Pure Multi Family REIT LP Annual Report 2017

Plain-text annual report

Pure Multi-Family REIT LP 2017 Annual Report Investing in the Future Park 28, Phoenix, Arizona PURE MULTI-FAMILY REIT LP ANNUAL REPORT2017 aT a GlanCe January Acquired Pure Creekside Apartments Acquired Lansbrook at Twin Creeks February Filed USD$500 Million Base Shelf Prospectus april Raised CAD$92 Million Bought Deal Sherry Tryssenaar Joins the Board May Commenced Property Management Internalization June Acquired Park 28 Acquired Pinnacle at Union Hills Raised CAD$92 Million Bought Deal July Acquired PURE at La Villita auGusT Tropical Storm Harvey Hits Houston sepTeMber Filed Normal Course Issuer Bid OCTOber Acquired PURE Farmers Market nOveMber Acquired PURE Fillmore Apartments DeCeMber Completed Property Management Internalization Table of Contents Letter to Unitholders ................................................................. 3 2017 Strategic Highlights .......................................................... 4 Deleveraging the Balance Sheet................................................ 6 Property Management Internalization ...................................... 8 An Institutional Quality Portfolio .............................................. 9 Portfolio Strategy .................................................................... 10 Feature Property: PURE Fillmore Apartments .......................... 11 Feature Property: PURE Farmers Market .................................. 12 Financial Highlights ................................................................ 13 Outlook ................................................................................... 15 Management Discussion & Analysis ........................................ 16 Consolidated Financial Statements ......................................... 62 Unitholder Information & Board of Directors ........................... 94 Management Team & 2017 Distributions ................................ 95 All currency is in USD unless otherwise stated. 1 ANNUAL REPORT PURE MULTI-FAMILY REIT LPOver the course of 2017, we undertook significant steps to establish our fully-internalized, vertically integrated real estate platform. Top to bottom: PURE Creekside at Onion Creek, Austin, Texas Top to bottom: Pinnacle at Union Hills, Phoenix, Arizona Lansbrook at Twin Creeks, Dallas, Texas Park 28, Phoenix, Arizona PURE at La Villita, Dallas, Texas PURE Farmers Market, Dallas, Texas PURE Fillmore Apartments, Phoenix, Arizona 2 PURE MULTI-FAMILY REIT LP ANNUAL REPORT letter to unitholders Dear Fellow Unitholders, 2017 was a year of transformation for Pure Multi Family REIT LP, during which we expanded and high-graded our portfolio, improved our balance sheet, internalized property management, and added key executives to our management team. As a team, we are excited about the continued growth of our platform. Our goal is to invest in the best quality apartment assets, situated in the most dynamic locations, in the some of the strongest growth cities in the U.S. Sunbelt. As part of our internalization process, we also invested in our future by upgrading our property and asset management software systems, which provides greater real-time analysis of all financial metrics throughout our portfolio. Our new systems include business intelligence and market analytics tools that provide a clearer view of trends within our sub-markets as they are developing, rather than looking in the rear-view mirror after they have occurred. We also continued to expand and high-grade our portfolio in 2017. Choosing strong “path of growth” locations, we expanded our footprint in the Phoenix market with the acquisition of three assets totaling 646 units. We entered the Austin, Texas market with the addition of a new 276 unit community, and we continued to add to our Dallas holdings with three more property acquisitions totaling 934 units. One of our key goals for 2017 was to improve our balance sheet. The debt to gross book value ratio across our portfolio was 53.4% as at December 31, 2017, representing an improvement of 180 basis points, compared to December 31, 2016. We have made a conscious effort to decrease our leverage ratios on new acquisitions. Of the seven acquisitions made during 2017, total debt of $162 million was used to help fund the purchase prices, representing a leverage ratio of 49.3%. Although deleveraging can create a negative impact on payout ratios in the near term, we believe a conservative debt strategy is prudent for long term success in a rising interest rate environment. We recognize that we are in a ‘people business’ providing homes and services for over 12,000 residents. Our people, the Pure Management Team, take this responsibility very seriously in striving to provide 5-Star Service. Our property management team has developed an acronym of our PURE name that captures our commitment in this area – Providing Ultimate Resident Experience! During mid-2017, a short-term over-supply in some of our submarkets resulted in a slight dip in occupancy rates and an increase in rental concessions. We view these challenges as temporary pot-holes on the road, nonetheless we must steer around them as we continue on our path of growth and enhancing Unitholder value. As we are situated in strong growth Sunbelt markets, we believe that rental concessions will be short-lived and our rental growth rates will return to be near the top of our peer set in the Canadian REIT sector. This year, Ms. Sherry Tryssenaar joined our board of directors and brought extensive experience and expertise to her position of Audit Chair. We would like to take this opportunity to recognize Mr. Douglas Scott, one of our founding directors, who retired in 2017. Mr. Scott provided a great deal of leadership, counsel, and support to Pure Multi Family REIT over our first five years, and we wish him all the best for the future. As we look forward to 2018, the fundamentals of our business remain strong. The U.S. unemployment rate has trended down, consumer confidence is strong, and dramatic U.S. tax cuts are providing fertile ground for continued economic growth that we believe will benefit our portfolio. Our team is engaged and excited to continue growing Pure Multi Family REIT LP with a constant focus on enhancing Unitholder value. In conclusion, I would like to thank our Unitholders for their support, and our over 170 employees for their hard work and dedication. Yours truly, ” “ Steve Evans Stephen J. Evans Chief Executive Officer 3 ANNUAL REPORT PURE MULTI-FAMILY REIT LP2017 strategic Highlights In 2017, we acquired seven multi-family properties comprised of 1,856 residential units for a combined purchase price of $328.3 million. We announced a new secured credit facility totaling $50 million, including an accordion feature that allows for increased borrowing capacity of up to $100 million. The new acquisitions had an average year of construction of 2010, improving our overall portfolio’s average year of construction to 2007. December 31, 2017 investment properties ................................ 22 residential units ........................................ 7,085 average unit size ........................................ 910 sf acres .......................................................... 351 Weighted average physical Occupancy (1) ...... 93.7% Weighted average leased Occupancy (1) ........ 95.0% average year of Construction ....................... 2007 Fair Market value ........................................ $1.13 billion Debt to Gross book value ............................. 53.4% average rent per Occupied unit (1) ................ $1,267 Weighted average interest rate .................. 3.72% Weighted average Mortgage Term ............... 8.9 years (1) For the month of December 2017. 4 PURE View at TPC, San Antonio, Texas PURE MULTI-FAMILY REIT LP ANNUAL REPORT5 ANNUAL REPORT PURE MULTI-FAMILY REIT LPDeleveraging the balance sheet The Debt-to-Gross Book Value Ratio across Pure Multi-Family’s portfolio was 53.4% as at December 31, 2017, representing an improvement of 180 basis points compared to December 31, 2016. Management has made a conscious effort to decrease leverage on new acquisitions to improve overall portfolio leverage ratios as Pure Multi-Family continues to pursue growth. Pure Multi-Family incurred total debt of $162 million, representing a leverage ratio of 49.3%, to partially fund the seven acquisitions completed during 2017. ' , s 0 0 0 0 0 0 $ Debt to Gross Book Value 1,400 1,200 1,000 800 600 400 200 - 66% 63% 60% 57% 54% 51% 48% 45% 2012 2013 2014 2015 2016 2017 Debt GBV Debt/GBV Although deleveraging has created a negative impact on payout ratios in the short term, management believes it is the fiscally responsible approach to ensure our long term stability and success. 6 The Boulevard at Deer Park, Houston, Texas PURE MULTI-FAMILY REIT LP ANNUAL REPORT Deleveraging the balance sheet Pure Multi-Family has strategically negotiated low leverage fixed rate mortgages featuring 7, 10, 12 and 15 year terms in order to stagger mortgage maturities. Across our portfolio our weighted average term to maturity is 8.9 years, which is amongst the longest average terms of Canadian REITs. Currently our mortgage weighted average interest rate is 3.72% and 87.7% of our mortgages mature after 2020. 100.0% 80.0% Mortgage Profile 4.32% 3.71% 60.0% 3.29% 3.26% 3.38% 40.0% 20.0% 0.0% 11.5% 0.8% 2018 1.2% 2020 7.6% 6.5% 5.5% 11.0% 1.3% 1.4% 2022 2024 2026 Thereafter 5.00% 4.50% 4.00% 3.83% 3.83% 3.50% 37.7% 15.5% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Principal Scheduled Principal Weighted Average Rate - Expiry San Brisas, Phoenix, Arizona 7 ANNUAL REPORT PURE MULTI-FAMILY REIT LPproperty Management internalization By December 2017, Pure Multi-Family completed the internalization of our property management function. Although there were some duplication of costs incurred during the transition phase, all properties were successfully transitioned in-house from external property management during the year. Our internal, vertically-integrated, property management platform will enable us to build our brand and expand our presence in our target markets, while enhancing operational efficiencies across our platform. As of October 1, 2017, we ceased paying external property management fees. We estimate the internal cost of our property management function to be approximately 2.5% of revenues on our current portfolio moving forward, a significant savings from the historical 3% of revenues which was previously paid to an external party. Management believes the internalization of the property management function will be accretive to unitholders and drive per unit cash flow growth over the long-term. as we maintain our commitment to our team to provide a positive, exciting and supportive work environment, engendering enthusiasm for our company becomes increasingly self- fulfilling. This permits us to focus on executing and delivering solid, measurable results that benefit all unitholders. 8 Park at West Ave, San Antonio, Texas PURE MULTI-FAMILY REIT LP ANNUAL REPORTan institutional Quality portfolio Acquisition Date Year of Construction Units Average Unit Size (sf) Property Location Stoneleigh Valley Ranch Prairie Creek Villas Stoneleigh at Bear Creek Vistas at Hackberry Creek Fountainwood Apts The Preserve at Arbor Hills Amalfi Stonebriar Avenue on Fairmount Lansbrook at Twin Creeks PURE at La Villita PURE Farmers Market DFW, TX DFW, TX DFW, TX DFW, TX DFW, TX DFW, TX DFW, TX DFW, TX DFW, TX DFW, TX DFW, TX Submarket Irving, TX 18-Jul-12 Richardson, TX 11-Oct-12 Euless, TX Irving, TX Euless, TX Plano, TX Frisco, TX Dallas, TX Allen, TX Irving, TX Dallas, TX 31-Oct-12 6-Jun-13 30-Aug-13 28-Aug-14 10-Aug-15 14-Sep-16 27-Jan-17 11-Jul-17 2-Oct-17 1999 1997 2004 1984 1986 1998 2014 2015 2002 2007 2016 210 464 436 560 288 330 395 368 288 306 340 Totals & Weighted Averages 2005 3,985 The Boulevard at Deer Park Houston, TX Deer Park, TX 21-Jun-13 Broadstone Walker Commons Houston, TX League City, TX 27-Jun-14 Totals & Weighted Averages Park at West Ave San Antonio, TX San Antonio, TX 7-May-15 Brackenridge at Midtown San Antonio, TX San Antonio, TX 30-Sep-15 PURE View at TPC PURE Estates at TPC Totals & Weighted Averages San Antonio, TX San Antonio, TX 1-Mar-16 San Antonio, TX San Antonio, TX 1-Mar-16 San Brisas Park 28 Phoenix, AZ Chandler, AZ Phoenix, AZ Phoenix, AZ Pinnacle at Union Hills Phoenix, AZ Phoenix, AZ 28-Aug-14 & 1-Oct-13 9-Jun-17 15-Jun-17 PURE Fillmore Apartments Phoenix, AZ Phoenix, AZ 29-Nov-17 Totals & Weighted Averages PURE Creekside at Onion Creek Austin, TX Austin, Texas 25-Jan-17 Totals & Weighted Averages Portfolio Totals & Weighted Averages Portfolio as at December 31, 2017. 2000 2008 2005 2014 2014 2014 2007 2012 1996 2015 1996 2016 2006 2016 2016 2007 216 352 568 360 282 416 344 1,402 208 152 264 230 854 276 276 7,085 991 1,000 962 777 795 940 811 829 961 918 824 886 934 928 930 898 852 943 1,135 960 1,006 826 1,019 934 959 828 828 910 9 ANNUAL REPORT PURE MULTI-FAMILY REIT LPAlthough there are long-term benefits of owning and operating high-quality, newly constructed properties, we experienced some initial short- term challenges. As we have encountered over the last few quarters, occupancy rates of the newly constructed properties still in stabilization tend to be at a slightly decreased occupancy level compared to our portfolio average, as they transition through a stabilization period. Once fully stabilized, which we anticipate being anywhere from a few months to 18 months from acquisition date, we expect these newer-built assets to be operating at or above our portfolio average occupancy rates. Newly constructed assets produce higher rental rates and lower capital expenditures, leading to improved net rental income margins. portfolio strategy Since 2012, Pure Multi-Family’s strategy has been to acquire a high-quality apartment portfolio located in the strongest growth markets within the U.S. Sunbelt region. Pure Multi-Family employs 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 generating top-line revenue growth and potentially reducing tenant turnover. Our diligent and active management style includes re-positioning our properties through value-add initiatives. We look to opportunistically divest select assets from time to time. Our goal is to renew our portfolio by acquiring newer, higher-quality assets to improve the quality of our overall portfolio. During 2017, we added seven high-quality, resort- style properties to the Pure Multi-Family portfolio, one of which is located in a new market for us, Austin, Texas. With the addition of Austin to our current markets, we now have expanded our presence to five strong markets within Texas and Arizona. The acquisitions that we completed in 2017 helped to renew our portfolio as the seven properties acquired had an average year of construction of 2010, bringing our overall portfolio’s average year of construction to 2007 at the end of the year. Avenue on Fairmount, Dallas, Texas Acquired PURE Creekside & Lansbrook at Twin Creeks Acquired Park 28 & Pinnacle at Union Hills Acquired PURE Farmers Market Acquired PURE at La Villita Acquired PURE Fillmore 2017 Jan 10 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec PURE MULTI-FAMILY REIT LP ANNUAL REPORTFeaTure prOperTy: pure Fillmore apartments, phoenix, arizona On November 29, 2017, we acquired Fillmore Apartments located in Phoenix, Arizona for a purchase price of $55.95 million. Upon closing, the property was rebranded as PURE Fillmore Apartments. Developed in 2016, PURE Fillmore is an institutional- quality multi-family asset comprising 230 units with an average unit size of 934 square feet. The property is located in the path of growth on four acres near Fillmore Street and Seventh Avenue and offers residents excellent walkability and bike access to the many amenities found in Downtown Phoenix. Central and Downtown Phoenix continue on a heightened pace of redevelopment as the city looks to revitalize and transform Downtown Phoenix into a desirable urban living environment, by adding a wide array of employment, transportation, entertainment, and education services. PURE Fillmore is ideally situated between Downtown Phoenix and Roosevelt Row, Phoenix’s renowned Arts District. PURE Fillmore is a convenient two minute walk from the community’s airport shuttle service/Bee Line Transportation, and within a five minute stroll from popular specialty colleges Rio Salado and Southwest School of Woodworking, forming a vibrant and innovative community. The PURE Fillmore property itself features artwork from local artists and architectural features that honour the heritage and style of this iconic neighbourhood. PURE Fillmore offers several unique and state-of-the- art features and amenities. Many units also come with electronic entry locks, private balconies and covered parking. High tech packages are also available in select suites featuring audio visual upgrades including wall speakers and Bluetooth capabilities. PURE Fillmore features a rooftop lounge with gorgeous views of downtown Phoenix, pet areas featuring dog washing stations and a fenced dog run, a club room with a 13-foot television, a demonstration kitchen, ultra-luxe pool, spa, cabanas with towel service, bike shop, gas grills, and an on- site coffee shop which delivers food and beverage items directly to residents in their apartment units, or to the pool deck, as needed. 11 ANNUAL REPORT PURE MULTI-FAMILY REIT LPFeaTure prOperTy: pure Farmers Market, Dallas, Texas On October 2, 2017, we acquired the Farmers Market Apartments for a purchase price of $66.35 million. Upon closing, we rebranded the property as PURE Farmers Market. PURE Farmers Market is an immaculate Class “A” institutional quality asset in a prime core location, featuring market-leading amenities such as gas stoves, bicycle rentals, four electric car charging stations, stained concrete floors and twelve foot ceilings on all first floor units, 67 package delivery lockers, 17 private yards, a state-of-the-art fitness center with TRX equipment, spa showers, wine racks, and more. PURE Farmers Market also offers a true Live, Work, Play experience as it is within ten minutes of the Dallas Central Business District (“CBD”), and is within walking distance of some of Dallas’ most popular restaurants, bars, and entertainment venues. The Dallas CBD is the largest employment center in North Texas as approximately 135,000 people work in the downtown area. During the last 24 months, more than 40 companies moved operations downtown, occupying two million square feet of office space and 12 bringing in 7,500 new employees. Today, the Dallas CBD is home to over 2,500 businesses, including 200 corporate or regional headquarters including AT&T, Comerica, Neiman Marcus, JPMorganChase, Goldman Sachs, and Invesco. PURE Farmers Market is located adjacent to the recently transformed Dallas Farmers Market, a 26,000 square foot open-air farmers’ pavilion offering local seasonal produce, naturally raised meats, eggs, cheeses, and other goods from local food artisans. The Deep Ellum Entertainment district is one of the top restaurant and entertainment destinations in Dallas, including several of the top restaurants in DFW. Deep Ellum also features a wide variety of music venues, bars and nightlife, trendy retail, chef- driven restaurants, gastro pubs, coffee shops and casual eateries. Over the last several years, Deep Ellum and Dallas Farmers Market have become innovative, pedestrian friendly, mixed-use urban hubs that residents of PURE Farmers Market routinely enjoy. PURE MULTI-FAMILY REIT LP ANNUAL REPORTFinancial Highlights ($000’s, except unit amounts and average rent) 2017 2016 Change FoR THE YEAR EnDED DECEMBER 31 Rental Revenue - Same Property(1) Rental Revenue - Total $61,653 $60,042 $93,099 $76,414 net Rental Income - Same Property (1) $34,869 $33,608 net Rental Income - Total $49,859 $41,692 2.7% 21.8% 3.8% 19.6% 3.8% $1,170 96.1% (60bps) 128.7% 128.7% 76.2% 76.2% 57.9% 57.9% 32.5% 32.5% Average Rent Per occupied Residential Unit - Same Property (1) Average Physical occupancy - Same Property (1) $1,215 95.5% (1) Same Property - represents properties owned as at January 1, 2016 and throughout the comparative period. ToTAL RETURnS SInCE IPo 200.0% Pure Multi Family REIT (US$) Pure Multi Family REIT (C$) 150.0% S&P/TSX Capped REIT Index S&P/TSX Capped Composite Index 100.0% 50.0% 0.0% (50.0%) 7/10/2012 1/10/2013 7/10/2013 1/10/2014 7/10/2014 1/10/2015 7/10/2015 1/10/2016 7/10/2016 1/10/2017 7/10/2017 1/10/2018 Total Returns YTD 1 Year 2 Years 3 Years RUF.U (TSX-V) USD RUF.Un (1) (TSX-V) CAD S&P/TSX Capped REIT Index S&P/TSX Capped Composite Index 1.0% (6.7%) 33.2% 50.9% 3.4% (8.0%) 29.4% 56.7% (1.1%) 5.7% 21.0% 11.2% 32.5% (4.7%) 1.9% 25.2% 10.1% 57.9% Since IPo 76.2% 128.7% Source: Bloomberg As at March 2, 2018. (1) Prior to launch of the C$ ticker on July 2, 2014, the C$ values were calculated based on the US$ ticker converted at the daily spot exchange rate. since the ipO in 2012, pure Multi-Family has outperformed the s&p/TsX Capped reiT index and the s&p/TsX Capped Composite index. When translated into Canadian dollars, the total returns significantly outperform these indices. 