFT Measures on a continuous basis in the future. If Pure Multi becomes a SIFT partnership it will be generally subject to income taxes at a rate that is substantially equivalent to the general tax rate applicable to Canadian corporations on its taxable non-portfolio earnings, if any. Pure Multi made a protective election to be treated as a partnership for U.S. federal income tax purposes. In addition, management believes at least 90% of Pure Multi’s gross income for the taxation year is qualifying income within the meaning of U.S. Internal Revenue Code (the “Code”) section 7704 and Pure Multi is not required to register as an investment company under the Investment Company Act of 1940. As such, it is generally not subject to U.S. federal income tax under the Code. Furthermore, Pure Multi’s subsidiary, the US REIT, timely made and intends to maintain an election to be taxed as a U.S. real estate investment trust (“REIT”) under the Code and to take the necessary steps to qualify as a REIT pursuant to the Code. In order for the US REIT to qualify as a REIT, the US REIT must meet a number of organizational and operational requirements, including a requirement to make annual dividend distributions to its shareholders equal to a minimum of 90% of its REIT taxable income, computed without regards to a dividends paid deduction and net capital gains. As a REIT, the US REIT generally will not be subject to U.S. federal income tax on its taxable income to the extent such income is distributed as a dividend to shareholders annually. Management believes that all REIT conditions necessary to eliminate income taxes for the reporting period have been met, and accordingly no provision for US federal and state income taxes has been made. Management intends to operate the US REIT in such a manner so as to qualify as a REIT on a continuous basis in the future. However, actual qualification as a REIT will depend upon meeting, through actual annual and quarterly operating results, the various conditions imposed by the Code. If the US REIT fails to qualify as a REIT in any taxable year, it will be subject to US federal and state income taxes at regular US corporate rates, including any applicable alternative minimum tax. In addition, the US REIT may not be able to requalify as a REIT for the four subsequent taxable years. Even if the US REIT qualifies for taxation as a REIT, the US REIT may be subject to certain US state and local taxes on its income and property, and to US federal income and excise taxes on its undistributed taxable income and/or specified types of income in certain circumstances. b. Texas Franchise Tax Texas Franchise Tax applicable to Pure Multi, for its investment properties operated in Texas during the year ended December 31, 2015, is equal to 0.95% of the lesser of: (i) 70% of total revenue; (ii) 100% of total revenue less cost of goods sold; (iii) 100% of total revenue less compensation expense; or (iv) 100% of total revenue less $1 million. Pure Multi has recorded a provision for Texas Franchise Tax of $378,175 for the year ended December 31, 2015 (year ended December 31, 2014 - $329,145), which is included within other expenses in the consolidated statement of income and comprehensive income. 60 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars O. Operating segments Pure Multi currently operates in one business segment, the owning and operating of multifamily apartment properties in the sun-belt area in the United States. The primary format for segment reporting is based on geographical region and is consistent with the internal reporting provided to the chief operating decision- maker, determined to be the general partners. P. Significant accounting judgments and estimates Judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of revenues, expenses, assets and liabilities are reviewed on an ongoing basis. Actual results may differ from these estimates. a. Judgments In the process of applying Pure Multi’s accounting policies, management has made the following critical judgments, which have the most significant effects on the amounts recognized in the consolidated financial statements: (i) Asset acquisitions Pure Multi, through the US REIT, acquires individual real estate properties. At the time of acquisition, Pure Multi considers whether or not the acquisition represents the acquisition of a business. Pure Multi accounts for an acquisition as a business combination where an integrated set of activities is acquired in addition to the property. More specifically, consideration is made to the extent to which significant processes are acquired and, in particular, the extent of ancillary services provided by the property (e.g., maintenance, cleaning, security, bookkeeping, etc.). When the acquisition of a property does not represent a business, it is accounted for as an acquisition of a group of assets and liabilities. The cost of the acquisition, including transaction costs, is allocated to the assets and liabilities acquired based upon their relative fair values, and no goodwill or deferred tax is recognized. All acquisitions to date by Pure Multi have been determined to be asset acquisitions. b. Estimates The significant areas of estimation include the following: (i) Valuation of investment properties The fair value of the investment properties is determined by management, using recognized valuation techniques supported, in certain instances, by independent real estate valuation experts. The determination of the fair value of investment properties requires the use of estimates such as future cash flows from assets (based on factors such as tenant profiles, future revenue streams and overall repair and condition of the property), capitalization rates and discount rates applicable to those assets. These estimates are based on market conditions existing at the