13 ANNUAL REPORT PURE MULTI-FAMILY REIT LPFinancial Highlights - con’t Same Property Growth SP noI SP Avg. Monthly Rent SP Avg. noI Average SP noI from 2014-2017 was 6.78% 4.30% 4.46% 4.12% 4.55% 5.61% 5.70% 6.04% 6.01% 5.53% 5.59% 5.64% 5.36% 4.57% 4.71% 3.42% 3.07% 15.00% 11.00% 7.00% 3.00% -1.00% Same Property as compared to properties owned as of the beginning of the previous year. Rent and occupancy Trends January 2017 to December 2017 Avg physical occupancy Avg rent per sq.ft. Avg leased occupancy $1.41 $1.40 $1.39 $1.38 $1.37 $1.36 $1.35 100% 95% 90% 85% 80% 75% 70% 65% 60% 14 The Preserve at Arbor Hills, Dallas, Texas PURE MULTI-FAMILY REIT LP ANNUAL REPORTOutlook LooKInG AHEAD: Internalized, vertically-integrated, property management platform U.S. tax reform has created fertile ground for positive economic growth U.S. apartment fundamentals continue to be strong Greater growth potential in U.S. versus Canadian market Job and population growth are fundamental drivers of apartment demand and our core and target markets continue to experience considerable economic growth and are nearing full employment levels, which is expected to continue with the passing of the recent U.S. tax reform bill. U.S. Tax Reform has also reduced incentives for first time homeowners which may reinforce demand for rental apartments in the U.S. With the internalization of the property management and the asset management functions, Pure Multi- Family is now a fully vertically integrated organization, which we believe will enhance unitholder value going forward through improved efficiencies, by way of streamlining processes, in addition to the elimination of external property management fees. A Special Committee has been formed to undertake a strategic review of all options, including the potential sale of Pure Multi-Family. Our migration to the TSX has been delayed pending the outcome of the strategic review. Our intention is to increase our portfolio holdings in our current growth markets, as well as to expand our platform operations to include additional strong growth Sunbelt markets, that offer similar compelling demand drivers. With the robust pipeline of high-quality apartment in these markets, properties available for sale coupled with stable capitalization rates and continuing favourable interest rates, we believe Pure Multi-Family is well positioned to continue its strong growth over the coming years, thus enhancing unitholder value further. Broadstone Walker Commons, Houston, Texas 15 ANNUAL REPORT PURE MULTI-FAMILY REIT LPAmalfi Stonebriar, Dallas, Texas 16 PURE MULTI-FAMILY REIT LP ANNUAL REPORTManagement Discussion & analysis For the year ended December 31, 2017 dated March 7, 2018 17 ANNUAL REPORT PURE MULTI-FAMILY REIT LPTHIS PAGE IS LEFT INTENTIONALLY BLANK 18 PURE MULTI-FAMILY REIT LP ANNUAL REPORTPure Multi-Family REIT LP MD&A – December 31, 2017 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-Family”) for the year ended December 31, 2017 should be read in conjunction with Pure Multi-Family’s audited consolidated financial statements for the year ended December 31, 2017, available on SEDAR at www.sedar.com and on Pure Multi-Family’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-Family’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-Family’s anticipated future events. These statements include, but are not limited to: (i) Pure Multi-Family’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- Family’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-Family’s properties; (iii) overall indebtedness levels, which could be impacted by the level of acquisition activity Pure Multi-Family is able to achieve, fair value of its properties and future financing opportunities; (iv) tax status of Pure US Apartments REIT Inc., which can be impacted by regulatory changes enacted by governmental authorities; (v) 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-Family’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-Family. 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-Family, property acquisition and disposition prospects and opportunities will be consistent with Pure Multi-Family’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 low relative to historic norms, and Pure Multi-Family’s business strategy, plans, outlook, projections, targets and operating costs will be consistent with Pure Multi-Family’s experience over the past 12 months, Pure Multi-Family will be able 19 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 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-Family’s business and financial results, and Pure Multi-Family 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-Family, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. These forward-looking statements are made as of March 7, 2018 and Pure Multi-Family 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, 2017 includes material information up to March 7, 2018. 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-Family 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-Family’s results of operations (consolidated to Pure Multi’s interest), 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, 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” and “Liquidity and Capital Resources – Funds from Operations and Adjusted Funds from Operations”. OVERVIEW About Pure Multi-Family Pure Multi-Family is a Canadian-based, vertically integrated, internally managed, publicly 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”). Pure Multi-Family 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-Family 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”), dated May 8, 2012, as amended and restated May 28, 2015 and as amended August 21, 2015, and as may be amended from time to time. Pure Multi-Family’s head office and address for service is located at 910 – 925 West Georgia Street, Vancouver, British Columbia, V6C 3L2. Pure Multi-Family’s property management office is located at 450 – 5810 Tennyson Parkway, Plano, Texas, 75024. A copy of the LP Agreement can be obtained from the Chief Financial Officer of Pure Multi-Family and is available on SEDAR at www.sedar.com. 20 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 Pure Multi-Family, 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)) Number of properties Number of residential units Portfolio average year of construction Physical occupancy Leased occupancy Investment properties (000’s) Mortgages payable (000’s) Credit facility (000’s) Weighted average effective interest rate on mortgages payable Loan to gross book value December 31, 2017 22 7,085 2007 93.7% 95.0% $ 1,133,501 $ 576,253 $ 25,762 3.72% 53.4% As at December 31, 2016 15 5,229 2006 92.8% 94.9% $ 778,547 $ 447,827 - 3.74% 55.2% December 31, 2015 14 4,437 2003 96.2% 97.3% $ 613,682 $ 354,202 - 3.72% 54.6% Pure Multi’s interest ($000’s, except per unit basis) (all per unit amounts based on basic weighted average number of units outstanding) Total rental revenue (2) Total operating expense (2) Total net rental income (2) Net rental income margin Basic weighted average number of units outstanding Class A Units Class B Units Funds from operations (2)(3) per Class A Unit per Class B Unit Payout ratio Adjusted funds from operations (2)(3) per Class A Unit per Class B Unit Payout ratio For the year ended December 31, 2017 93,099 43,240 49,859 53.6% $ For the year ended December 31, 2016 76,414 34,722 41,692 54.6% $ For the three months ended December 31, 2017 26,200 11,124 15,076 57.5% $ For the three months ended December 31, 2016 20,116 9,845 10,271 51.1% $ 68,926,987 200,000 22,684 0.32 4.22 119.9% 21,146 0.30 3.94 128.6% 51,553,540 200,000 20,207 0.37 4.90 101.5% 18,981 0.35 4.60 108.0% 76,726,771 200,000 7,526 0.10 1.26 98.9% 7,073 0.09 1.19 105.2% 55,418,872 200,000 4,584 0.08 1.05 119.7% 4,262 0.07 0.98 128.8% Notes: (1) The adjustments from the IFRS measure to Pure Multi’s interest (non-IFRS measure) is limited to the prorating and accrual of the property tax liability and expense on all portfolio investments, based on the time period of ownership throughout the given reporting year. As a result, balances other than property tax expense and the corresponding fair value adjustments present directly to the IFRS financial statements. (2) For an IFRS to non-IFRS reconciliation, see “Results of Operations Reconciliation” and “Liquidity and Capital Resources – Funds from Operations and Adjusted Funds from Operations”. (3) Restated FFO and AFFO amounts for the three months and year ended December 31, 2016 to remove amortization of transaction costs and mortgage prepayment expense. 21 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 During the year ended December 31, 2017, Pure Multi-Family acquired seven investment properties, comprised of 1,856 residential units for a combined purchase price of $328.3 million. These properties were acquired with cash, cash held in trust, new mortgage financing in the amount of $133 million and funds advanced through a new corporate level credit facility. These acquisitions resulted in Pure Multi-Family improving its portfolio average year of construction to 2007 as at December 31, 2017, compared to 2006 as at December 31, 2016, and 2003 as at December 31, 2015. Pure Multi-Family continues to maintain a conservative debt profile with a current average interest rate on mortgages payable of 3.72% per annum and an average mortgage term to maturity of 8.9 years. For the year ended December 31, 2017, rental revenue was $93,098,656 and net rental income was $49,858,162, representing increases of $16,684,297 and $8,166,498, respectively, compared to the prior year. For the three months ended December 31, 2017, rental revenue was $26,200,371 and net rental income was $15,075,978, representing increases of $6,084,487 and $4,804,786, respectively, compared to the same period in the prior year. For the year ended December 31, 2017, net rental income margin decreased to 53.6% from 54.6% in the prior year, and for the three months ended December 31, 2017, net rental income margin increased to 57.5% from 51.1% compared to the three months ended December 31, 2016. The decrease in net rental income margin for the year was primarily driven by an increase in property tax expense, which was partially offset by the decrease in property management fees. The increase in the three months ending December 31, 2017 compared to the prior year quarter is primarily due to timing on the settlement of property tax appeals and the reduction in property management fees. For the year ended December 31, 2017, Pure Multi-Family earned an average monthly rent per occupied unit of $1,250 or $1.370 per square foot, across its entire portfolio (year ended December 31, 2016 - $1,212 and $1.310, respectively), representing an increase in the average monthly rent of an occupied unit of 3.1%, or 4.6% per square foot, over the prior year. Pure Multi-Family earned an average monthly rent per occupied unit of $1,264 or $1.388 per square foot, across its entire portfolio for the three months ended December 31, 2017 (three months ended December 31, 2016 - $1,244 and $1.356, respectively), representing an increase in the average monthly rent of an occupied unit of 1.6%, or 2.4% per square foot, compared to the same period in the prior year. For the year ended December 31, 2017, the FFO payout ratio increased to 119.9% from 101.5% and the AFFO payout ratio increased to 128.6% from 108.0% compared to the year ended December 31, 2016. For the three months ended December 31, 2017, compared to the three months ended December 31, 2016, the FFO payout ratio decreased to 98.9% from 119.7% and the AFFO payout ratio decreased to 105.2% from 128.8%. The increases in the FFO and AFFO payout ratios for the year ended December 31, 2017 compared to the same period in the prior year were primarily due to the bought deal equity offerings completed during the current year combined with the timing of the deployment of the proceeds used for acquisitions therefrom, an increase in property tax expenses, the additional general and administrative expense incurred due to the internalization of the property management and asset management functions, and the lowering of the overall leverage of Pure Multi-Family’s statement of financial position. The decreases in the FFO and AFFO payout ratios for the three months ended December 31, 2017 compared to the same period in the prior year were primarily due to the elimination of the payment of property management fees, as all investment properties were fully transitioned internally by September 30, 2017, and from the settlement of the remaining prior year property tax appeals. During the year ended December 31, 2017, Pure Multi-Family internalized its property management function and moved all property management related services under the US REIT. All investment properties were fully transitioned by September 30, 2017, resulting in no property management fees being expensed across the portfolio during the three months ended December 31, 2017, resulting in an increase in the net rental income margin. No penalties were incurred upon termination of the property management agreement. 22 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 Same Property Analysis (all metrics stated at Pure Multi’s interest) Pure Multi’s interest Rental revenue – same property (1) (by location) January 1, 2016 base portfolio ($000’s) Dallas - Fort Worth, Texas Houston, Texas San Antonio, Texas Phoenix, Arizona $ December 31, 2017 40,203 8,421 10,032 2,997 $ For the year ended December 31, 2016 38,910 8,375 9,902 2,855 $ Change % Change 3.3% $ 0.6% 1.3% 5.0% 1,293 46 130 142 Total – same property (1) Total – properties acquired/sold (2) 61,653 31,446 60,042 16,372 1,611 2.7% 15,074 92.1% Total rental revenue $ 93,099 $ 76,414 $ 16,685 21.8% Notes: (1) Same property (non-IFRS measure) - represents properties owned as at January 1, 2016 and throughout the comparative periods, which removes the impact of acquisitions and dispositions. (2) Properties acquired/sold (non-IFRS measure) - represents properties which were acquired or sold, therefore not owned as at January 1, 2016 and throughout the comparative periods. Pure Multi’s interest Rental revenue – same property (1) (by location) October 1, 2016 base portfolio ($000’s) Dallas - Fort Worth, Texas Houston, Texas San Antonio, Texas Phoenix, Arizona For the three months ended December 31, 2017 $ 11,650 2,167 5,496 742 December 31, 2016 $ 11,365 2,088 5,341 710 $ Change % Change 2.5% $ 3.8% 2.9% 4.5% 285 79 155 32 Total – same property (1) Total – properties acquired/sold (2) Total rental revenue Notes: (1) 20,055 6,145 19,504 612 551 2.8% 5,533 904.1% $ 26,200 $ 20,116 $ 6,084 30.2% Same property (non-IFRS measure) - represents properties owned as at October 1, 2016 and throughout the comparative periods, which removes the impact of acquisitions and dispositions. (2) Properties acquired/sold (non-IFRS measure) - represents properties which were acquired or sold, therefore not owned as at October 1, 2016 and throughout the comparative periods. Pure Multi’s interest Net rental income – same property (1) (by location) January 1, 2016 base portfolio ($000’s) Dallas - Fort Worth, Texas Houston, Texas San Antonio, Texas Phoenix, Arizona Total – same property (1) Total – properties acquired/sold (2) For the year ended December 31, 2017 $ 22,888 4,936 5,205 1,840 34,869 14,990 $ December 31, 2016 22,034 4,982 4,903 1,689 $ Change % Change 3.9% $ (0.9%) 6.2% 8.9% 854 (46) 302 151 33,608 8,084 1,261 6,906 3.8% 85.4% Total net rental income $ 49,859 $ 41,692 $ 8,167 19.6% Notes: (1) Same property (non-IFRS measure) - represents properties owned as at January 1, 2016 and throughout the comparative periods, which removes the impact of acquisitions and dispositions. (2) Properties acquired/sold (non-IFRS measure) - represents properties which were acquired or sold, therefore not owned as at January 1, 2016 and throughout the comparative periods. 23 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 Pure Multi’s interest Net rental income – same property (1) (by location) October 1, 2016 base portfolio ($000’s) Dallas - Fort Worth, Texas Houston, Texas San Antonio, Texas Phoenix, Arizona For the three months ended December 31, 2017 $ 6,801 1,352 3,071 466 December 31, 2016 $ 6,023 1,251 2,261 412 $ Change % Change 12.9% $ 8.1% 35.8% 13.2% 778 101 810 54 Total – same property (1) Total – properties acquired/sold (2) 11,690 3,386 9,947 324 1,743 3,062 17.5% 945.1% Total net rental income $ 15,076 $ 10,271 $ 4,805 46.8% Notes: (1) Same property (non-IFRS measure) - represents properties owned as at October 1, 2016 and throughout the comparative periods, which removes the impact of acquisitions and dispositions. (2) Properties acquired/sold (non-IFRS measure) - represents properties which were acquired or sold, therefore not owned as at October 1, 2016 and throughout the comparative periods. Average monthly rent per occupied unit -same property (1) (by location) January 1, 2016 base portfolio Dallas - Fort Worth, Texas Houston, Texas San Antonio, Texas Phoenix, Arizona For the year ended $ December 31, 2017 1,194 1,212 1,329 1,157 $ December 31, 2016 1,143 1,176 1,301 1,102 $ Change % Change 4.4% $ 3.1% 2.1% 5.0% 51 36 28 55 Portfolio weighted average – same property (1) Notes: (1) Average monthly rent per occupied unit – same property (non-IFRS measure) - represents average monthly rental income for occupied units, 1,215 1,170 3.9% 45 for properties owned as at January 1, 2016 and throughout the comparative periods. Average monthly rent per occupied unit -same property (1) (by location) October 1, 2016 base portfolio Dallas - Fort Worth, Texas Houston, Texas San Antonio, Texas Phoenix, Arizona For the three months ended $ December 31, 2017 1,240 1,219 1,324 1,174 $ December 31, 2016 1,214 1,194 1,341 1,129 $ Change % Change 2.2% $ 2.1% (1.2%) 4.0% 26 25 (17) 45 Portfolio weighted average – same property (1) Notes: (1) Average monthly rent per occupied unit – same property (non-IFRS measure) - represents average monthly rental income for occupied units, 1,242 1,258 1.3% 16 for properties owned as at October 1, 2016 and throughout the comparative periods. 24 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 Average physical occupancy – same property (1) (by location) January 1, 2016 base portfolio Dallas - Fort Worth, Texas Houston, Texas San Antonio, Texas Phoenix, Arizona For the year ended December 31, 2017 95.5% 95.9% 94.8% 96.3% December 31, 2016 96.4% 96.7% 94.4% 96.7% % Change (0.9%) (0.8%) 0.4% (0.4%) Portfolio weighted average – same property (1) 95.5% 96.1% (0.6%) Notes: (1) Average physical occupancy – same property (non-IFRS measure) - represents average physical occupancy, for properties owned as at January 1, 2016 and throughout the comparative periods. Average physical occupancy – same property (1) (by location) October 1, 2016 base portfolio Dallas - Fort Worth, Texas Houston, Texas San Antonio, Texas Phoenix, Arizona For the three months ended December 31, 2017 95.2% 98.4% 95.0% 94.4% December 31, 2016 94.8% 95.4% 89.9% 94.9% % Change 0.4% 3.0% 5.1% (0.5%) Portfolio weighted average – same property (1) 95.5% 93.5% 2.0% Notes: (1) Average physical occupancy – same property (non-IFRS measure) - represents average physical occupancy, for properties owned as at October 1, 2016 and throughout the comparative periods. For the year ended December 31, 2017, same property rental revenue increased by 2.7%, and same property net rental income increased by 3.8%, compared to the prior year. The increase in same property rental revenue was primarily driven by a 3.9% increase in the same property average monthly rent per occupied unit, while the increase in same property net rental income was a result of increased revenues, the elimination of management fees due to the internalization of the property management function, and increased efficiency managing the operating expenses, all being partially offset by an increase in property tax expense and a slight decrease in average physical occupancy. For the three months ended December 31, 2017, for investments which have been owned since October 1, 2016, same property rental revenue increased by 2.8%, and same property net rental income increased by 17.5%, compared to the same time period in the prior year. The increase in same property rental revenue was driven by a 2.0% increase in average physical occupancy and a 1.3% increase in the same property average monthly rent per occupied unit, while the increase in same property net rental income was driven largely by the elimination of the management fees due to the internalization of the property management function, which resulted in the expense of no property management fees during the three months ended December 31, 2017. Due to the fluctuating nature of property tax expense and the material short term variances this creates quarter over quarter, management feels the most accurate measure of same property net rental income is to compare twelve months ended December 31 over the same period in the prior year. Same Property Analysis (all metrics stated at Pure Multi’s interest) In order to provide a more representative analysis of the same property operating metrics, the following section provides a revised base portfolio for the comparison of same property operating metrics for the current quarter over the same quarter in the prior year and includes only investment properties that have been owned since January 1, 2016. Upon acquisition of a newly constructed investment property, there is a period required to bring the property to operational efficiency under our new management. Each acquisition varies in the amount of time necessary to achieve operational efficiency. Factors such as the occupancy level on acquisition and the year of construction can influence the amount required to bring the property to a stabilized level. Additionally, depending on when in a given year an acquisition is completed and at what stage of development the property is at when acquired, there can be significant property tax expense increases during the year following the acquisition. By including only investment properties that were owned at the beginning of the previous fiscal year, many of the issues noted above will be eliminated, allowing 25 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 for a more representative analysis when looking at a same property measure. For the three months ended December 31, 2017, the change in the base portfolio for this new disclosure, as compared to the base portfolio which includes investments properties owned since October 1, 2016, is the elimination from the analysis of Pure View (defined herein) and Pure Estates (defined herein), as both of these investment properties were acquired in March 2016 and the Avenue (defined herein), which was acquired in September 2016. Pure Multi’s interest Rental revenue – same property (1) (by location) January 1, 2016 base portfolio ($000’s) Dallas - Fort Worth, Texas Houston, Texas San Antonio, Texas Phoenix, Arizona Total – same property (1) Total – properties acquired/sold (2) For the three months ended $ December 31, 2017 10,072 2,167 2,587 742 $ December 31, 2016 9,841 2,087 2,541 710 $ Change % Change 2.4% $ 3.8% 1.8% 4.5% 231 80 46 32 15,568 10,632 15,179 4,937 389 2.6% 5,695 115.4% Total rental revenue $ 26,200 $ 20,116 $ 6,084 30.2% Notes: (1) Same property (non-IFRS measure) - represents properties owned as at January 1, 2016 and throughout the comparative periods, which removes the impact of acquisitions and dispositions. (2) Properties acquired/sold (non-IFRS measure) - represents properties which were acquired or sold, therefore not owned as at January 1, 2016 and throughout the comparative periods. Pure Multi’s interest Net rental income – same property (1) (by location) January 1, 2016 base portfolio ($000’s) Dallas - Fort Worth, Texas Houston, Texas San Antonio, Texas Phoenix, Arizona Total – same property (1) Total – properties acquired/sold (2) For the three months ended $ December 31, 2017 6,044 1,352 1,522 466 $ December 31, 2016 5,213 1,251 1,315 412 $ Change % Change 16.0% $ 8.1% 15.6% 13.2% 831 101 207 54 9,384 5,692 8,191 2,080 1,193 3,612 14.6% 173.7% Total net rental income $ 15,076 $ 10,271 $ 4,805 46.8% Notes: (1) Same property (non-IFRS measure) - represents properties owned as at January 1, 2016 and throughout the comparative periods, which removes the impact of acquisitions and dispositions. (2) Properties acquired/sold (non-IFRS measure) - represents properties which were acquired or sold, therefore not owned as at January 1, 2016 and throughout the comparative periods. Average monthly rent per occupied unit – same property (1) (by location) January 1, 2016 base portfolio Dallas - Fort Worth, Texas Houston, Texas San Antonio, Texas Phoenix, Arizona For the three months ended $ December 31, 2017 1,207 1,219 1,339 1,174 $ December 31, 2016 1,168 1,194 1,302 1,129 $ $ Change % Change 3.3% 2.1% 2.8% 4.0% 39 25 37 45 Portfolio weighted average – same property (1) $ 1,228 $ 1,191 $ 37 3.1% Notes: (1) Average monthly rent per occupied unit – same property (non-IFRS measure) - represents average monthly rental income for occupied units, for properties owned as at January 1, 2016 and throughout the comparative periods. 26 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 Average physical occupancy – same property (1) (by location) January 1, 2016 base portfolio Dallas - Fort Worth, Texas Houston, Texas San Antonio, Texas Phoenix, Arizona For the three months ended December 31, 2016 95.8% 95.4% 95.1% 94.9% December 31, 2017 95.5% 98.4% 96.4% 94.4% % Change (0.3%) 3.0% 1.3% (0.5%) Portfolio weighted average – same property (1) 96.0% 95.6% 0.4% Notes: (1) Average physical occupancy – same property (non-IFRS measure) - represents average physical occupancy, for properties owned as at January 1, 2016 and throughout the comparative periods. For the three months ended December 31, 2017, for investment properties which have been owned since January 1, 2016, same property rental revenue increased by 2.6%, and same property net rental income increased by 14.6%, over the same period in the prior year. The increase in same property rental revenue was driven by a 3.1% increase in same property average rent per occupied unit coupled with a 0.4% increase in physical occupancy, while being partially offset by an increase in concessions offered at the investment properties. The increase in same property net rental income was driven primarily by the elimination of the management fees during the three months ended December 31, 2017, due to the internalization of the property management function. Portfolio Summary As at December 31, 2017, Pure Multi-Family’s portfolio consists of 22 investment properties, comprising an aggregate of 7,085 residential units, with an average size of 910 square feet per residential unit, located within five metropolitan areas: (i) Dallas - Fort Worth (“DFW”), Texas, (ii) San Antonio (“SA”), Texas, (iii) Houston, Texas, (iv) Austin, Texas and (v) Phoenix, Arizona. The weighted average physical occupancy rate was 93.7% and weighted average leased occupancy rate was 95.0% for all properties owned as at December 31, 2017 (December 31, 2016 – 92.8% and 94.9%, respectively). Typical residential property leases have terms of between one to 12 months. 27 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 Property Name Location Pure Farmers Market DFW, TX Pure at La Villita DFW, TX Lansbrook at Twin Creeks DFW, TX The Avenue on Fairmount DFW, TX Amalfi at Stonebriar DFW, TX Preserve at Arbor Hills DFW, TX Vistas at Hackberry Creek DFW, TX Fountainwood Apartments DFW, TX Stoneleigh at Valley Ranch DFW, TX Prairie Creek Villas DFW, TX Stoneleigh at Bear Creek DFW, TX Pure Estates at TPC Pure View at TPC DFW, TX SA, TX SA, TX Brackenridge at Midtown SA, TX Park at West Avenue SA, TX SA, TX Walker Commons Houston, TX The Boulevard at Deer Park Houston, TX Year of Acquisition Year of Construction Units As at December 31, 2017 Debt to Fair Market Value Fair Market Value ($000’s) Cap Rate For the three months ended December 31, 2017 Physical Occupancy Leased Occupancy Average Rent per Occupied Unit 2017 2017 2017 2016 2015 2014 2013 2013 2012 2012 2012 2016 2016 2015 2015 2014 2013 2016 340 $ 66,387 50.5% 5.00% 85.5% 87.0% $ 1,450 2007 306 48,908 49.9% 5.00% 87.8% 88.7% 1,361 2002 288 40,335 40.9% 5.25% 97.1% 98.0% 1,125 2015 368 67,309 63.9% 4.75% 95.8% 97.3% 1,483 2014 395 66,917 67.2% 4.75% 93.4% 94.3% 1,247 1998 330 53,168 45.1% 5.25% 92.8% 93.8% 1984 560 67,217 43.9% 5.50% 96.0% 97.1% 1986 288 29,300 41.9% 6.00% 93.9% 94.8% 1999 210 32,023 42.7% 5.25% 93.2% 95.2% 1997 464 84,950 52.6% 5.25% 96.9% 98.3% 2004 436 66,057 48.6% 5.25% 97.3% 98.4% 2005 3,985 622,571 51.2% 5.16% 94.0% 95.2% 2007 344 56,896 66.4% 5.00% 94.7% 96.0% 2014 416 58,818 64.3% 5.00% 93.1% 94.6% 2014 282 51,400 59.5% 5.00% 97.2% 98.2% 2014 360 53,080 68.8% 5.00% 95.7% 97.3% 2012 1,402 220,194 64.8% 5.00% 95.0% 96.4% 2008 352 53,013 53.7% 6.00% 99.0% 99.9% 2000 216 27,700 57.1% 5.75% 97.4% 98.4% 1,253 1,041 984 1,316 1,383 1,256 1,258 1,409 1,232 1,459 1,245 1,324 1,229 1,202 Houston, TX 2005 568 80,713 54.9% 5.91% 98.4% 99.3% 1,219 Pure Creekside Austin, TX 2017 2016 276 40,119 49.9% 5.00% 91.7% 93.3% 1,186 Pure Fillmore Phoenix, AZ Pinnacle at Union Hills Phoenix, AZ Pure Park 28 Apartments Phoenix, AZ San Brisas Apartments Phoenix, AZ 2017 2017 2017 2013 & 2014 2016 230 55,975 - 5.00% 87.4% 90.4% 1996 264 47,663 49.8% 5.25% 95.1% 96.8% 2015 152 29,721 50.0% 5.00% 93.6% 95.9% 1,382 1,205 1,287 1996 208 36,545 45.3% 5.25% 94.4% 95.1% 1,174 Portfolio Total/Average 2007 7,085 $1,133,501 51.2% 5.17% 94.4% 95.7% $ 1,263 Phoenix, AZ 2006 854 169,904 32.5% 5.12% 93.7% 95.4% 1,234 28 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 Acquisitions and Dispositions Properties Acquired During 2017 On January 25, 2017, Pure Multi-Family, through the US REIT, acquired PURE Creekside at Onion Creek (“Creekside”), a multi-family apartment community, located in Austin, Texas, for a purchase price of $40,000,000, plus standard closing costs and adjustments. This acquisition was financed with cash on hand and a new 10-year mortgage in the amount of $20,000,000. On January 27, 2017, Pure Multi-Family, through the US REIT, acquired Lansbrook at Twin Creeks (“Lansbrook”), a multi-family apartment community, located in Dallas, Texas, for a purchase price of $40,000,000, plus standard closing costs and adjustments. This acquisition was financed with cash on hand and a new 5-year mortgage in the amount of $16,500,000. On June 9, 2017, Pure Multi-Family, through the US REIT, acquired Park 28 (“Park 28”), a multi-family apartment community, located in Phoenix, Arizona, for a purchase price of $29,700,000, plus standard closing costs and adjustments. This acquisition was financed with cash on hand and a new 15-year mortgage in the amount of $14,850,000. On June 15, 2017, Pure Multi-Family, through the US REIT, acquired Pinnacle at Union Hills (“Pinnacle”), a multi- family apartment community, located in Phoenix, Arizona, for a purchase price of $47,500,000, plus standard closing costs and adjustments. This acquisition was financed with cash on hand. Subsequent to the acquisition, on July 7, 2017, Pure Multi-Family obtained a new 7-year mortgage in the amount of $23,750,000. On July 11, 2017, Pure Multi-Family, through the US REIT, acquired PURE at La Villita (“La Villita”), a multi- family apartment community, located in Phoenix, Arizona, for a purchase price of $48,800,000, plus standard closing costs and adjustments. This acquisition was financed with cash on hand a new 15-year mortgage in the amount of $24,400,000. On October 2, 2017, Pure Multi-Family, through the US REIT, acquired PURE Farmers Market Apartments (“Farmers Market”), a multi-family apartment community, located in Dallas, Texas, for a purchase price of $66,350,000, plus standard closing costs and adjustments. This acquisition was financed with cash on hand and a new 12-year mortgage in the amount of $33,500,000. On November 29, 2017, Pure Multi-Family, through the US REIT, acquired PURE Fillmore Apartments (“Fillmore”), a multi-family apartment community, located in Phoenix, Arizona, for a purchase price of $55,947,140, plus standard closing costs and adjustments. This acquisition was financed with cash on hand and $29,000,000 from a new corporate level credit facility. Financings April 2017 Class A Unit Offering On April 7, 2017, Pure Multi-Family completed a public offering (the “April 2017 Offering”) of 10,343,100 Class A Units, at a price of $6.665 (CDN$8.90) per Class A Unit, for gross proceeds of $68,938,208 (CDN$92,053,590), less offering costs. The April 2017 Offering was completed on a “blind-pool” basis, meaning there were no properties identified for acquisition at the time of the offering. Net proceeds from the April 2017 Offering were used to acquire Park 28 and Pinnacle, as follows: 29 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 Use of Proceeds ($000’s) Purchase Price (Before Closing Adjustments) Mortgage Proceeds Gross proceeds used from April 2017 Offering Working Capital Park 28 Pinnacle Totals $ 29,700 $ 14,850 $ 14,850 $ 47,500 77,200 - 14,850 47,500 62,350 - - - Total $ 29,700 47,500 77,200 The remaining gross proceeds of approximately $6.6 million from the April 2017 Offering were used to fund the offering costs of the April 2017 Offering, acquisition and financing costs of Park 28 and Pinnacle, and for general working capital purposes for Pure Multi-Family. June 2017 Class A Unit Offering On June 30, 2017, Pure Multi-Family completed a public offering (the “June 2017 Offering”) of 10,281,000 Class A Units, at a price of $6.756 (CDN$8.95) per Class A Unit, for gross proceeds of $69,459,954 (CDN$92,014,950), less offering costs. The June 2017 Offering was completed on a “blind-pool” basis, meaning there were no properties identified for acquisition at the time of the offering. Net proceeds from the June 2017 Offering were used to acquire Farmers Market and Fillmore, as follows: Use of Proceeds ($000’s) Purchase Price (Before Closing Adjustments) Mortgage Proceeds Gross proceeds used from June 2017 Offering Working Capital Total Farmers Market $ 66,350 $ 33,500 $ 32,850 $ - $ 66,350 Fillmore Totals 55,947 - 122,297 33,500 26,947 59,797 29,000 (1) 55,947 29,000 122,297 (1) Corporate credit facility, secured against property. The remaining gross proceeds of approximately $9.7 million from the June 2017 Offering were used to fund the offering costs of the June 2017 Offering, acquisition and financing costs of Farmers Market and Fillmore, and for general working capital purposes for Pure Multi-Family. Credit Facility On November 28, 2017, Pure Multi-Family entered into a secured revolving credit agreement (the “Facility”), through the US REIT, with a total commitment available of up to $50 million. The contract period is 3 years in duration and interest is calculated using the effective interest rate, which was 3.64% for 2017. Amounts drawn under the Facility will bear interest at a variable rate initially equal to: (i) LIBOR plus a margin ranging from 1.55% to 2.20% per annum, or (ii) a base rate plus a margin ranging from 0.55% to 1.20% per annum. As at December 31, 2017, a balance of $26 million was outstanding. The Facility is secured by the Fillmore investment property. 