reporting date. The following approaches, either individually or in combination, are used by management, together with the appraisals, in their determination of the fair value of the investment properties: 61 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars The Income Approach derives market value by estimating the future cash flows that will be generated by the property and then applying an appropriate capitalization rate or discount rate to those cash flows. This approach can utilize the direct capitalization method and/or the discounted cash flow analysis. The Direct Comparison Approach involves comparing or contrasting the recent sale, listing or optioned prices of properties comparable to the subject and adjusting for any significant differences between them. Management reviews each appraisal obtained and ensures the assumptions used by the appraisers are reasonable and the final fair value amount reflects those assumptions used in the various approaches above. Where an appraisal is not obtained at the reporting date, management uses the approaches described above, for each investment property, and estimates the fair value. The significant assumptions used by management in estimating the fair value of investment properties are set out in note 4. Q. Provisions Provisions are recognized by Pure Multi when: i) Pure Multi has a present legal or constructive obligation as a result of past events; ii) it is probable that an outflow of resources will be required to settle the obligation; and iii) the amount can be reasonably estimated. If the time value of money is material, provisions are discounted using a current rate that reflects the risk profile of the liability, and the increase to the provision due to the passage of time will be recognized as interest expenses. R. Accounting standards not yet adopted Financial instruments: classification and measurement On July 24, 2014 the IASB issued the complete IFRS 9, Financial Instruments (“IFRS 9 (2014)”). The mandatory effective date of IFRS 9 (2014) is for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions. Early adoption is permitted. The restatement of prior periods is not required and is only permitted if information is available without the use of hindsight. IFRS 9 (2014) introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2014), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. The standard introduces additional changes relating to financial liabilities. It also amends the impairment model by introducing a new ‘expected credit loss’ model for calculating impairment. IFRS 9 (2014) also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management. This new standard does not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, however it will provide more hedging strategies that are used for risk management to qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging relationship. Special transitional requirements have been set for the application of the new general hedging model. Pure Multi intends to adopt IFRS 9 (2014) in its consolidated financial statements for the annual period beginning on January 1, 2018. The extent of the impact of adoption of the standard has not yet been determined, however it is not expected to have a material impact on Pure Multi’s consolidated financial statements. 62 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars Revenue recognition On May 28, 2014 the IASB issued IFRS 15, Revenue from Contracts with Customers (“IFRS 15”). The new standard is effective for annual periods beginning on or after January 1, 2018. Earlier application is permitted. IFRS 15 will replace IAS 11, Construction Contracts, IAS 18, Revenue, 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. The standard contains a single 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. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The new standard applies to contracts with customers. It does not apply to insurance contracts, financial instruments or lease contracts, which fall in the scope of other IFRSs. Pure Multi intends to adopt IFRS 15 in its consolidated financial statements for the annual period beginning on January 1, 2018. Pure Multi does not expect the standard to have a material impact on the consolidated financial statements. Leases On January 13, 2016 the IASB issued IFRS 16, Leases (“IFRS 16”). The new standard is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15 at or before the date of initial adoption of IFRS 16. IFRS 16 will replace IAS 17, Leases (“IAS 17”). This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors. Other areas of the lease accounting model have been impacted, including the definition of a lease. Transitional provisions have been provided. Pure Multi intends to adopt IFRS 16 in its financial statements for the annual period beginning on January 1, 2019. The extent of the impact of adoption of the standard has not yet been determined, however it is not expected to have a material impact on Pure Multi’s consolidated financial statements. 