30 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 The following summarizes the face and carrying values of the credit facility: ($000’s) Balance as at December 31, 2016 Credit facility draws Credit facility repayments Credit facility financing costs Amortization of transaction costs Balance as at December 31, 2017 OUTLOOK Face Value $ - 29,000 (3,000) - - $ 26,000 Carrying Value $ - 29,000 (3,000) (245) 7 $ 25,762 Pure Multi-Family’s strategy is to acquire a high-quality apartment portfolio located in the strongest growth markets within the U.S. Sunbelt region. A conservative approach to balance sheet management has resulted in one of the longest average mortgage terms in the sector at 8.9 years, with an average mortgage interest rate of 3.72% per annum, as at December 31, 2017. Job and population growth are fundamental drivers of apartment demand and our core and target markets continue to experience considerable economic growth and are nearing full employment levels, which is expected to continue with the passing of the recent U.S. tax reform bill. U.S. Tax Reform has also reduced incentives for first time homeowners which may reinforce demand for rental apartments in the U.S.. Pure Multi-Family 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 affecting our urban-renewal approach to our overall portfolio asset management. During 2017, we added seven high-quality, resort-style investment properties to the Pure Multi-Family portfolio, one of which being located in a new market for us, Austin, Texas. With the addition of Austin, Texas to our current markets, we now have expanded our presence to five strong geographical markets within Texas and Arizona. These acquisitions helped to renew our portfolio as the seven investment properties acquired had an average year of construction of 2010, bringing our overall portfolio’s average year of construction to 2007 at the end of the year. Along with the long-term benefits of owning and operating high-quality, newly constructed investment properties are some initial short-term challenges. As we have encountered over the last few quarters, occupancy rates of the newly constructed investment properties still in stabilization tend to be at a slightly decreased level compared to our portfolio average, as they transition through a stabilization period. Once fully stabilized, which we anticipate being anywhere from a few months to 18 months from acquisition date, given the specific factors of each investment property, we expect these newer-built assets to be operating at our portfolio average occupancy rates, while at the same time achieving the benefits that a newly constructed asset produces, such as higher rental rates and lower capital expenditures, which create an increased net rental income margin. 31 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 With the internalization of the property management function completed during the current year and the internalization of the asset management function completed during the prior year, Pure Multi-Family is now a fully vertically integrated organization, which we believe will enhance unitholder value going forward through improved efficiencies, by way of streamlining processes, in addition to the elimination of external property management fees. 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 strong growth Sunbelt markets, that offer similar compelling demand drivers. With the robust pipeline of high-quality apartment properties available for sale in these markets, coupled with stable capitalization rates and continuing favourable interest rates, we believe Pure Multi-Family is well positioned to continue its strong growth over the coming years, thus enhancing unitholder value further. SECTION II RESULTS OF OPERATIONS RECONCILIATION “Pure Multi’s interest” is a non-IFRS measure representing 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-Family’s consolidated financial statements prepared in accordance with IFRS to Pure Multi’s interest, as described above, for the affected current and comparative periods. 32 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 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, 2017 ($000’s) 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 Franchise taxes Consolidated (1) IFRIC 21 Property Tax Adjustment (2) Pure Multi’s Interest (3) $ 93,099 $ - $ 93,099 1,908 1,859 15,647 20,916 40,330 52,769 112 (22,104) (16) (22,008) 663 (5,369) 17,602 (461) 12,435 - - 2,910 - 2,910 (2,910) - - - - - - 2,910 - 2,910 1,908 1,859 18,557 20,916 43,240 49,859 112 (22,104) (16) (22,008) 663 (5,369) 20,512 (461) 15,345 NET INCOME AND COMPREHENSIVE INCOME $ 43,196 $ - $ 43,196 Notes: (1) Represents Pure Multi-Family’s consolidated statement of income and comprehensive income prepared in accordance with IFRS. (2) Represents Pure Multi-Family’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. 33 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 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, 2017 ($000’s) REVENUES Rental OPERATING EXPENSES Insurance 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 Franchise taxes Consolidated (1) IFRIC 21 Property Tax Adjustment (2) Pure Multi’s Interest (3) $ 26,200 $ - $ 26,200 526 (372) 5,723 5,877 20,323 13 (6,171) (4) (6,162) 425 (1,683) (5,749) (3,946) (130) (11,083) - 5,247 - 5,247 (5,247) - - - - - 1,301 3,946 - 5,247 526 4,875 5,723 11,124 15,076 13 (6,171) (4) (6,162) 425 (1,683) (4,448) - (130) (5,836) NET INCOME AND COMPREHENSIVE INCOME $ 3,078 $ - $ 3,078 Notes: (1) Represents Pure Multi-Family’s consolidated statement of income and comprehensive income prepared in accordance with IFRS. (2) Represents Pure Multi-Family’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. 34 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 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, 2016 ($000’s) 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 properties Franchise taxes Consolidated (1) IFRIC 21 Property Tax Adjustment (2) Pure Multi’s Interest (3) $ 76,414 $ 1,588 2,301 11,185 16,705 31,779 44,635 38 (19,799) (16) (19,777) 18 (1,438) 26,498 (1,485) (287) 23,306 - - - 2,943 - 2,943 (2,943) - - - - - - 2,943 - - 2,943 $ 76,414 1,588 2,301 14,128 16,705 34,722 41,692 38 (19,799) (16) (19,777) 18 (1,438) 29,441 (1,485) (287) 26,249 NET INCOME AND COMPREHENSIVE INCOME $ 48,164 $ - $ 48,164 Notes: (1) Represents Pure Multi-Family’s consolidated statement of income and comprehensive income prepared in accordance with IFRS. (2) Represents Pure Multi-Family’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. 35 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 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, 2016 ($000’s) 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 expense General and administrative Fair value adjustments to investment properties IFRIC 21 fair value adjustment to investment properties Loss on disposal of investment properties Franchise taxes Consolidated (1) IFRIC 21 Property Tax Adjustment (2) Pure Multi’s Interest (3) $ 20,116 $ 417 622 220 4,602 5,861 14,255 11 (4,952) (4) (4,945) (72) (568) (1,042) (2,782) (1,485) (102) (6,051) - - - 3,984 - 3,984 (3,984) - - - - - - 1,202 2,782 - - 3,984 $ 20,116 417 622 4,204 4,602 9,845 10,271 11 (4,952) (4) (4,945) (72) (568) 160 - (1,485) (102) (2,067) NET INCOME AND COMPREHENSIVE INCOME $ 3,259 $ - $ 3,259 Notes: (1) Represents Pure Multi-Family’s consolidated statement of income and comprehensive income prepared in accordance with IFRS. (2) Represents Pure Multi-Family’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. 36 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 RESULTS OF OPERATIONS ($000’s, except per unit basis) Revenues Rental Operating Expenses Insurance Property management Property taxes (1) Property operating expenses Net Rental Income (1) Net Finance Income (Expenses) Interest income Interest expense Distributions to subsidiary’s preferred unitholders Other Income (Expenses) (1) Other income (expense) General and administrative Fair value adjustments to investment properties (1) Loss on disposal of investment properties Franchise taxes Net Income and Comprehensive Income For the year ended December 31, 2017 For the year ended December 31, 2016 For the three months ended December 31, 2017 For the three months ended December 31, 2016 $ 93,099 $ 76,414 $ 26,200 $ 20,116 1,908 1,859 18,557 20,916 43,240 49,859 112 (22,104) (16) (22,008) 663 (5,369) 20,512 - (461) 15,345 1,588 2,301 14,128 16,705 34,722 41,692 38 (19,799) (16) (19,777) 18 (1,438) 29,441 (1,485) (287) 26,249 526 - 4,875 5,723 11,124 15,076 13 (6,171) (4) (6,162) 425 (1,683) (4,448) - (130) (5,836) 417 622 4,204 4,602 9,845 10,271 11 (4,952) (4) (4,945) (72) (568) 160 (1,485) (102) (2,067) $ 43,196 $ 48,164 $ 3,078 $ 3,259 Earnings per Class A Unit – basic $ 0.60 $ 0.89 $ 0.04 $ 0.06 Weighted average number of Class A Units – basic 68,926,987 51,553,540 76,729,771 55,418,872 Earnings per Class A Unit – diluted $ 0.60 $ 0.86 $ 0.04 $ 0.06 Weighted average number of Class A Units – diluted Earnings per Class B Unit – basic Earnings per Class B Unit – diluted Weighted average number of Class B Units – basic and diluted 72,958,845 55,739,002 76,729,771 55,497,401 $ $ 8.04 7.96 $ $ 11.67 11.67 $ $ 0.52 0.52 $ $ 0.75 0.75 200,000 200,000 200,000 200,000 Notes: (1) Represents Pure Multi’s interest, see “Results of Operations Reconciliation” for adjustments from IFRS to Pure Multi’s interest. 37 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 During the year ended December 31, 2017, based on Pure Multi’s interest, Pure Multi-Family recorded rental revenue of $93,098,656, net rental income of $49,858,162, fair value adjustments to investment properties of $20,512,447 and net income of $43,196,301 (year ended December 31, 2016 - $76,414,359, $41,691,664, $29,440,739 and $48,163,729, respectively). During the year ended December 31, 2017, Pure Multi-Family incurred $5,369,059 of general and administrative expenses (year ended December 31, 2016 - $1,438,416), recorded no gains or losses on disposal of investment properties (year ended December 31, 2016 – loss of $1,484,345), and incurred franchise tax expense of $460,952 (year ended December 31, 2016 - $287,241). The increase in revenues and expenses, in general, primarily attributable to Pure Multi-Family operating additional investment properties, coupled with rental revenue growth during the year ended December 31, 2017, compared to the prior year. The increase in general and administrative expenses was primarily due to the internalization of the property management function, which commenced during the second quarter of 2017, and the internalization of the asset management function, which occurred during the third quarter of 2016. The decrease in net income during the year ended December 31, 2017, is primarily due to an increase in property tax expense and general and administrative expense, coupled with a smaller gain on fair value adjustments to investments properties, compared to the prior year. Rental Revenue Rental revenue from investment properties includes recoveries of specified operating expenses, in accordance with the terms of the lease agreements. The increase in rental revenue was primarily attributable to Pure Multi-Family operating additional investment properties and residential units during the three months and year ended December 31, 2017, compared to the same periods in the prior year, in addition to organic rental revenue growth experienced from the investment properties operated during such periods. Operating Expenses Operating expenses include costs relating to such items as cleaning, repairs and maintenance, turnover costs, HVAC, property payroll, insurance, property taxes, utilities and property management fees among other items. In aggregate, operating expenses totaled $43,240,494 for the year ended December 31, 2017 (year ended December 31, 2016 - $34,722,695) and $11,124,393 for the three months ended December 31, 2017 (three months ended December 31, 2016 - $9,844,692). The increase in operating expenses was primarily due to Pure Multi-Family operating additional investment properties and residential units during the current period combined with an increase in property tax expense, which was partially offset by a reduction in property management fees. The increase in property tax expense is primarily due to the acquisition of newly constructed investment properties across the portfolio. As these newly constructed investment properties transition from the lease-up phase to expected occupancy, their respective assessed tax values can, and most often do, significantly increase which in turn increases the overall property tax expense compared to the prior year. The increase in property tax expense and the reduction in property management fees had the most significant impacts on the operating margins, whereby Pure Multi-Family’s operating margin during the year ended December 31, 2017 decreased to 53.6% compared to 54.6% during the prior year. The increase in the operating margin for the three months ended December 31, 2017, 57.5%, compared to the prior year period, 51.1%, is due mainly to timing with regard to the settlement of property tax appeals and the elimination of property management fees. 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 Net rental income margin For the year ended December 31, 2017 4.4% 4.3% 42.9% For the year ended December 31, 2016 4.6% 6.6% 40.7% For the three months ended December 31, 2017 4.7% - 43.8% For the three months ended December 31, 2016 4.2% 6.3% 42.7% 48.4% 100.0% 53.6% 48.1% 100.0% 54.6% 51.5% 100.0% 57.5% 46.8% 100.0% 51.1% 38 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 Finance Income Finance income consists of interest income which was earned from bank deposits at Pure Multi-Family 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-Family declared distributions in the amount of $15,625 to the subsidiary’s preferred unitholders during the year ended December 31, 2017 (year ended December 31, 2016 - $15,625). 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. The weighted average interest rate on the mortgages is 3.72% per annum as at December 31, 2017 (December 31, 2016 - 3.74%) and the mortgages mature between 2019 and 2032 with a weighted average mortgage term of 8.9 years remaining (December 31, 2016 - 9.4 years remaining). Pure Multi-Family intends to refinance any mortgages which mature within six months of the maturity date. General and Administrative Expenses General and administrative (“G&A”) expenses are primarily comprised of corporate compensation, directors’ fees, directors’ and officers’ liability insurance, professional fees, legal fees, filing fees, and administrative expenses. Professional fees include audit and tax fees. Administrative expenses include US REIT compliance expenditures, investor relations expenses, bank charges, and beginning September 1, 2016, office overhead and rent. Subsequent to the Determination Event (as defined in the LP Agreement), on September 1, 2016, Pure Multi-Family internalized its asset management and terminated the Asset Management Agreement with the Managing GP. No penalties were incurred upon termination of the agreement. Prior to September 1, 2016, pursuant to the Asset Management Agreement, the Managing GP provided Pure Multi-Family 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. During 2017, Pure Multi-Family went through the process of internalizing its property management function. These additional corporate compensation and administrative expenses, which were not incurred during the comparative periods, include non-recurring start-up costs, salaries and benefits, office rent and additional office overhead. The non-recurring start-up costs incurred during the year ended December 31, 2017 were $921,207, and during the three months ended December 31, 2017 were $219,217. When removing these non-recurring expenditures from overall G&A expense, this results in an adjusted G&A expense as a percentage of revenue of 4.8% for the twelve months ended December 31, 2017 and 5.6% for the three months ended December 31, 2017. 39 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 The following table illustrates corporate expenses as a percentage of overall general and administrative expenses: For the year ended December 31, 2017 1.3% 8.2% 7.1% 5.4% 46.8% 31.2% For the year ended December 31, 2016 3.5% 25.4% 20.8% 21.0% 17.5% 11.8% For the three months ended December 31, 2017 1.8% 8.7% 4.8% 3.8% 47.6% 33.3% For the three months ended December 31, 2016 2.2% 19.1% 12.4% 14.8% 36.3% 15.2% 100.0% 5.8% 100.0% 1.9% 100.0% 6.4% 100.0% 2.8% Insurance Professional fees Legal and filing fees Directors’ fees Corporate compensation Administrative expenses G&A expense as a percentage of rental revenue Other Income (Expenses) Other income (expenses) includes proceeds resulting from acquisition guarantees, certain property due diligence expenses, GST, Canadian income tax provision and foreign currency exchange gains and losses. Fair Value Adjustments to Investment Properties Pure Multi-Family 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, 2017, based on Pure Multi’s interest, Pure Multi-Family recorded an increase of $20,512,447 in the fair value of its investment properties (year ended December 31, 2016 - $29,440,739). The weighted average capitalization rate of the investment properties at December 31, 2017, based on Pure Multi’s interest, was 5.17% (December 31, 2016 – 5.41%). Income Taxes Pure Multi-Family is not subject to tax under Part I of the Income Tax Act (Canada) (the “Tax Act”). Each partner (or “unitholder”) of Pure Multi-Family 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-Family 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. Pure Multi-Family’s indirect Canadian subsidiary, Pure Multi-Family Management Ltd., is a taxable Canadian corporation subject to Canadian income tax. Franchise Taxes Texas Franchise Tax applicable to Pure Multi-Family, for its investment properties operated in Texas during the year ended December 31, 2017, is equal to 0.75% 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-Family recorded a provision for Texas Franchise Tax of $460,952 for the year ended December 31, 2017 (year ended December 31, 2016 - $287,241). 40 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 Offering Costs Offering costs are the costs incurred by Pure Multi-Family that relate to the issuance of securities, which are included in the statement of partners’ capital. Pure Multi-Family incurred $6,147,062 of offering costs, during the year ended December 31, 2017 (year ended December 31, 2016 - $1,420,147). SEGMENTED INFORMATION 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. Pure Multi-Family currently operates in one business segment, indirectly owning and operating multifamily apartment properties in the Sunbelt region in the United States. FINANCIAL CONDITION Assets Investment Properties Investment properties are stated at fair value. Fair value adjustments to investment properties arising from changes in fair value are included in the consolidated statement of income and comprehensive income in the period which they arise. As at December 31, 2017, investment properties were valued at $1,133,501,407 (December 31, 2016 - $778,547,182). The increase in investment properties is primarily due to the acquisition of seven investment properties for a combined purchase price of $328,297,140, combined with a fair value increase adjustment. The increase in the fair value adjustment to investment properties was driven by both an increase in net rental income and a reduction in capitalization rates at certain properties. The investment properties are pledged as security against the mortgages payable. 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, 2017, the term for the current mortgage reserve fund is less than 12 months. The mortgage reserve fund is $6,421,458, as at December 31, 2017 (December 31, 2016 - $5,193,406). Liabilities The LP Agreement limits the indebtedness of Pure Multi-Family 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 53.4% of the gross book value as at December 31, 2017 (December 31, 2016 – 55.2%). Mortgages Payable The mortgages bear interest at a weighted average effective rate of 3.72% per annum, as at December 31, 2017 (December 31, 2016 – 3.74%) and mature between 2019 and 2032. 41 ANNUAL REPORT PURE MULTI-FAMILY REIT LP 42 PURE MULTI-FAMILY REIT LP ANNUAL REPORTPure Multi-Family REIT LP MD&A – December 31, 2017 The scheduled principal payments, principal maturities and weighted average effective rate are as follows: December 31, 2017 ($000’s, except percentage amounts) Weighted Average Effective Rate (on expiry) Scheduled Principal Repayments Principal Maturities Total Repayments 2018 - 4,563 - 4,563 2019 3.29% 6,166 60,550 66,716 2020 - 7,019 - 7,019 2021 3.26% 7,226 37,060 44,286 2022 3.38% 7,485 30,180 37,665 2023 4.32% 7,683 24,679 32,362 2024 3.71% 7,416 56,292 63,708 2025 - 7,530 - 7,530 2026 - 8,122 - 8,122 2027 3.83% 7,801 82,425 90,226 Thereafter 3.83% 16,587 201,972 218,559 3.72% $ 87,598 $ 493,158 580,756 Unamortized mortgage transaction costs (4,503) $ 576,253 The following chart shows the remaining scheduled principal payments and principal maturities of the mortgages due within the next 10 years and thereafter: 0.8%11.5%1.2%7.6%6.5%5.5%11.0%1.3%1.4%15.5%37.7%0.0%20.0%40.0%60.0%80.0%100.0%20182020202220242026ThereafterMaturityScheduled PrincipalPure Multi-Family REIT LP MD&A – December 31, 2017 Credit Facility On November 28, 2017, Pure Multi-Family entered into a secured revolving credit agreement (the “Facility”), through the US REIT, with a total commitment available of up to $50 million. The contract period is 3 years in duration and interest is calculated using the effective interest rate, which was 3.64% for 2017. Amounts drawn under the Facility will bear interest at a variable rate initially equal to: (i) LIBOR plus a margin ranging from 1.55% to 2.20% per annum, or (ii) a base rate plus a margin ranging from 0.55% to 1.20% per annum. As at December 31, 2017, a balance of $26 million was outstanding. The Facility is secured by the Fillmore investment property. (000’s) Balance as at December 31, 2016 Credit facility draws Credit facility repayments Credit facility financing costs Amortization of transaction costs Balance as at December 31, 2017 Preferred Units of Subsidiary Face Value $ - 29,000 (3,000) - - $ 26,000 Carrying Value $ - 29,000 (3,000) (245) 7 $ 25,762 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-Family. 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. Convertible Debentures On August 7, 2013, Pure Multi-Family 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 (each a “Class A Unit”) 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-Family, 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-Family at any time. During the year ended December 31, 2017, 210 of the originally issued 23,000 6.5% convertible debentures were converted into Class A Units (December 31, 2016 – 10). At December 31, 2017, $22,780,000 of the face value of the 6.5% convertible debentures was outstanding 43 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 The following summarizes the face and carrying values of the 6.5% convertible debentures: ($000’s) Balance as at December 31, 2016 Conversion of convertible debenture Amortization of transaction costs Accretion of liability component Balance as at December 31, 2017 Balance as at December 31, 2015 Conversion of convertible debenture Amortization of transaction costs Accretion of liability component Balance as at December 31, 2016 Partners’ Capital Convertible Debentures Face Value $ 22,990 (210) - - 22,780 $ 23,000 (10) - - $ 22,990 Liability Component Carrying Value Equity Component Carrying Value $ 20,793 $ 1,984 (191) 181 332 21,115 (19) - - 1,965 $ 20,320 $ 1,985 (9) 168 314 (1) - - $ 20,793 $ 1,984 The capital of Pure Multi-Family consists of an unlimited number of Class A Units and Class B units (each a “Class B Unit”) and the interest held by the Governing GP. The Governing GP has made a capital contribution of $20 to Pure Multi-Family 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-Family, at a price of $5.00 per Class B Unit, for gross proceeds to Pure Multi-Family of $1,000,000. As of the date hereof, Pure Multi-Family has 200,000 Class B Units outstanding. From the date of formation on May 8, 2012, to December 31, 2016, Pure Multi-Family has issued 56,068,506 Class A Units for gross proceeds of $383,992,529, less offering costs. During the years ended December 31, 2017, the following transactions occurred: (a) On April 7, 2017, Pure Multi-Family completed the closing of a public offering of 10,343,100 Class A Units on a bought deal basis, at a price of $6.67 (CDN$8.90) per Class A Unit for gross proceeds of $68,938,208 (CDN$92,053,590). Pure Multi-Family issued the Class A Units from treasury. (b) On June 30, 2017, Pure Multi-Family completed the closing of a public offering of 10,281,000 Class A Units on a bought deal basis, at a price of $6.76 (CDN$8.95) per Class A Unit for gross proceeds of $69,459,954 (CDN$92,014,950). Pure Multi-Family issued the Class A Units from treasury. (c) During the year ended December 31, 2017, 210 6.5% convertible debentures were converted at a conversion price of $5.65 into 37,165 Class A Units. Pure Multi-Family issued the Class A Units from treasury. (d) In September 2017, Pure Multi-Family received approval from the TSX Venture Exchange to commence a normal course issuer bid (“NCIB”), allowing for the purchase for cancellation of up to 1,000,000 Class A Units. The NCIB commenced on October 3, 2017 and will expire on October 2, 2018, or such earlier date as Pure Multi- Family completes its purchases pursuant to the NCIB. Purchases subject to this NCIB will be carried out pursuant to open market transactions through the facilities of the TSX-V by CIBC on behalf of Pure Multi-Family in accordance with applicable regulatory requirements. All Class A Units purchased by Pure Multi-Family under the NCIB will be returned to treasury and cancelled. During the year ended December 31, 2017, Pure Multi- Family did not purchase and cancel any Class A Units under the NCIB. 44 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 Class A Units outstanding, beginning of year Class A Units issued, public offering Class A Units issued, warrants exercised Class A Units issued, debentures converted Class A Units outstanding, end of year 2017 56,068,506 20,624,100 - 37,165 76,729,771 2016 49,039,824 4,884,000 2,142,913 1,769 56,068,506 As at December 31, 2017, Pure Multi-Family had 76,729,771 Class A Units and 200,000 Class B Units outstanding. The capital of Pure Multi-Family 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-Family’s prospectuses dated July 3, 2012, October 12, 2012, May 1, 2013, July 22, 2014, May 4, 2015, December 7, 2015, July 22, 2016, March 31, 2017 and June 26, 2017, 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. 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, after the Determination Event, which occurred on August 12, 2016, the Class B Unitholders’ proportion of the total distribution will fluctuate depending on the number of Class A Units outstanding. For the year ending December 31, 2017, 3.72% of net income was allocated to the Class B Units (year ended December 31, 2016 - 4.85%). Following the occurrence of the Determination Event, the number of Class A Units to which the Class B Unitholder is entitled upon exercising Conversion Rights (as defined in the LP Agreement) became fixed, and future issuances of Class A Units will result in a decline in the Class B Unit Percentage Interest. Upon the Determination Event, which occurred on August 12, 2016, the number of Class A Units into which the Class B Units may be converted was fixed at 2,665,835 Class A Units. The Conversion Rights may be exercised by the Managing GP at any time provided that: (a) Pure Multi-Family 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 2,665,835 Class A 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-Family as was previously designated in the form of Class B Units. Subject to applicable laws, Pure Multi-Family will re-designate all the interests of Class B Unitholders into 2,665,835 Class A Units, effective as of the date that Pure Multi-Family receives a notice of exercise of the Conversion Rights. Upon such occurrence and the exercise of the Conversion Rights by the Class B Unitholders, the interests of Class B Unitholders will be re-designated as Class A Units. The Class B Units will not be required to be redeemed or cancelled. 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-Family’s assets. 45 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 LIQUIDITY AND CAPITAL RESOURCES Funds from Operations and Adjusted Funds from Operations Funds from operations (“FFO”) is a non-IFRS measure, 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. Pure Multi-Family’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 entities operating results more meaningful. As FFO excludes fair value adjustments, IFRIC 21 adjustments, 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, 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-Family’s method of calculating AFFO may differ from other companies and accordingly may not be comparable to similar measures presented by other companies. Pure Multi-Family presents AFFO for both an earnings and cash flow measure. 46 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 The following table provides the analysis of Pure Multi-Family’s FFO and AFFO performance: ($000’s, except percent and per unit basis) For the year ended December 31, 2017 For the year ended December 31, 2016 (2) For the three months ended December 31, 2017 For the three months ended December 31, 2016 (2) Net income and comprehensive income $ 43,196 $ 48,164 $ 3,078 $ 3,259 Adjustment: Fair value adjustment to investment properties Loss on disposal of investment property Property tax adjustments on acquisition or sale IFRIC 21 fair value adjustment to investment properties IFRIC 21 property tax liability adjustment, net (17,602) - (2,910) - - (26,498) 1,484 (2,943) - - 5,750 - (1,302) 3,946 (3,946) 1,043 1,484 (1,202) 2,782 (2,782) Funds from operations $ 22,684 $ 20,207 $ 7,526 $ 4,584 Maintenance capital provision (1) Accretion of convertible debentures (1,870) 332 (1,540) 314 (540) 87 (403) 81 Adjusted funds from operations $ 21,146 $ 18,981 $ 7,073 $ 4,262 Weighted average number of units (000’s) Class A Units Class B Units Diluted weighted average number of units (000’s) Class A Units Class B Units FFO per unit – Basic and Diluted Class A Units Class B Units Payout Ratio on FFO AFFO per unit – Basic and Diluted Class A Units Class B Units Payout Ratio on AFFO 68,927,987 51,553,540 76,729,771 55,418,872 200,000 200,000 200,000 200,000 72,958,845 55,739,002 76,729,771 55,497,401 200,000 200,000 200,000 200,000 $ 0.32 $ 0.37 $ 0.10 $ 0.08 4.22 119.9% 4.90 101.5% 1.26 98.9% 1.05 119.7% $ 0.30 $ 0.35 $ 0.09 $ 0.07 3.94 128.6% 4.60 108.0% 1.19 105.2% 0.98 128.8% Notes: (1) Calculated using an 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. See “Liquidity and Capital Resources – Calculating Maintenance Capital Provision for AFFO”. (2) Restated FFO and AFFO amounts for the three months and year ended December 31, 2016 to remove amortization of transaction costs and mortgage prepayment expense. 47 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 Calculating Maintenance Capital Provision for AFFO In Q1 2017, REALpac issued updated guidance on maintenance capital expenditures to be used in the calculation of AFFO. As a high degree of significant judgement is involved in classifying capital expenditures as value enhancing or maintenance capital, Pure Multi-Family historically has applied a maintenance capital provision of $300 per residential unit per annum, which is based on management’s experience and the location of former and current investment properties. The $300 maintenance capital provision includes capital expenditures incurred at the investment properties, in-suite or common area, which are required to maintain revenues at current levels and maintain the residential suites and apartment facilities in current operating conditions. Value enhancing capital expenditures include items such as in-suite upgrades and building enhancements that management believes will grow the investment property net rental income. The following table provides Pure Multi-Family’s total capital expenditures attributable to value enhancing and maintenance capital for each of the last three fiscal years: ($000’s, except per percent and residential unit basis) Value enhancing capital expenditures Maintenance capital expenditures Total capital expenditures Maintenance capital - % of total capital Portfolio average year of construction # of residential units (1) Maintenance capital expenditures per residential unit Value enhancing capital expenditures per residential unit Notes: (1) Weighted average number of residential units within portfolio during the year. For the year ended December 31, 2017 $ 3,052 1,870 $ 4,922 38% 2007 6,233 $ 300 $ 490 2016 $ 2,393 1,540 $ 3,933 39% 2006 5,132 $ 300 $ 466 2015 $ 1,631 1,289 $ 2,920 44% 2003 4,295 $ 300 $ 380 Management is of the view that the maintenance capital provision of $300 per residential unit per annum is an appropriate provision to use in the calculation of AFFO, as it fairly represents the amount of maintenance capital required to maintain the current revenues and condition of its investment properties, based on the location and year of construction of such properties. As noted in the table above, the “Maintenance capital - % of total capital” has decreased compared to each of the prior years. This is primarily the result of the steps we have taken to improve our portfolio’s average year of construction. As newly constructed properties require less maintenance capital to keep them in current condition, it would be expected that the trend of “Maintenance capital - % of total capital” will decrease as the “Portfolio average year of construction” continues to improve. Management will continue to monitor the maintenance capital provision currently being applied and adjust as necessary to reflect any changes as new locations are added where the portfolio operates and to any changes in the portfolio average year of construction. 48 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 The following is a reconciliation of the Pure Multi-Family’s AFFO and FFO to cash provided by operations: ($000’s) 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 Amortization of transaction costs Interest income Interest expense Distributions to subsidiary’s preferred unitholders For the year ended December 31, 2017 $ 21,146 1,870 (332) For the year ended December 31, 2016 (1) $ 18,981 1,540 (314) For the three months ended December 31, 2017 $ 7,073 540 (87) For the three months ended December 31, 2016 (1) $ 4,262 403 (81) 22,684 451 (1,492) 380 12,167 782 - 332 638 (112) 21,133 16 20,207 (1,168) (413) 163 1,503 168 - 314 655 (38) 18,831 16 7,526 (485) (2,574) 158 (2,181) (316) 3,946 87 181 (13) 5,903 4 4,584 (542) (1,284) (146) (9,031) (90) 2,782 81 194 (11) 4,677 4 Net cash provided from operating activities $ 56,979 $ 40,238 $ 12,236 $ 1,218 Notes: (1) Restated FFO and AFFO amounts for the three months and year ended December 31, 2016 to remove amortization of transaction costs and mortgage prepayment expense. Capital Resources Cash generated by investment properties represents the primary source of funds to fund total distributions to unitholders of $27,193,282 for the year ended December 31, 2017 (year ended December 31, 2016 - $20,504,317). 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-Family’s properties to transfer funds to Pure Multi-Family. 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-Family intends to refinance any mortgages which mature within six months of maturity. Management expects to be able to meet all of Pure Multi-Family’s ongoing obligations and to finance future growth through cash generated by operations, the issuance of securities and debt financing. Pure Multi-Family is not in default or arrears on any of its obligations including distribution payments, interest or principal payments on debt. Distributed Cash In accordance with National Instrument 41-201, Pure Multi-Family is required to provide additional disclosure relating to cash distributions. 49 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 For the years ended December 31, 2017 and 2016, cash provided from operating activities, less interest paid (“adjusted cash provided from (used by) operating activities”), was greater than cash distributions declared. For the three months ended December 31, 2017, adjusted cash provided from (used by) operating activities was less than cash distributions declared, which was primarily due to the decrease in non-cash working capital items. For the three months ended December 31, 2016, adjusted cash provided from (used by) operating activities, was less than cash distributions declared due to a non-recurring expense in the amount of $5,188,836, incurred by Pure Multi-Family on the mortgage refinancing of Prairie Creek Villas. Management expects that adjusted cash provided from (used by) operating activities, on an annual basis, will exceed cash distributions declared. ($000’s) Cash provided from operating activities Less interest paid Adjusted cash provided from (used by) operating activities Actual cash distributions declared Surplus (shortfall) of cash from operating activities over cash distributions declared For the year ended December 31, 2017 56,979 (20,759) $ For the year ended December 31, 2016 40,238 (18,651) $ For the three months ended December 31, 2017 12,236 (5,547) $ For the three months ended December 31, 2016 1,218 (4,329) $ 36,220 27,193 21,587 20,504 6,689 7,443 (3,111) 5,487 $ 9,027 $ 1,083 $ (755) $ (8,598) For the years ended December 31, 2017 and 2016, net income was greater than cash distributions declared. For the three months ended December 31, 2017 and 2016, net income was less than cash distributions declared primarily due to the combination of the timing and use of excess cash on the balance sheet held during the current period and the acquisition of investment properties which were going through their stabilization period during the current period. Management expects annual net income to continue to exceed cash distributions declared, over time. ($000’s) Net income Actual cash distributions declared Surplus (shortfall) of net income over cash distributions declared CAPITAL STRUCTURE For the year ended December 31, 2017 43,196 27,193 $ For the year ended December 31, 2016 48,164 20,504 $ For the three months ended December 31, 2017 3,078 7,443 $ For the three months ended December 31, 2016 3,259 5,487 $ $ 16,003 $ 27,660 $ (4,365) $ (2,228) Pure Multi-Family defines capital as the aggregate of partners’ capital, preferred units of subsidiary and long-term debt. Pure Multi-Family’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-Family’s capital structure is approved by the board of directors of the Governing GP through its periodic reviews. 