63 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars 4) INVESTMENT PROPERTIES Balance, at December 31, 2014 Acquisitions Dispositions Property tax adjustments on acquisitions and dispositions Capital additions Fair value adjustments to investment properties IFRIC 21 property tax liability adjustment IFRIC 21 fair value adjustment to investment properties $ 2015 468,518,077 172,850,553 (65,844,185) 718,222 2,920,095 34,519,113 613,681,875 - - Balance, December 31, 2015 $ 613,681,875 Balance, at December 31, 2013 Acquisitions Dispositions Transfer from equity-accounted investment Property tax adjustments on acquisitions and dispositions Capital additions Fair value adjustments to investment properties IFRIC 21 property tax liability adjustment IFRIC 21 fair value adjustment to investment properties $ 2014 332,002,818 110,625,439 (10,014,899) 5,660,000 580,496 2,157,679 27,506,544 468,518,077 - - Balance, December 31, 2014 $ 468,518,077 On January 14, 2015, Pure Multi, through the US REIT, sold Sunset Point Apartments, a multi-family apartment community (“Sunset Point”), located in Arlington, Texas, for a sale price of $27,950,000, less standard closing costs and adjustments. The mortgage payable of $15,898,050, secured by Sunset Point, was assumed by the purchaser on the same date and net cash proceeds received by Pure Multi were $12,051,950. On May 7, 2015, Pure Multi, through the US REIT, acquired Park at West Avenue, a multi-family apartment community (“Park West”), located in San Antonio, Texas, for a purchase price of $54,250,000, plus standard closing costs and adjustments. This acquisition was financed with cash and a new 15 year mortgage in the amount of $36,500,000. On August 10, 2015, Pure Multi, through the US REIT, acquired Amalfi Stonebriar, a multi-family apartment community (“Amalfi”), located in Frisco, Texas, for a purchase price of $67,500,000, plus standard closing costs and adjustments. This acquisition was financed with cash and a new 12 year mortgage in the amount of $45,000,000. 64 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars On September 2, 2015, Pure Multi, through the US REIT, sold Oakchase Apartment Homes, a multi-family apartment community (“Oakchase”), located in Arlington, Texas, for a sale price of $17,850,000, less standard closing costs and adjustments. The mortgage payable, secured by Oakchase, was paid in full as of the same date. On September 30, 2015, Pure Multi, through the US REIT, acquired Brackenridge at Midtown, a multi-family apartment community (“Brackenridge”), located in San Antonio, Texas, for a purchase price of $51,000,000, plus standard closing costs and adjustments. This acquisition was financed with cash and a new 12 year mortgage in the amount of $30,600,000. On December 30, 2015, Pure Multi, through the US REIT, sold Windsong Apartments, a multi-family apartment community (“Windsong”), located in Dallas, Texas, for a sale price of $22,000,000, less standard closing costs and adjustments. The gain (loss) on disposal of investment properties is calculated as follows: For the year ended December 31, Sales price Disposition costs Net proceeds Fair value of investment properties $ $ 2015 67,800,000 (1,430,727) 66,369,273 (65,844,185) 2014 10,500,000 (720,522) 9,779,478 (10,014,899) Gain (loss) on disposal of investment properties $ 525,088 $ (235,421) The investment properties are pledged as security against the mortgages payable. Investment properties are carried at fair value. As set out in note 3(P), in arriving at their estimates of fair value, management and the independent appraisers have used their market knowledge and professional judgment and have not relied solely on historical transactional comparisons. Independent appraisals were performed by accredited appraisers with recognized and relevant professional qualifications and with recent experience in the location and category of the investment property being valued. Management reviews each appraisal and ensures that the assumptions used are reasonable and the final fair value amount reflects those assumptions used in the determination of the fair market values of the properties. Pure Multi does not obtain appraisals for each property at each reporting date. Where Pure Multi does not obtain an appraisal for a specific investment property at the reporting date, management uses specific indicators (i.e. market conditions, discount rate changes, etc.) and determines whether a change in fair value has occurred. During the year ended December 31, 2015, Pure Multi obtained independent appraisals on all investment properties held at December 31, 2015 (year ended December 31, 2014 – obtained independent appraisals on all investment properties held at December 31, 2014). As disclosed in note 3(P), where appropriate, management incorporated these appraisals in its determination of fair value for each of the investment properties. 65 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars The significant assumptions made relating to the valuations of the investment properties are set out below: December 31, 2015 December 31, 2014 Weighted average Range Weighted average Range Capitalization rate 5.50% 5.00% - 6.00% 5.90% 5.35% - 6.25% 5) EQUITY-ACCOUNTED INVESTMENT On October 1, 2013, Pure Multi, through the US REIT, acquired a 19.99% interest in Sunstone San Brisas LP and a 20% interest in Sunstone San Brisas Apartments, LLC (collectively referred to as ”San Brisas”), located in Chandler, Arizona, for a purchase price of $5,600,000, plus standard closing costs and adjustments. This acquisition was financed with cash and the assumption of a mortgage in the amount of $2,755,967 bearing a rate of interest of 5.63%. On August 28, 2014, Pure Multi acquired the remaining 80% interest in San Brisas, resulting in a 100% ownership interest of the investment property. As a result of this transaction, as of August 28, 2014, Pure Multi’s interest in San Brisas was no longer measured using the equity method but instead the consolidation method. The tables below show Pure Multi’s investment in San Brisas, while measured measured using the equity method: Balance, December 31, 2013 Additions Share of net loss Equity value at time of acquisition of control Balance, August 28, 2014 For the year ended December 31 2014 (from January 1, 2014 until acquisition of remaining interest by Pure Multi on August 28, 2014) Revenues Operating expenses Net rental income Net finance expenses Fair value adjustment to investment properties Net income and comprehensive income Pure Multi’s share of net income and comprehensive income, before adjustments Adjustment for Pure Multi’s net finance expenses related to joint venture $ 2,830,709 - (357,696) (2,473,013) $ - $ 1,710,348 690,732 1,019,616 (453,183) 135,844 702,277 140,456 (498,152) Pure Multi’s share of net loss and comprehensive loss, for the period $ (357,696) 66 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars 6) MORTGAGE RESERVE FUND The mortgage reserve fund consists of cash on deposit requested by the lenders to be retained in escrow to pay for any repairs to the properties and certain costs. These funds will be released to pay the respective obligations or once certain conditions are met, such as completion of repairs. The term of the mortgage reserve fund is less than 12 months. 