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-Family for borrowed money (including the face amount outstanding under any convertible debentures and any outstanding liabilities of Pure Multi-Family arising from the issuance of subordinated notes, but excluding any premium in respect of indebtedness assumed by Pure Multi-Family for which Pure Multi-Family 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-Family 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-Family. Pure Multi-Family’s indebtedness is 53.4% as at December 31, 2017 (December 31, 2016 – 55.2%). Pure Multi- 50 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 Family was in compliance with all of its investment and debt restrictions during the year ended December 31, 2017 and the year ended December 31, 2016. Maintaining a relatively low indebtedness ratio is important in current economic conditions because it allows Pure Multi-Family 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-Family’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 distributions paid to the unitholders on a regular basis. Pure Multi-Family declared distributions in the amount of $26,193,594 to Class A Unitholders and $999,688 to Class B Unitholders during the year ended December 31, 2017 (year ended December 31, 2016 - $19,514,630 and $989,687 respectively). The capital structure consisted of the following components at December 31, 2017 and December 31, 2016: ($000’s) Capital Mortgages payable Credit Facility Convertible debentures Preferred units of subsidiary Partners’ capital December 31, 2017 December 31, 2016 Change $ 576,253 25,762 21,115 125 518,607 $ 447,827 - 20,793 125 370,162 $ 128,426 25,762 322 - 148,445 Total Capital $ 1,141,862 $ 838,907 $ 302,955 The total capital of Pure Multi-Family increased from December 31, 2016 to December 31, 2017 primarily due to the April 2017 and June 2017 Offerings, new mortgages and credit facility obtained on seven investment property acquisitions, 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-Family’s financial instruments, including cash and cash equivalents, amounts receivable, mortgage reserve fund, 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. 51 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 ($000’s) Mortgages payable Credit facility payable Convertible debentures Preferred units of subsidiary OFF-BALANCE SHEET ITEMS December 31, 2017 Carrying Amount $ 576,253 25,762 21,115 125 Fair Value $ 547,121 26,000 23,919 125 December 31, 2016 Carrying Amount $ 447,827 - 20,793 125 Fair Value $ 440,116 - 25,151 125 Pure Multi-Family does not have any off-balance sheet items. SECTION III SUMMARY OF SELECTED ANNUAL INFORMATION Pure Multi’s interest ($000’s, 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 For the year ended December 31, 2017 For the year ended December 31, 2016 For the year ended December 31, 2015 $ 93,099 $ 76,414 $ 58,876 49,859 43,196 1,170,675 1,133,501 652,068 618,692 27,193 $ 0.38 $ 5.00 41,692 48,164 853,372 778,547 483,210 465,139 20,504 $ 0.38 $ 4.95 32,696 51,179 691,153 613,682 386,879 372,776 15,810 $ 0.38 $ 3.95 $ 1.22 $ 12.79 Basic net income per Class A Unit Basic net income per Class B Unit $ 0.60 $ 8.04 $ 0.89 $ 11.67 Pure Multi-Family’s total assets and liabilities have increased significantly during the year ended December 31, 2017 due to investment property acquisitions and their related mortgages, the acquisition of a new credit facility, the issuance of equity, and fair value increases of its investment properties. As at December 31, 2017, Pure Multi held 22 investment properties comprising 7,085 residential units and 6,450,687 gross rentable square feet, compared to 15 investment properties with 5,229 residential units and 4,774,758 gross rentable square feet as at December 31, 2016. 52 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 Total rental revenue from the investment properties totaled $93.1 million for the year ended December 31, 2017 compared to $76.4 million for the year ended December 31, 2016. This increase is reflective of the increase in the number of days the investment properties were operating during 2017 compared to 2016, 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. SUMMARY OF QUARTERLY RESULTS During the three months ended December 31, 2017, based on Pure Multi’s interest: • • • Total assets increased to $1,170,675,160 from $1,115,605,699 as at September 30, 2017. This increase was primarily due to the acquisition of investment properties during the current quarter, which were partially funded through debt. As at December 31, 2017, Pure Multi-Family had cash and cash equivalents of $25,862,723, funds held in trust of $nil, and investment properties of $1,133,501,407, compared to $59,676,112, $32,737,300 and $1,013,652,235, respectively, as at September 30, 2017. Total liabilities increased to $652,068,282 from $592,617,809 as at September 30, 2017. This increase was primarily due to an increase in mortgages payable and the acquisition of a credit facility. Partners’ capital decreased to $518,606,878 from $522,983,890 as at September 30, 2017. This decrease was a result of distributions declared to unitholders, being partially offset by net income earned during the quarter. • Pure Multi-Family earned rental revenue of $26,200,371 from investment properties (three months ended December 31, 2016 - $20,115,884). These properties incurred operating expenses of $11,124,393, resulting in net rental income of $15,075,978 during the three months ended December 31, 2017 (three months ended December 31, 2016 - $9,844,692 and $10,271,192, respectively). The increase in rental revenue, operating expenses and net rental income, compared to the prior year, are primarily attributable to Pure Multi-Family operating additional investment properties, the elimination of property management fees in the current quarter due to the internalization of the property management function, and organic rental revenue growth, which was partially offset by an increase in property tax expense. • • • Pure Multi-Family incurred interest expense of $6,170,566 and distributions to subsidiary’s preferred unitholders of $3,906 (three months ended December 31, 2016 - $4,952,174 and $3,906, respectively). The increase in net finance expense was primarily due to the additional mortgage interest costs during the period. Pure Multi-Family incurred general and administrative expenses of $1,683,447, fair value adjustment gain to investment properties of $4,448,216 and franchise tax expense of $129,407 (three months ended December 31, 2016 - $567,793, $159,519 and $101,969, respectively). General and administrative expenses increased in the quarter primarily due to one-time internalization costs of $219,217 incurred to transition from an external management system to a fully internalized one and the additional related costs arising from internalization, such as office space, salaries and systems support. Pure Multi-Family earned net income of $3,077,869 (three months ended December 31, 2016 - $3,259,020), as a result of the above transactions. 53 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 Pure Multi’s interest Quarter ended ($000’s, 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 ($000’s, 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 As at ($000’s) Total assets Total liabilities Partners’ capital Investment properties Mortgages payable As at ($000’s) Total assets Total liabilities Partners’ capital Investment properties Mortgages payable December 31, 2017 September 30, 2017 June 30, 2017 $ 26,200 $ 24,257 $ 21,804 March 31, 2017 $ 20,837 11,124 15,076 (6,171) (1,683) (4,448) 3,078 0.04 0.52 11,888 12,369 (5,704) (1,645) 1,730 6,668 0.08 1.12 10,491 11,313 (5,187) (1,240) 11,615 16,407 0.24 3.19 9,738 11,099 (5,042) (799) 11,615 17,043 0.29 3.87 December 31, 2016 September 30, 2016 June 30, 2016 $ 20,116 $ 19,864 $ 19,369 March 31, 2016 $ 17,066 9,845 10,271 (4,952) (568) 160 3,259 0.06 0.75 9,158 10,706 (5,996) (322) 9,754 14,163 0.26 3.42 8,400 10,969 (4,705) (282) 8,264 14,248 0.28 3.56 December 31, 2017 September 30, 2017 June 30, 2017 $ 1,170,675 $ 1,115,602 $ 1,061,323 652,068 518,607 1,133,501 576,253 592,618 522,984 1,013,652 543,906 537,571 523,752 961,684 497,002 December 31, 2016 September 30, 2016 June 30, 2016 $ 853,372 $ 868,683 $ 793,016 483,210 370,162 778,547 447,827 505,917 362,766 834,465 463,837 467,476 325,540 752,412 430,518 7,320 9,746 (4,146) (268) 11,262 16,494 0.32 4.12 March 31, 2017 $ 898,779 517,142 381,637 871,129 483,090 March 31, 2016 $ 777,579 461,650 315,929 743,132 431,106 The selected quarterly information noted above highlights fluctuations over the most recently completed eight quarters. The fluctuations are generally due to the timing of new investment property acquisitions, dispositions and 54 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 fair value changes of the investment properties under IFRS, and are not generally reflective of seasonality or cyclicality. Operating expenses include property tax expense related to the investment properties. Depending on when prior period property tax appeals are settled, the operating expenses can demonstrate volatility due to nature of the timing of when the property tax appeal settlement is recognized into the operating expenses. 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-Family’s significant accounting policies are described in note 3 to the December 31, 2017 audited consolidated financial statements, available on SEDAR at www.sedar.com and on Pure Multi-Family’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-Family’s significant accounting policies are described in note 3 to the December 31, 2017 audited consolidated financial statements, available on SEDAR at www.sedar.com and on Pure Multi-Family’s website at 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)”). 55 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 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. Pure Multi-Family will adopt IFRS 9 (2014) in its consolidated financial statements for the annual period beginning on January 1, 2018. Management has determined there will be no material impact on the 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. 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 that fall in the scope of other IFRSs. Pure Multi-Family will to adopt IFRS 15 in its consolidated financial statements for the annual period beginning on January 1, 2018. Management has determined there will be no 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-Family intends to adopt IFRS 16 in its consolidated financial statements for the annual period beginning on January 1, 2019. Management does not expect the standard to have a material impact on the consolidated financial statements. 56 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 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-Family’s risk management framework. Pure Multi-Family’s risk management policies are established to identify and analyze the risks faced by Pure Multi-Family, 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-Family’s activities. In the normal course of business, Pure Multi-Family 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-Family is exposed to financial risk from the interest rate differentials between the market rate and the rates used on these financial instruments. Pure Multi-Family manages its financial instruments and interest rate risks based on its cash flow needs. Pure Multi- Family 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 50% to 60% and is restricted under the LP Agreement to a maximum of 70%. As Pure Multi-Family does not have any mortgages payable maturing prior to 2019 and all of the mortgages payable bear interest at fixed rates, with only the outstanding credit facility bearing interest at a variable rate, Pure Multi-Family does not face significant interest rate risk in the context of its outstanding debt. The profile of Pure Multi-Family’s interest-bearing financial instruments was: ($000’s) Fixed rate instruments Mortgages payable Credit facility Convertible debentures Preferred units of subsidiary Face Value December 31, 2017 December 31, 2016 $ 580,756 26,000 22,780 125 $ 629,661 $ 451,427 - 22,990 125 $ 474,542 57 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 Credit Risk Credit risk is the risk of financial loss to Pure Multi-Family if a tenant, customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from Pure Multi-Family’s receivables from tenants. Pure Multi-Family’s exposure to credit risk is influenced mainly by the individual characteristics of each tenant. Pure Multi-Family, 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-Family 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-Family may experience difficulty renewing leases as they expire or in re-leasing space vacated by tenants upon lease expiry. All leases of Pure Multi-Family’s investment properties have lease terms of one year or less. Typically, Pure Multi-Family instructs its property managers to initiate the renewal process before the existing leases expire. For any vacant spaces, Pure Multi-Family uses qualified leasing agents to actively market the spaces. Class A Unit Prices It is not possible to predict the price at which Class A 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-Family. Accordingly, the Class A Units may trade at a premium or discount to the value implied by the value of Pure Multi-Family’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-Family’s control. Environmental Risk As an owner of real property, Pure Multi-Family 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-Family’s ability to vary its portfolio promptly in response to changing economic or investment conditions. If Pure Multi-Family were required to liquidate a real property investment, the proceeds to Pure Multi-Family might be significantly less than the aggregate carrying value of such property. Liquidity risk is the risk that Pure Multi-Family will not be able to meet its financial obligations as they fall due. Pure Multi-Family’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-Family intends to refinance any mortgages which mature within six months. 58 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 The following table provides the future non-discounted scheduled payments of financial liabilities, including estimated interest payments: Year ended December 31, ($000’s) Mortgages payable (principal and interest) Credit facility (principal and interest) Convertible debentures payable (principal and interest) Preferred units of subsidiary (principal and interest) Accounts payable and accrued liabilities Total Tax Risk 2018 2019 2020 2021 2022 2023 and thereafter $ 25,906 $ 87,208 $ 25,878 $ 62,565 $ 54,102 $ 502,282 946 946 26,868 1,481 1,481 23,891 16 16 16 - - 16 - - - - 16 140,625 25,498 - - - - - $ 53,847 $ 89,651 $ 76,653 $ 62,581 $ 54,118 $ 642,907 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-Family. 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-Family or its unitholders. Administration in the United States The Administration in the United States may bring about changes in social, political, regulatory, tax and economic conditions or in laws and policies governing foreign trade, development and investment that could potentially cause significant volatility in global financial markets, including in global currency and debt markets. Such volatility could cause a slowdown in economic activities in the United States, Canada or globally, which could adversely affect Pure Multi-Family’s operating results and growth prospects, the extent of which may not be identifiable as of the date hereof. RELATED PARTY TRANSACTIONS Managing GP Pure Multi-Family is related to the Managing GP, by virtue of having an officer and director in common (Stephen Evans). Pure Multi-Family declared distributions to the Managing GP in the amount of $999,688 during the year ended December 31, 2017 ($989,687 during the year ended December 31, 2016). Included in accounts payable and accrued liabilities at December 31, 2017 was $nil (December 31, 2016 - $nil) payable to the Managing GP. 59 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP MD&A – December 31, 2017 Tipton Asset Group, Inc. Tipton Asset Group, Inc. (“Tipton”) was the property manager for Pure Multi-Family up until September 30, 2017. Pure Multi-Family is related to Tipton by virtue of having an officer and director in common (Bryan Kerns) with a subsidiary of Pure Multi-Family. Tipton charged property management fees in the amount of $1,858,703 during the year ended December 31, 2017 (year ended December 31, 2016 $2,301,288). During the year ended December 31, 2017, Tipton charged due diligence and acquisition analysis fees of $706,741 (year ended December 31, 2016 - $nil), which were capitalized upon the acquisition of the related properties. Included in accounts payable and accrued liabilities at December 31, 2017 was $nil (December 31, 2016 - $nil) payable to Tipton. Asset Management Agreement Effective September 1, 2016, Pure Multi-Family terminated its Asset Management Agreement with the Managing GP, as permitted upon the triggering of the Determination Event. No penalties were incurred upon termination of the Asset Management Agreement Compensation The Directors 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 indirectly reimburses such directors for any out of pocket expenses, including out of pocket expenses for attending meetings. Pure Multi-Family reimburses the Governing GP for such amounts. In addition, Pure Multi-Family has obtained insurance coverage for such directors. Compensation is reviewed on an annual basis, giving consideration to Pure Multi-Family’s growth and the extent of its portfolio. As part of the internalization of asset management, as described in Asset Management Agreement, certain key personnel of the Managing GP became corporate employees of a subsidiary of Pure Multi-Family effective September 1, 2016. Key corporate personnel have the authority and responsibility for planning, directing and controlling the activities of Pure Multi-Family, directly or indirectly. Pure Multi-Family’s key personnel include the Chief Executive Officer, Chief Financial Officer, Vice Presidents and the Directors. Salaries, bonuses, directors’ fees and other short-term employee benefits and incentives are accrued when earned and are as follows: ($000’s) For the year ended December 31, 2017 December 31, 2016 Salaries, directors’ fees, and other short-term benefits $ 1,897 $ 505 There was no unit based compensation expense incurred by Pure Multi-Family during the years ended December 31, 2017 and December 31, 2016. 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. As at March 7, 2018, the following of Pure Multi-Family’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 a maximum of 2,665,835 Class A Units; (b) 76,731,540 Class A Units; and 60 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP MD&A – December 31, 2017 (c) 22,770 Convertible Debentures. The Convertible Debentures are convertible at the option of the holder and redeemable by Pure Multi-Family in accordance with the terms of the trust indenture dated August 7, 2013. See “Financial Condition – Convertible Debentures”. SECTION VI SUBSEQUENT EVENTS a) On February 2, 2018, 10 of the remaining outstanding 22,780 6.5% convertible debentures were converted into 1,769 Class A Units. ADDITIONAL INFORMATION Additional information relating to Pure Multi-Family is available on SEDAR at www.sedar.com and on Pure Multi- Family’s website at www.puremultifamily.com. TRADING SYMBOLS TSX Venture Exchange: RUF.U, RUF.UN, RUF.DB.U OTCQX: PMULF 61 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Brackenridge at Midtown, San Antonio, Texas 62 PURE MULTI-FAMILY REIT LP ANNUAL REPORTConsolidated Financial statements For the year ended December 31, 2017 dated March 7, 2018 63 ANNUAL REPORT PURE MULTI-FAMILY REIT LPTHIS PAGE IS LEFT INTENTIONALLY BLANK 64 PURE MULTI-FAMILY REIT LP ANNUAL REPORTKPMG LLP PO Box 10426 777 Dunsmuir Street Vancouver BC V7Y 1K3 Canada Telephone (604) 691-3000 Fax (604) 691-3031 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, 2017 and 2016, 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. 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. 65 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP Page 2 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, 2017 and 2016, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards. March 7, 2018 Vancouver, Canada 66 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP Consolidated Statement of Financial Position (expressed in thousands of United States dollars) December 31, 2017 December 31, 2016 ASSETS Non-current assets Investment properties (note 4) $ 1,133,501 $ 778,547 Current assets Prepaid expenses Mortgage reserve fund (note 5) Amounts receivable Cash held in trust Cash and cash equivalents 3,361 6,421 1,529 - 25,863 37,174 1,869 5,194 1,980 45,179 20,603 74,825 TOTAL ASSETS $ 1,170,675 $ 853,372 LIABILITIES Non-current liabilities Mortgages payable (note 6) Credit Facility (note 7) Convertible debentures (note 8) Preferred units of subsidiary (note 9) Current liabilities Mortgages payable (note 6) Rental deposits Unearned revenue Accounts payable and accrued liabilities TOTAL LIABILITIES PARTNERS’ CAPITAL (note 10) $ $ 571,690 25,762 21,115 125 618,692 4,563 1,548 1,767 25,498 33,376 652,068 518,607 TOTAL LIABILITIES AND PARTNERS’ CAPITAL $ 1,170,675 $ Subsequent event (note 20) The accompanying notes are an integral part of these consolidated financial statements 444,221 - 20,793 125 465,139 3,606 1,168 985 12,312 18,071 483,210 370,162 853,372 67 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP Consolidated Statement of Partners’ Capital (expressed in thousands of United States dollars) Balance, December 31, 2016 Issuance of units Offering costs Debenture conversion Distributions to limited partners Net income for the period Balance, December 31, 2017 Limited Partners Class A Limited Partners Class B General Partner Other Equity Items (note 10) Accumulated Earnings Total $ 269,187 $ 1,000 $ 138,398 (6,147) 210 - - - - - - - - - - - - - $ 1,984 $ 97,991 $ 370,162 - - (19) - - - - - 138,398 (6,147) 191 (27,193) (27,193) 43,196 43,196 $ 401,648 $ 1,000 $ - $ 1,965 $ 113,994 $ 518,607 Balance, December 31, 2015 Issuance of units Conversion of warrants, net of costs Offering costs Debenture conversion Distributions to limited partners Net income for the period Balance, December 31, 2016 Limited Partners Class A Limited Partners Class B General Partner Other Equity Items (note 10) Accumulated Earnings Total $ 230,278 $ 1,000 $ - $ 2,665 $ 70,331 $ 304,274 39,639 680 (1,420) 10 - - - - - - - - - - - (680) - (1) - - - - 39,639 - (1,420) 9 (20,504) (20,504) 48,164 48,164 $ 269,187 $ 1,000 $ - $ 1,984 $ 97,991 $ 370,162 The accompanying notes are an integral part of these consolidated financial statements 68 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP Consolidated Statement of Income and Comprehensive Income (expressed in thousands of United States dollars, except units and per unit amounts) December 31, 2017 December 31, 2016 $ 93,099 $ 76,414 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 11) Distributions to subsidiary’s preferred unitholders NET OTHER INCOME (EXPENSES) Other income (expenses) General and administrative Fair value adjustments to investment properties (note 4) Franchise tax Loss on disposal of investment properties (note 4) 1,908 1,859 15,647 20,916 40,330 52,769 112 (22,104) (16) (22,008) 663 (5,369) 17,602 (461) - 12,435 1,588 2,301 11,185 16,706 31,780 44,634 38 (19,799) (16) (19,777) 18 (1,438) 26,498 (287) (1,484) 23,307 NET INCOME AND COMPREHENSIVE INCOME $ 43,196 $ 48,164 Earnings per Class A unit Basic Diluted (note 19) Weighted average number of Class A units Basic Diluted (note 19) Earnings per Class B unit Basic Diluted Weighted average number of Class B units Basic and diluted $ 0.60 $ 0.60 $ $ 0.89 0.86 68,926,987 72,958,845 51,553,540 55,739,002 $ 8.04 7.96 $ $ $ 11.67 11.67 200,000 200,000 The accompanying notes are an integral part of these consolidated financial statements 69 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Year ended Cash provided by (used in) OPERATIONS Net income Items not involving cash: Amortization of transaction costs and accretion of convertible debentures Fair value adjustments to investment properties (note 4) Property tax adjustments on acquisitions Property tax adjustments on sale 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 13) INVESTING Acquisitions of investment properties Capital additions to investment properties Cash held in trust Interest received Proceeds received on disposal of investment properties Disposition costs on disposal of investment properties FINANCING Distribution paid to subsidiary’s preferred unitholders Distributions paid to limited partners Interest paid Mortgage proceeds received Repayment of mortgages payable Credit facility received Repayment of credit facility Funds from mortgage reserve fund Payment of finance transaction costs Proceeds from the issuance of limited partner units Unit offering costs Net change in cash and cash equivalents Cash and cash equivalents, beginning of year CASH AND CASH EQUIVALENTS, END OF PERIOD Supplemental cash flow information: Non-cash financing: Pure Multi-Family REIT LP Consolidated Statement of Cash Flows (expressed in thousands of United States dollars) December 31, 2017 December 31, 2016 $ 43,196 $ 48,164 970 (17,602) (2,910) - - (112) 21,134 16 12,288 56,980 (329,520) (4,922) 45,179 112 - - (289,151) (16) (26,548) (20,759) 133,000 (3,671) 29,000 (3,000) (1,227) (1,599) 138,398 (6,147) 237,431 5,260 20,603 $ 25,863 $ 968 (26,498) (3,067) 125 1,484 (38) 18,831 16 253 40,238 (188,592) (3,933) (22,474) 38 57,100 (1,484) (159,345) (16) (20,285) (18,651) 121,000 (26,649) - - 1,377 (1,213) 39,640 (1,420) 93,783 (25,324) 45,927 20,603 Distributions to the limited partners included in accounts payable and accrued liabilities Conversion of convertible debentures $ 2,398 191 $ 1,752 9 The accompanying notes are an integral part of these consolidated financial statements 70 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) 1. PURE MULTI-FAMILY REIT LP INFORMATION Pure Multi-Family REIT LP (“Pure Multi-Family”) 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- Family was established by Pure Multifamily 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-Family’s head office and address for service is located at 910 – 925 West Georgia Street, Vancouver, British Columbia, V6C 3L2. Pure Multi-Family was established for, among other things, the purposes of: • • • 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-Family and making distributions to Unitholders; in connection with the undertaking set out above, reinvesting income and gains of Pure Multi-Family and taking other actions besides the mere protection and preservation of Pure Multi-Family 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, 2017 were authorized for issue by the Board of Directors of the Governing GP (the “Board”) on March 7, 2018. 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-Family’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(R). C. Functional and presentation currency These consolidated financial statements are presented in United States dollars, which is Pure Multi- Family’s functional currency. 71 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) D. Presentation of financial statements Pure Multi-Family 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-Family 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-Family and its subsidiaries, over which Pure Multi-Family has control. Control exists when Pure Multi-Family 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. 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-Family and its subsidiaries. B. Translation of foreign currency The functional and reporting currency of Pure Multi-Family is United States dollars. Pure Multi-Family 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. C. 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(R). 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. D. 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-Family 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 72 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) 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 consolidated statement of income and comprehensive income in the period in which they arise. An investment property is derecognized when it has been disposed of and no future economic benefit is expected from its disposal. Any gains or losses on the disposal of an investment property are recognized in the consolidated statement of income and comprehensive income in the period of disposal. E. Fair value Pure Multi-Family 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. F. Impairment of financial assets At each reporting date, Pure Multi-Family 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. G. 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-Family’s designation of such instruments. Pure Multi-Family 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 73 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) 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. H. Cash and cash equivalents Cash and cash equivalents consists of cash on hand and cash held at banks. I. Cash held in trust Cash held in trust consists of funds held in trust and refundable deposits, held pursuant to agreements of purchase and sale, which are to be used for the acquisition of investment properties. J. Convertible debentures Convertible debentures issued by Pure Multi-Family are converted into Class A units (each a “Class A Unit”) of Pure Multi-Family 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. 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. K. Operating segments 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. Pure Multi- Family currently operates in one business segment, the owning and operating of multifamily apartment properties in the sun-belt area in the United States. L. 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. 74 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) M. 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-Family to the lessees are accounted for as finance leases. All current leases of Pure Multi-Family are operating leases. N. 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. O. Taxes (i) Income Taxes Pure Multi-Family is not subject to tax under Part I of the Income Tax Act (Canada) (the “Tax Act”). Each partner of Pure Multi-Family 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-Family 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. 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-Family 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-Family in such a manner so as to remain exempt from the SIFT Measures on a continuous basis in the future. If Pure Multi-Family 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-Family 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-Family’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-Family 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-Family’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 75 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) 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. 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. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“U.S. Tax Reform”). The U.S. Tax Reform made many significant changes to the U.S. federal tax laws, including reducing the U.S. federal corporate income tax rate from 35% to 21% effective as of January 1, 2018. Future regulations and interpretations to be issued by U.S. authorities may impact the Pure Multi-Family’s estimates and assumptions used in calculating its income tax provisions. Pure Multi-Family’s indirect Canadian subsidiary, Pure Multi-Family Management Ltd. (“Management Co”), is a taxable Canadian corporation subject to Canadian income tax. Income tax expense comprises current tax. Current tax is recognized in net earnings. Current income tax is the expected tax payable or receivable on the taxable income or loss for the period using tax rates enacted or substantively enacted by the reporting date, and any adjustment to tax payable in respect of previous years. (ii) Texas Franchise Tax Texas Franchise Tax applicable to Pure Multi-Family, for its investment properties operated in Texas during the year ended December 31, 2017, is equal to 0.75% 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-Family has recorded a provision for Texas Franchise Tax of $460,952 for the year ended December 31, 2017 (year ended December 31, 2016 - $287,241), which is included within other expenses in the consolidated statement of income and comprehensive income. P. 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. Q. Provisions Provisions are recognized by Pure Multi-Family when: (i) Pure Multi-Family 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 expense. R. 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. 76 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) (i) Judgments In the process of applying Pure Multi-Family’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: a) Asset acquisitions Pure Multi-Family, through the US REIT, acquires individual real estate properties. At the time of acquisition, Pure Multi-Family considers whether or not the acquisition represents the acquisition of a business. Pure Multi-Family 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-Family have been determined to be asset acquisitions. (ii) Estimates The significant areas of estimation include the following: a) 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, 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. 77 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) S. Accounting standards not yet adopted (i) 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. Pure Multi-Family will adopt IFRS 9 (2014) in its consolidated financial statements for the annual period beginning on January 1, 2018. Management has determined there will be no material impact on the consolidated financial statements. (ii) 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, but do no 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 that fall in the scope of other IFRSs. Pure Multi-Family will adopt IFRS 15 in its consolidated financial statements for the annual period beginning on January 1, 2018. Management has determined there will be no material impact on the consolidated financial statements. (iii) 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. 78 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) Pure Multi-Family intends to adopt IFRS 16 in its consolidated financial statements for the annual period beginning on January 1, 2019. Management does not expect the standard to have a material impact on the consolidated financial statements. 4. INVESTMENT PROPERTIES Balance, as at December 31, 2016 Acquisitions Property tax adjustments on acquisitions and dispositions Capital additions Fair value adjustments to investment properties Balance, as at December 31, 2017 Balance, as at December 31, 2015 Acquisitions Dispositions Property tax adjustments on acquisitions and dispositions Capital additions Fair value adjustments to investment properties Balance, as at December 31, 2016 2017 $ 778,547 329,520 2,910 4,922 17,602 $ 1,133,501 2016 $ 613,682 188,592 (57,100) 2,942 3,933 26,498 $ 778,547 The investment properties are pledged as security against the mortgages payable. A. 2017 Acquisitions On January 25, 2017, Pure Multi-Family, through the US REIT, acquired PURE Creekside at Onion Creek (“Creekside”), a multi-family apartment community, located in Austin, Texas, for a purchase price of $40,000,000, plus standard closing costs and adjustments. This acquisition was financed with cash, cash held in trust and a new 10-year mortgage in the amount of $20,000,000. On January 27, 2017, Pure Multi-Family, through the US REIT, acquired the Lansbrook at Twin Creeks (“Lansbrook”), a multi-family apartment community, located in Dallas, Texas, for a purchase price of $40,000,000, plus standard closing costs and adjustments. This acquisition was financed with cash, cash held in trust and a new 5-year mortgage in the amount of $16,500,000. On June 9, 2017, Pure Multi-Family, through the US REIT, acquired PURE Park 28 (“Park 28”), a multi-family apartment community, located in Phoenix, Arizona, for a purchase price of $29,700,000, plus standard closing costs and adjustments. This acquisition was financed with cash and a new 15-year mortgage in the amount of $14,850,000. On June 15, 2017, Pure Multi-Family, through the US REIT, acquired the Pinnacle at Union Hills (“Pinnacle”), a multi-family apartment community, located in Phoenix, Arizona, for a purchase price of $47,500,000, plus standard closing costs and adjustments. This acquisition was financed with cash. Subsequent to the acquisition, on July 7, 2017, Pure Multi-Family obtained a new 7-year mortgage in the amount of $23,750,000, secured by Pinnacle. 79 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) On July 11, 2017, Pure Multi-Family, through the US REIT, acquired Pure at La Villita (“La Villita”), a multi- family apartment community, located in Dallas, Texas, for a purchase price of $48,800,000, plus standard closing costs and adjustments. This acquisition was financed with cash and a new 15-year mortgage in the amount of $24,400,000. On October 2, 2017, Pure Multi-Family, through the US REIT, acquired Pure Farmers Market Apartments (“Farmers Market”), a multi-family apartment community, located in Dallas, Texas, for a purchase price of $66,350,000, plus standard closing costs and adjustments. This acquisition was financed with cash and a new 12-year mortgage in the amount of $33,500,000. On November 29, 2017, Pure Multi-Family, through the US REIT, acquired Pure Fillmore Apartments (“Fillmore”), a multi-family apartment community, located in Phoenix, Arizona, for a purchase price of $55,947,140, plus standard closing costs and adjustments. This acquisition was financed with cash and $29,000,000 from a new secured corporate credit facility (see note 7). B. 2016 Acquisitions On March 1, 2016, Pure Multi-Family, through the US REIT, acquired Pure View at TPC (“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 and a new 15-year mortgage in the amount of $39,000,000. On March 1, 2016, Pure Multi-Family, through the US REIT, acquired Pure Estates at TPC (“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 and a new 8-year mortgage in the amount of $39,000,000. On September 14, 2016, Pure Multi-Family, through the US REIT, acquired The Avenue on Fairmount Apartments (“Avenue”), a multi-family apartment community, located in Dallas, Texas, for a purchase price of $71,000,000, plus standard closing costs and adjustments. This acquisition was financed with cash and a new 12-year mortgage in the amount of $43,000,000. C. Disposals There were no disposals of properties during the year ended December 31, 2017. On November 4, 2016, Pure Multi-Family, through the US REIT, sold Livingston Apartments (“Livingston”), a multi-family apartment community, located in Dallas, Texas, for a sale price of $34,300,000, less standard closing costs and adjustments. The mortgage payable, that was secured by Livingston, was paid in full as of the same date. On November 17, 2016, Pure Multi-Family, through the US REIT, sold Fairways at Prestonwood (“Prestonwood”), a multi-family apartment community, located in Dallas, Texas, for a sale price of 22,800,000, less standard closing costs and adjustments. The 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 Loss on disposal of investment properties 2017 - - - - - $ 2016 57,100 (1,484) 55,616 (57,100) $ (1,484) 80 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) D. Valuations Investment properties are carried at fair value. As set out in note 3(R), 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. 