7) CASH AND CASH EQUIVALENTS Included in cash and cash equivalents is $21,705,731 of cash held in trust by an escrow agency. This cash represents the net proceeds received from the sale of the Windsong investment property. This cash is readily available and will be released in less than 12 months, therefore it is classified as a current asset. 8) MORTGAGES PAYABLE Valley Ranch Prairie Creek (1) Bear Creek Prestonwood Hackberry Creek Deer Park Fountainwood Livingston Walker Commons Preserve San Brisas Park West Amalfi Brackenridge Oakchase Sunset Point Nominal interest rate Year of maturity December 31, 2015 December 31, 2014 Face value Face value 3.51% 4.07% 3.45% 3.46% 3.90% 4.21% 4.46% 3.51% 3.11% 3.26% 3.26% 4.02% 3.83% 3.72% 3.28% 3.54% 2022 2030 2019 2023 2028 2023 2023 2018 2019 2021 2021 2030 2027 2027 - - $ 13,680,000 46,372,718 32,080,000 8,670,000 29,500,000 16,370,676 12,734,504 15,517,539 28,470,000 24,600,000 16,980,000 36,500,000 45,000,000 30,600,000 - - $ 13,680,000 31,712,271 32,080,000 8,670,000 29,500,000 16,480,000 12,948,076 15,824,842 28,470,000 24,600,000 16,980,000 - - - 8,706,995 15,921,585 Total mortgages principal payable Unamortized mortgage transaction costs 357,075,437 255,573,769 (2,873,370) (2,048,215) Unamortized mark to market mortgage adjustment - 3,209,439 Total carrying value of mortgages payable $ 354,202,067 $ 256,734,993 (1) On September 9, 2015, Pure Multi obtained new mortgage financing on Prairie Creek Villas in the amount of $46,500,000, with a term of 15 years and bearing a fixed interest rate of 4.07%. The prior mortgage payable, secured by Prairie Creek Villas, was paid in full as of the same date and the balance of the unamortized mark to market mortgage adjustment of $2,737,202 was written off (note 13). 67 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars The mortgages payable are recorded at amortized cost and bear a weighted average effective interest rate of 3.72% as at December 31, 2015 (December 31, 2014 – 3.86%). The mortgages payable are secured by charges on Pure Multi’s investment properties. Principal repayments, as of December 31, 2015, based on scheduled repayments to be made on the mortgages payable over the next five years and thereafter are as follows: 2016 2017 2018 2019 2020 Thereafter $ 1,870,858 2,510,654 17,714,902 64,298,911 4,505,456 266,174,656 $ 357,075,437 9) CONVERTIBLE DEBENTURES On August 7, 2013, Pure Multi issued 23,000 6.5% convertible unsecured subordinated debentures (each a“6.5% convertible debenture”) at a price of $1,000 per 6.5% convertible debenture, for gross proceeds of $23,000,000. The 6.5% convertible debentures mature of September 30, 2020 and are convertible at the holder’s option at any time into Class A Units at a conversion price of $5.65 per Class A Unit, in accordance with the terms of the trust indenture dated August 7, 2013. On or after September 30, 2016, but prior to September 30, 2018, the 6.5% convertible debentures may be redeemed by Pure Multi, in whole or in part, at a price equal to their principal amount plus accrued and unpaid interest thereon, provided the weighted average trading price of the Class A Units for the 20 consecutive trading days, ending on the fifth trading day immediately preceding the date on which notice of redemption is given, is at least 125% of the conversion price. After September 30, 2018, the 6.5% convertible debentures may be redeemed by Pure Multi at any time. During the year ended December 31, 2015, none of the 6.5% convertible debentures have been converted into Class A Units. At December 31, 2015, $23,000,000 of the face value of the 6.5% convertible debentures was outstanding. The following summarizes the face and carrying values of the 6.5% convertible debentures at December 31, 2015: Balance as at December 31, 2014 Amortization of transaction costs Accretion of liability component Convertible Debentures Face Value $ 23,000,000 - - Liability Component Carrying Value $ 19,876,109 155,350 288,431 Equity Component Carrying Value $ 1,985,429 - - Balance as at December 31, 2015 $ 23,000,000 $ 20,319,890 $ 1,985,429 68 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars 10) PREFERRED UNITS OF SUBSIDIARY During the year ended December 31, 2013, the US REIT issued 125 preferred units at $1,000 per preferred unit for gross proceeds of $125,000. On consolidation, the preferred units of the US REIT are reflected as a liability of Pure Multi. The preferred units are non-voting preferred units. Unitholders holding preferred units are entitled to receive dividends from the US REIT at a per annum rate equal to 12.5%, payable on June 30 and December 31 of each year. Unitholders holding preferred units will be allocated such return in priority to any allocations or distributions to all other classes and series of units of the US REIT. However, after payment of such return to unitholders holding preferred units, preferred unitholders are not otherwise entitled to share in the income of the US REIT. The US REIT may redeem the preferred units at any time, for a price equal to $1,000 per preferred unit, plus accrued and unpaid distributions. Due to the fixed distributions and preferred treatment for preferred units, they meet the definition of a liability. In addition, the Board does not expect to redeem any preferred units within the next year. Thus, the preferred units are classified as non-current liabilities. Pure Multi declared distributions of $15,625 during the year ended December 31, 2015 to the preferred unitholders (year ended December 31, 2014 – $15,625). 11) CREDIT FACILITY On July 19, 2013, Pure Multi established a revolving credit facility with a lender in the amount of $9,900,000. On December 11, 2015, Pure Multi paid its outstanding balance on the credit facility and extinguished the facility on the same date. The revolving credit facility was interest bearing at a variable interest rate based at 2.00% plus the London Interbank Offered Rate (“LIBOR”). The revolving credit facility was secured by a charge in respect of Windsong Apartments prior to its extinguishment. Revolving credit facility Less: Line of credit outstanding Remaining unused credit facility December 31, 2015 December 31, 2014 9,900,000 $ (5,546,485) - - $ $ - $ 4,353,515 The amount payable on the credit facility at December 31, 2014 was $5,474,301. This amount is net of the related unamortized transaction costs of $72,184, which were amortized, on a straight-line basis, over the term of the credit facility. 12) PARTNERS’ CAPITAL a) Limited Partners and General Partner The capital of Pure Multi consists of an unlimited number of units of Pure Multi and the interest held by the Governing GP. The Governing GP has made a capital contribution of $20 to Pure Multi and has no further obligation to contribute capital. 69 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars On May 30, 2012, the Managing GP subscribed for 200,000 Class B units (each a “Class B Unit”) of Pure Multi, at a price of $5.00 per Class B Unit, for gross proceeds to Pure Multi of $1,000,000, which initially entitles the Class B Unitholders to a 5% interest in Pure Multi. Pure Multi did not issue any additional Class B Units subsequent to this. From the date of formation on May 8, 2012, to December 31, 2014, Pure Multi issued 34,834,824 Class A Units for gross proceeds of $170,743,517, less offering costs. On May 8, 2015, Pure Multi completed a public offering of 6,900,000 Class A Units, on a bought deal basis, at a price of $5.10 per Class A Unit for gross proceeds of $35,190,000, less offering costs. On October 27, 2015, 55,000 Class A Unit purchase warrants (each a “Warrant”) were exercised for 55,000 Class A Units, at an exercise price of $5.15, for gross proceeds of $283,250. Pure Multi issued the 55,000 Class A Units from treasury. On December 11, 2015, Pure Multi completed a public offering of 7,250,000 Class A Units, on a bought deal basis, at a price of $5.40 per Class A Unit for gross proceeds of $39,150,000, less offering costs. Pure Multi is authorized to issue an unlimited number of Class A Units and Class B Units. b) Other Equity Items December 31, 2015 December 31, 2014 Convertible Debentures Equity Component (note 9) Warrants Total Convertible Debentures Equity Component (note 9) Warrants Total $ 1,985,429 $ 697,595 $ 2,683,024 $ 1,985,429 $ - $ 1,985,429 - - - - (17,456) (17,456) - - 697,595 697,595 - - $ 1,985,429 $ 680,139 $ 2,665,568 $ 1,985,429 $ 697,595 $ 2,683,024 Balance at beginning of year Issuance of warrants, net of offering costs Warrants exercised, net of offering cost Balance at end of year During the year ended December 31, 2014, Pure Multi issued 2,197,912 Warrants. Each Warrant entitles the holder to acquire one additional Class A Unit from Pure Multi at a price of $5.15 per Class A Unit until November 20, 2016. During the year ended December 31, 2015, 55,000 Warrants were exercised and converted into Class A units. As at December 31, 2015, Pure Multi had outstanding Warrants as follows: Number of Warrants 2,142,912 Exercise Price $5.15 Expiry November 20, 2016 70 13) INTEREST EXPENSE Interest expense consists of the following: Mortgage interest Credit facility interest Convertible debenture interest Amortization of transaction costs and accretion of convertible debentures Amortization and write-off of mark to market mortgage adjustment (1) Mortgage prepayment expense (1) Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars Year ended December 31, 2015 $ 11,156,074 112,402 1,495,000 $ December 31, 2014 8,815,187 134,284 1,495,104 1,255,192 (3,209,439) 5,188,836 586,744 (687,895) - $ 15,998,065 $ 10,343,424 (1) On September 9, 2015, Pure Multi obtained new mortgage financing on Prairie Creek Villas and incurred a mortgage prepayment expense of $5,188,836, related to paying off its prior mortgage. This prepayment expense was partially offset by the write-off of the unamortized portion of the market to market mortgage adjustment in the amount of $2,737,202, on the same date. 14) NET CHANGE IN NON-CASH WORKING CAPITAL ITEMS Cash provided by (used in) Amounts receivable Prepaid expenses Accounts payable and accrued liabilities Unearned revenue Rental deposits Year ended December 31, 2015 $ (325,302) (368,851) (1,676,070) (93,794) 202,435 $ December 31, 2014 (453,067) (137,879) 2,010,682 260,807 243,434 $ (2,261,582) $ 1,923,977 15) CAPITAL MANAGEMENT Pure Multi defines capital as the aggregate of partners’ capital, preferred units of subsidiary and long term debt. Pure Multi’s objectives in managing capital are to maintain a level of capital that complies with investment and debt restrictions pursuant to the initial offering prospectus; complies with existing debt covenants, if any; funds its business strategies; and builds long-term partners’ value. Pure Multi’s capital structure is approved by the board of directors of the Governing GP through its periodic reviews. 71 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars The LP Agreement provides for a maximum indebtedness level of up to 70% of the gross book value. The term "indebtedness" means any obligation of Pure Multi for borrowed money (including the face amount outstanding under any convertible debentures and any outstanding liabilities of Pure Multi arising from the issuance of subordinated notes but excluding any premium in respect of indebtedness assumed by Pure Multi for which Pure Multi has the benefit of an interest rate subsidy), but excludes trade accounts payable, distributions payable to unitholders, preferred units of subsidiary, accrued liabilities arising in the ordinary course of business and short-term acquisition credit facilities. The LP Agreement defines “gross book value” as the book value of the assets of Pure Multi plus the amount of accumulated depreciation and amortization in respect of such assets (and related intangible assets), the amount of future income tax liability arising out of indirect acquisitions and excluding the amount of any receivable reflecting interest rate subsidies on any debt assumed by Pure Multi. Pure Multi’s indebtedness is 54.6% as at December 31, 2015 (December 31, 2014 – 57.9%). Pure Multi was in compliance with all restrictions during the years ended December 31, 2015 and 2014. There were no changes in Pure Multi’s approach to capital management during the year ended December 31, 2015. The capital structure consisted of the following components at December 31, 2015 and 2014: Capital Mortgages payable Convertible debentures Preferred units of subsidiary Partners’ capital December 31, 2015 December 31, 2014 $ 354,202,067 20,319,890 125,000 304,274,226 $ 256,734,993 19,876,109 125,000 197,797,807 Total capital $ 678,921,183 $ 474,533,909 16) FINANCIAL INSTRUMENTS Fair value of financial instruments For certain of Pure Multi’s financial instruments, including cash and cash equivalents, amounts receivable, mortgage reserve fund, credit facility, and accounts payable and accrued liabilities, the carrying amounts approximate the fair values due to the short-term nature of the instruments. The fair values of the mortgages payable and preferred units have been calculated based on discounted future cash flows using discount rates that reflect current market conditions for instruments having similar terms and conditions. Discount rates are either provided by lenders or are observable in the open market. The fair value of the convertible debentures has been calculated using quoted prices in active markets. The following table presents the carrying amounts and fair values of Pure Multi’s non-current financial instruments: Mortgages payable Preferred units of subsidiary Convertible debentures December 31, 2015 Carrying Amount $ 354,202,067 125,000 20,319,890 Fair Value $ 366,039,986 125,000 23,000,000 December 31, 2014 Carrying Amount $ 256,734,993 125,000 19,876,109 Fair Value $ 262,022,675 125,000 22,885,000 72 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars Financial risk management The board of directors of the Governing GP has the overall responsibility for the establishment and oversight of Pure Multi’s risk management framework. Pure Multi’s risk management policies are established to identify and analyze the risks faced by Pure Multi, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and in response to Pure Multi’s activities. In the normal course of business, Pure Multi, through the US REIT, is exposed to a number of risks that can affect its operating performance. These risks include, but are not limited to, credit risk, interest rate risk, liquidity risk, currency risk and environmental risk. These risks, and the actions taken to manage them, are as follows: a. Credit risk Credit risk is the risk of financial loss to Pure Multi if a tenant, customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from Pure Multi’s receivables from tenants. Pure Multi’s exposure to credit risk is influenced mainly by the individual characteristics of each tenant. Pure Multi minimizes the risk by checking tenants’ credit histories, requesting security deposits and initiating a prompt collection process. All trade receivables are current. b. Interest rate risk Interest rate risk arises from the possibility that the value of, or cash flows related to, a financial instrument will fluctuate as a result of changes in market interest rates. Pure Multi is exposed to interest rate risk from the interest rate differentials between the market rate and the rates used on these financial instruments. Pure Multi manages its financial instruments and interest rate risks based on its cash flow needs and with a view to minimizing interest expense. Whenever possible, Pure Multi, through the US REIT, tries to secure fixed interest rate mortgages. As all of the mortgages payable bear interest at fixed rates, Pure Multi does not face significant interest rate risk. c. Liquidity risk Liquidity risk is the risk that Pure Multi will not be able to meet its financial obligations as they fall due. Real estate property investments tend to be relatively illiquid, with the degree of liquidity generally fluctuating in relation to demand for and the perceived desirability of such investments. Such illiquidity may tend to limit Pure Multi’s ability to vary its portfolio promptly in response to changing economic or investment conditions. If Pure Multi were required to liquidate the investment properties, the proceeds to Pure Multi might be significantly less than the aggregate carrying value of such property. Pure Multi’s approach to managing liquidity is to ensure that it will have sufficient cash available to meet its liabilities when due. In addition, Pure Multi intends to refinance any mortgages which mature within six months. The following table provides the future non-discounted scheduled payments of financial liabilities, including estimated interest payments: 73 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars Year ended December 31, 2016 2017 2018 2019 2020 and thereafter Mortgages payable (principal and interest) Convertible debentures payable (principal and interest) Preferred units of subsidiary (principal and interest) Accounts payable and accrued liabilities $ 15,219,689 $ 15,756,027 $ 30,685,613 $ 76,152,422 $ 337,941,459 1,495,000 1,495,000 1,495,000 1,495,000 24,122,274 15,625 15,625 15,625 15,625 140,625 10,409,972 - - - - Total $ 27,140,286 $ 17,266,652 $ 32,196,238 $ 77,663,047 $ 362,204,358 d. Currency risk Pure Multi is exposed to minimal currency risk since only a small portion of the expenses is in Canadian dollars. e. Environmental risk Pure Multi, through the US REIT, is subject to various federal, state and municipal laws relating to the environment. On acquisition, Pure Multi conducts environmental inspections of its properties and appropriate testing by qualified environmental consultants when required to ensure compliance with all applicable environmental laws. 17) RELATED PARTY TRANSACTIONS AND COMMITMENTS Managing GP Pure Multi is related to the Managing GP, by virtue of having an officer and director in common (Stephen Evans). During the year ended December 31, 2015, Pure Multi declared distributions to the Managing GP in the amount of $790,515 (year ended December 31, 2014 - $595,945). Included in accounts payable and accrued liabilities at December 31, 2015 was $nil (December 31, 2014 - $495,630). Sunstone U.S. Opportunity (No. 2) Realty Trust Pure Multi is related to Sunstone U.S. Opportunity (No. 2) Realty Trust, by virtue of having officers and directors in common (Stephen Evans, Robert King and James Redekop). There have been no related party transactions between Pure Multi and Sunstone U.S. Opportunity (No. 2) Realty Trust during the year ended December 31, 2015. During the year ended December 31, 2014, Pure Multi acquired the following investment properties from Sunstone U.S. Opportunity (No. 2) Realty Trust: • Walker Commons acquired on June 27, 2014 for a purchase price of $43,800,000; • • 50% interest in Preserve acquired on August 28, 2014 for a purchase price of $20,500,000; and 80% interest in San Brisas acquired on August 28, 2014 for a purchase price of $22,640,000. 74 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars Pure Multi negotiated the purchase price of the properties above with reference to independently prepared third party appraisals. Pure Multi paid to Sunstone U.S. Opportunity (No. 2) Realty Trust an amount equal to the fair market value adjustment that Pure Multi would have incurred if it had assumed the mortgage as part of the acquisition. The total amount paid, related to these adjustments, to Sunstone U.S. Opportunity (No. 2) Realty Trust during the year ended December 31, 2014 was $2,926,438. Sunstone U.S. Opportunity (No. 3) Realty Trust Pure Multi is related to Sunstone U.S. Opportunity (No. 3) Realty Trust, by virtue of having officers and directors in common (Stephen Evans, Robert King and James Redekop). There have been no related party transactions between Pure Multi and Sunstone U.S. Opportunity (No. 3) Realty Trust during the year ended December 31, 2015. During the year ended December 31, 2014, Pure Multi acquired the following investment property from Sunstone U.S. Opportunity (No. 3) Realty Trust: • 50% interest in Preserve acquired on August 28, 2014 for a purchase price of $20,500,000. Pure Multi negotiated the purchase price of the property above with reference to an independently prepared third party appraisal. Asset Management Agreement The Managing GP, pursuant to the Asset Management Agreement, will provide asset management, administrative and reporting services to Pure Multi as its managing general partner. The Asset Management Agreement also requires the Managing GP to provide Pure Multi, at no cost, with support services consisting of office space and equipment and the necessary clerical and secretarial personnel for the administration of its day-to-day activities. The Asset Management Agreement may be terminated by Pure Multi at any time upon the occurrence of certain events of default and at any other time, without bonus or penalty, upon not less than 60 days notice. In lieu of the fees typically associated with a third party asset management agreement, the Managing GP will only be entitled to a reimbursement of any reasonable costs and expenses (including legal and audit costs but excluding personnel costs) that it incurs providing asset management services to Pure Multi and will not be entitled to any other remuneration or compensation for its services. Tipton Asset Group, Inc. (“Tipton”) is the property manager for Pure Multi. Pure Multi is related to Tipton by virtue of having an officer and director in common with a subsidiary of Pure Multi (Bryan Kerns). Tipton charged $1,764,027 in property management fees during the year ended December 31, 2015 (year ended December 31, 2014 - $1,454,305). Included in accounts payable and accrued liabilities at December 31, 2015 was $nil (December 31, 2014 - $nil). Compensation Currently, the directors of the Governing GP who are not affiliated with or employees of the Managing GP receive annual compensation, in addition to fees for attending meetings of the directors or any committee, and acting as committee chairs and members. As well, the Governing GP will indirectly reimburse such directors for any out of pocket expenses, including out of pocket expenses for attending meetings. Pure Multi will reimburse the Governing GP for such amounts. In addition, Pure Multi will obtain insurance coverage for such directors. Compensation will be reviewed on an annual basis, giving consideration to Pure Multi’s growth and the extent of its portfolio. The amount incurred during the year ended December 31, 2015 was $210,293 (year ended December 31, 2014 - $96,797). 75 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars 18) LEASES Pure Multi, through the US REIT, has entered into lease agreements on its investment properties. The residential property leases typically have lease terms of 1 to 12 months. Future minimum rental revenue to be earned under non–cancellable operating leases is $27,215,236 as at December 31, 2015 (December 31, 2014 - $22,072,084). 19) FAIR VALUE MEASUREMENT Pure Multi measures investment properties at fair value at each balance sheet date, the fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, acting at arms-length, at the measurement date under current market conditions. In certain circumstances, the initial fair value may be based on other observable current market transactions, without modification or on a valuation technique using market based inputs. Fair value measurements recognized in the statement of financial position are categorized in accordance with the following levels: • Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: Quoted prices in active markets for similar assets or liabilities or valuation techniques where significant inputs are based on observable market data. • Level 3: Valuation techniques for which any significant input is not based on observable market data. The fair value hierarchy of assets and liabilities measured at fair value on the consolidated statement of financial position or disclosed in the notes to the financial statements is as follows: (000’s) Investment properties Mortgages payable Preferred units of subsidiary Convertible debentures 23,000 December 31, 2015 December 31, 2014 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 $ - - - $ - $ 613,682 $ 366,040 125 - - - - - - - 22,885 $ - $ 468,518 262,023 125 - - - - There have been no transfers between the levels during the year. As disclosed above, the fair value methodology for Pure Multi’s investment properties is considered Level 3, as significant unobservable inputs are required to determine fair value. Refer to note 4, for a description of how management determines fair value and for further details of the average capitalization rates and ranges for investment properties, including equity-accounted investees. Investment properties as at December 31, 2015 and 2014 have been valued using the overall capitalization rate (“OCR”) method, an income based approach, whereby the stabilized net operating income is capitalized at the requisite OCR. 76 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars Valuations determined by the OCR method are most sensitive to changes in capitalization rates. The table below summarizes the sensitivity of the fair value of investment properties to changes in the capitalization rate at December 31, 2015: Rate sensitivity + 75 basis points + 50 basis points + 25 basis points Base rate (5.50%) - 25 basis points - 50 basis points - 75 basis points OCR Sensitivity Fair value Change in fair value $ 539,850,418 $ (73,831,457) 562,397,913 586,917,834 613,681,875 643,014,251 675,305,096 711,028,203 (51,283,962) (26,764,041) - 29,332,376 61,623,221 97,346,328 20) DILUTED EARNINGS PER CLASS A UNIT The components of diluted earnings per share are summarized in the following tables: Basic net income and comprehensive income Dilutive interest expense (1) Diluted net income and comprehensive income Diluted net income and comprehensive income allocated to Class A unitholders Year ended December 31, 2015 $ 51,179,380 1,938,780 53,118,160 December 31, 2014 $ 41,949,277 1,707,492 43,656,769 $ 50,462,252 $ 41,473,931 Notes: (1) Dilutive interest expense includes the removal of the interest expense related to the dilutive 6.5% convertible debentures. Weighted average number of Class A units - basic Dilutive effect of the conversion of convertible debentures using the treasury stock method (1) Weighted average number of Class A units - dilutive Notes: Year ended December 31, 2015 39,761,071 December 31, 2014 29,512,727 4,070,796 43,831,867 4,070,796 33,583,523 (1) Conversion of 6.5% convertible debentures based on exercise price of $5.65 per Class A Unit. 77 Pure Multi-Family REIT LP Notes to Consolidated Financial Statements Expressed in United States dollars 21) SUBSEQUENT EVENTS a) Pure View at TPC (“Pure View”) On March 1, 2016, Pure Multi, through the US REIT, acquired Pure View, a multi-family apartment community located in San Antonio, Texas, for a purchase price of $61,000,000, plus standard closing costs and adjustments. This acquisition was financed with cash on hand and proceeds from a new mortgage financing. b) Pure Estates at TPC (“Pure Estates”) On March 1, 2016, Pure Multi, through the US REIT, acquired Pure Estates, a multi-family apartment community located in San Antonio, Texas, for a purchase price of $56,500,000, plus standard closing costs and adjustments. This acquisition was financed with cash on hand and proceeds from a new mortgage financing. 78 MANAGEMENT STEPHEN EVANS Director and Chief Executive Officer SAMANTHA ADAMS Vice President SCOTT SHILLINGTON, CA Chief Financial Officer ANDREW GREIG Director of Investor Relations DIRECTORS ROBERT KING Lead Independent Director JAMES REDEKOP Independent Director DOUGLAS SCOTT, CA Independent Director JOHN O’NEILL Independent Director JAMES SPEAKMAN Director Corporate Legal Counsel FRASER BERRILL Independent Director 80 Fountainwood Apartments, Dallas, TX 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: 604-691-3031 F: 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.UN, RUF.DB.U OTCQX: PMULF ANNuAl meeTING OF shArehOlDers 2:30 PM Eastern Daylight Time Friday May 13, 2016 KPMG LLP Bay Adelaide Centre 333 Bay Street, Suite 4600 Toronto, ON Valley Ranch, Irving, TX 81 WWW.PUREMULTIFAMILY.COM

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