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-Family does not obtain appraisals for each property at each reporting date. Where Pure Multi- Family 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 years ended December 31, 2017 and 2016, Pure Multi-Family obtained independent appraisals throughout the period on all of the investment properties it held at December 31, 2017 and at December 31, 2016, respectively. As disclosed in note 3(R), where appropriate, management incorporated these appraisals in its determination of fair value for each of the investment properties. The significant assumptions made relating to the valuations of the investment properties are set out below: December 31, 2017 December 31, 2016 Weighted average Range Weighted average Range Capitalization rate 5.17% 4.75% - 6.00% 5.41% 4.75% - 6.00% 5. 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. 81 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) 6. MORTGAGES PAYABLE Nominal interest rate Year of maturity December 31, 2017 December 31, 2016 Face value Face value Valley Ranch Prairie Creek Bear Creek Hackberry Creek Deer Park Fountainwood Walker Commons Preserve San Brisas Park West Amalfi Brackenridge Pure Estates Pure View The Avenue Creekside Lansbrook Park 28 Pinnacle at Union Hill La Villita Farmers Market 3.51% 4.07% 3.45% 3.90% 4.21% 4.46% 3.11% 3.26% 3.26% 4.02% 3.83% 3.72% 3.96% 3.92% 3.40% 3.98% 3.27% 3.84% 3.32% 3.81% 3.67% $ 2022 2030 2019 2028 2023 2023 2019 2021 2021 2030 2027 2027 2024 2031 2028 2027 2022 2032 2024 2032 2029 Total mortgages principal payable Unamortized mortgage transaction costs Total carrying value of mortgages payable Less current portion Non-current portion $ 13,680 44,705 32,080 29,500 15,811 12,278 28,470 23,983 16,554 36,500 45,000 30,600 37,824 37,771 43,000 20,000 16,500 14,850 23,750 24,400 33,500 580,756 (4,503) 576,253 4,563 13,680 45,590 32,080 29,500 16,098 12,511 28,470 24,479 16,896 36,500 45,000 30,600 38,484 38,539 43,000 - - - - - - 451,427 (3,600) 447,827 3,606 $ 571,690 $ 444,221 The mortgages payable are recorded at amortized cost and bear a weighted average effective interest rate of 3.72% as at December 31, 2017 (December 31, 2016 – 3.74%). The mortgages payable are secured by charges on Pure Multi-Family’s investment properties. 82 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) Principal repayments, as of December 31, 2017, based on scheduled repayments to be made on the mortgages payable over the next five years and thereafter are as follows: 2018 2019 2020 2021 2022 Thereafter $ 4,563 66,716 7,019 44,286 37,665 420,507 $ 580,756 7. CREDIT FACILITY On November 28, 2017, Pure Multi-Family entered into a secured revolving credit agreement (the “Facility”), through the US REIT, with a total commitment available of up to $50 million. The contract period is 3 years in duration and interest is calculated using the effective interest rate, which was 3.64% for 2017. Amounts drawn under the Facility will bear interest at a variable rate initially equal to: (i) LIBOR plus a margin ranging from 1.55% to 2.20% per annum, or (ii) a base rate plus a margin ranging from 0.55% to 1.20% per annum. As at December 31, 2017, a balance of $26 million was outstanding. The Facility is secured by the Fillmore investment property. Balance as at December 31, 2016 Credit facility draws Credit facility repayments Credit facility financing costs Amortization of transaction costs Balance as at December 31, 2017 8. CONVERTIBLE DEBENTURES Face Value $ - 29,000 (3,000) - - $ 26,000 Carrying Value $ - 29,000 (3,000) (245) 7 $ 25,762 On August 7, 2013, Pure Multi-Family 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-Family, 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-Family at any time. During the year ended December 31, 2017, 210 of the originally issued 23,000 6.5% convertible debentures were converted into Class A Units (December 31, 2016 – 10 Class A Units). At December 31, 2017, $22,780,000 of the face value of the 6.5% convertible debentures was outstanding. 83 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) The following summarizes the face and carrying values of the 6.5% convertible debentures: Balance as at December 31, 2016 Conversion of convertible debenture Amortization of transaction costs Accretion of liability component Balance as at December 31, 2017 Balance as at December 31, 2015 Conversion of convertible debenture Amortization of transaction costs Accretion of liability component Convertible Debentures Face Value $ 22,990 (210) - - 22,780 $ 23,000 (10) - - Liability Component Carrying Value Equity Component Carrying Value $ 20,793 $ 1,984 (191) 181 332 21,115 (19) - - 1,965 $ 20,320 $ 1,985 (9) 168 314 (1) - - Balance as at December 31, 2016 $ 22,990 $ 20,793 $ 1,984 9. 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-Family. 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-Family declared distributions of $15,625 during the year ended December 31, 2017 to the preferred unitholders (year ended December 31, 2016 - $15,625). 10. PARTNERS’ CAPITAL A. Limited Partners and General Partner The capital of Pure Multi-Family consists of an unlimited number of units of Pure Multi-Family and the interest held by the Governing GP. The Governing GP has made a capital contribution of $20 to Pure Multi-Family and has no further obligation to contribute capital. 84 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) On May 30, 2012, the Managing GP subscribed for 200,000 Class B units (each a “Class B Unit”) of Pure Multi-Family. On August 12, 2016, a Determination Event, as defined in the LP Agreement, occurred as a result of Pure Multi-Family’s market capitalization exceeding $300,000,000 for a period of 10 consecutive trading days. Upon the occurrence of the Determination Event, the number of Class A Units, into which the Class B Units may be converted to, was fixed at 2,665,835. Pure Multi-Family has not issued any additional Class B Units. As defined in the LP Agreement, the Governing GP has discretion to allocate revenue and expenses on a basis which ensures a fair distribution among unitholders. For the years ended December 31, 2017 and 2016, the Governing GP has allocated the revenue and expenses based on the weighted average number of Class A Units outstanding during the reporting periods and the respective Class B Units, per the Specified Ratio, as described in the LP Agreement. For the year ended December 31, 2017, 3.72% of net income was allocated to the Class B Units (year ended December 31, 2016 - 4.85%). During the years ended December 31, 2017 and 2016, the following transactions not already disclosed in these financial statements occurred: (i) On April 7, 2017, Pure Multi-Family completed the closing of a public offering of 10,343,100 Class A Units on a bought deal basis, at a price of $6.67 (CDN$8.90) per Class A Unit for gross proceeds of $68,938,208 (CDN$92,053,590). Pure Multi-Family issued the Class A Units from treasury. (ii) On June 30, 2017, Pure Multi-Family completed the closing of a public offering of 10,281,000 Class A Units on a bought deal basis, at a price of $6.76 (CDN$8.95) per Class A Unit for gross proceeds of $69,459,954 (CDN$92,014,950). Pure Multi-Family issued the Class A Units from treasury. (iii) During the year ended December 31, 2017, 210 6.5% convertible debentures were converted at a conversion price of $5.65 into 37,165 Class A Units. Pure Multi-Family issued the Class A Units from treasury. (iv) On July 29, 2016, Pure Multi-Family completed the closing of a public offering of 4,884,000 Class A Units on a bought deal basis, at a price of $5.857 (or CDN$7.64) per Class A Unit for gross proceeds of $28,603,483 (or CDN$37,313,760). Pure Multi-Family issued the Class A Units from treasury. (v) During the year ended December 31, 2016, the remaining 2,142,913 Class A Unit purchase warrants (each a “Warrant”) were exercised for 2,142,913 Class A Units at an exercise price of $5.15 for gross proceeds of $11,036,002 (year ended December 31, 2015 – $283,250). Pure Multi-Family issued the Class A Units from treasury. (vi) During the year ended December 31, 2016, 10 6.5% convertible debentures were converted at a conversion price of $5.65 into 1,769 Class A Units (year ended December 31, 2015 – $nil). Pure Multi-Family issued the Class A Units from treasury. (vii) In September 2017, Pure Multi-Family received approval from the TSX Venture Exchange to commence a normal course issuer bid (“NCIB”), allowing for the purchase for cancellation of up to 1,000,000 Class A Units. The NCIB commenced on October 3, 2017 and will expire on October 2, 2018, or such earlier date as Pure Multi-Family completes its purchases pursuant to the NCIB. Purchases subject to this NCIB will be carried out pursuant to open market transactions through the facilities of the TSX-V by CIBC on behalf of Pure Multi-Family in accordance with applicable regulatory requirements. All Class A Units purchased by Pure Multi-Family under the NCIB will be returned to treasury and cancelled. During the year ended December 31, 2017, Pure Multi-Family did not purchase and cancel any Class A Units under the NCIB. 85 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) Class A Units outstanding, beginning of year 56,068,506 Class A Units issued, public offering 20,624,100 Class A Units issued, warrants exercised Class A Units issued, debentures converted - 37,165 2017 2016 49,039,824 4,884,000 2,142,913 1,769 Class A Units outstanding, end of year 76,729,771 56,068,506 Pure Multi-Family is authorized to issue an unlimited number of Class A Units and Class B Units. B. Other Equity Items Balance as at December 31, 2016 Convertible debentures converted, equity portion Convertible Debentures Equity Component (note 8) 1,984 $ (19) Warrants - $ $ Balance as at December 31, 2017 $ 1,965 $ - $ Balance as at December 31, 2015 Warrants exercised, net of offering costs Convertible debentures converted, equity portion 1,985 - (1) Balance as at December 31, 2016 $ 1,984 $ 680 (680) - - $ Total 1,984 (19) 1,965 2,665 (680) (1) 1,984 11. INTEREST EXPENSE Interest expense consists of the following: Mortgage interest Convertible debenture interest Credit facility interest Amortization of transaction costs and accretion of convertible debentures Mortgage prepayment expense Year ended December 31, 2017 December 31, 2016 $ $ 19,572 1,477 85 970 - 16,159 1,498 - 968 1,174 $ 22,104 $ 19,799 86 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) 12. INCOME TAXES A. Current income taxes Pure Multi-Family has recorded a provision for Canadian income tax related to Management Co of $43,210 for the year ended December 31, 2017 (2016 - $2,251), which is included in other income (expenses) in the consolidated statement of comprehensive income. B. Deferred income taxes No deferred income taxes have been recorded in respect of Management Co. 13. 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 14. CAPITAL MANAGEMENT Year ended $ December 31, 2017 451 (1,492) 12,167 782 380 December 31, 2016 (1,168) $ (413) 1,503 168 163 $ 12,288 $ 253 Pure Multi-Family defines capital as the aggregate of partners’ capital, preferred units of subsidiary and long- term debt. Pure Multi-Family’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-Family’s capital structure is approved by the board of directors of the Governing GP through its periodic reviews. 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-Family for borrowed money (including the face amount outstanding under any convertible debentures and any outstanding liabilities of Pure Multi-Family arising from the issuance of subordinated notes, but excluding any premium in respect of indebtedness assumed by Pure Multi-Family for which Pure Multi-Family 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-Family 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-Family. Pure Multi-Family’s indebtedness is 53.4% as at December 31, 2017 (December 31, 2016 – 55.2%). Pure Multi-Family was in compliance with all of its investment and debt restrictions during the years ended December 31, 2017 and 2016. There were no changes in Pure Multi-Family’s approach to capital management during the year ended December 31, 2017. 87 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) The capital structure consisted of the following components as at December 31, 2017 and December 31, 2016: December 31, 2017 December 31, 2016 Capital Mortgages payable Credit facility payable Convertible debentures Preferred units of subsidiary Partners’ capital $ $ 576,253 25,762 21,115 125 518,607 Total capital $ 1,141,862 $ 447,827 - 20,793 125 370,162 838,907 15. FINANCIAL INSTRUMENTS Fair value of financial instruments For certain of Pure Multi-Family’s financial instruments, including cash and cash equivalents, amounts receivable, mortgage reserve fund, and accounts payable and accrued liabilities, the carrying amounts approximate the fair value due to the short-term nature of the instruments. The fair value 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 amount and fair value of Pure Multi-Family’s non-current financial instruments: December 31, 2017 Carrying Amount 576,253 $ Fair Value 547,121 $ December 31, 2016 Carrying Amount 447,827 $ 25,762 21,115 125 26,000 23,919 125 - 20,793 125 Fair Value 440,116 - 25,151 125 Mortgages payable Credit facility Convertible debentures Preferred units of subsidiary $ Financial risk management The board of directors of the Governing GP (the “Directors”) has the overall responsibility for the establishment and oversight of Pure Multi-Family’s risk management framework. Pure Multi-Family’s risk management policies are established to identify and analyze the risks faced by Pure Multi-Family, 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-Family’s activities. In the normal course of business, Pure Multi-Family, 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-Family if a tenant, customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from Pure Multi- Family’s receivables from tenants. 88 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) Pure Multi-Family’s exposure to credit risk is influenced mainly by the individual characteristics of each tenant. Pure Multi-Family 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-Family 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-Family 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-Family, through the US REIT, tries to secure fixed interest rate mortgages for the majority of its investment properties. As Pure Multi-Family does not have any mortgages maturing within the next 6 months and all of the mortgages payable bear interest at fixed rates, with only the outstanding credit facility bearing interest at a variable rate, Pure Multi-Family does not face significant interest rate risk in the context of its outstanding debt. C. Liquidity risk Liquidity risk is the risk that Pure Multi-Family 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-Family’s ability to vary its portfolio promptly in response to changing economic or investment conditions. If Pure Multi-Family were required to liquidate the investment properties, the proceeds to Pure Multi-Family might be significantly less than the aggregate carrying value of such property. Pure Multi-Family’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-Family 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: Mortgages payable (principal and interest) Credit facility (principal and interest) Convertible debentures (principal and interest) Preferred units of subsidiary (principal and interest) Accounts payable and accrued liabilities 2018 2019 2020 2021 2022 2023 and thereafter $ 25,906 $ 87,208 $ 25,878 $ 62,565 $ 54,102 $ 502,282 946 946 26,868 1,481 1,481 23,891 - - - - - - 16 16 16 16 16 140,625 25,498 - - - - - Total $ 53,847 $ 89,651 $ 76,653 $ 62,581 $ 54,118 $ 642,907 D. Currency risk Pure Multi-Family is exposed to minimal currency risk since only a small portion of the expenses is in Canadian dollars. 89 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) E. Environmental risk Pure Multi-Family, through the US REIT, is subject to various federal, state and municipal laws relating to the environment. On acquisition, Pure Multi-Family conducts environmental inspections of its properties and appropriate testing by qualified environmental consultants when required to ensure compliance with all applicable environmental laws. 16. RELATED PARTY TRANSACTIONS Managing GP Pure Multi-Family is related to the Managing GP, by virtue of having an officer and director in common (Stephen Evans). Pure Multi-Family declared distributions to the Managing GP in the amount of $999,688 during the year ended December 31, 2017 (year ended December 31, 2016 - $989,687). Included in accounts payable and accrued liabilities at December 31, 2017 was $nil (December 31, 2016 - $nil) payable to the Managing GP. Asset Management Agreement Effective September 1, 2016, Pure Multi-Family terminated its Asset Management Agreement with the Managing GP, as permitted upon the triggering of the Determination Event. No penalties were incurred upon termination of the Asset Management Agreement. Tipton Asset Group, Inc. Tipton Asset Group, Inc. (“Tipton”) was the property manager for Pure Multi-Family up until September 30, 2017. Pure Multi-Family is related to Tipton by virtue of having an officer and director in common (Bryan Kerns) with a subsidiary of Pure Multi-Family. Tipton charged property management fees in the amount of $1,858,703 during the year ended December 31, 2017 (year ended December 31, 2016 $2,301,288). During the year ended December 31, 2017, Tipton charged due diligence and acquisition analysis fees of $706,741 (year ended December 31, 2016 - $nil), which were capitalized upon the acquisition of the related properties. Included in accounts payable and accrued liabilities at December 31, 2017 was $nil (December 31, 2016 - $nil) payable to Tipton. Compensation The Directors 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 indirectly reimburses such directors for any out of pocket expenses, including out of pocket expenses for attending meetings. Pure Multi-Family reimburses the Governing GP for such amounts. In addition, Pure Multi-Family has obtained insurance coverage for such directors. Compensation is reviewed on an annual basis, giving consideration to Pure Multi-Family’s growth and the extent of its portfolio. As part of the internalization of asset management, as described in Asset Management Agreement, certain key personnel of the Managing GP became corporate employees of a subsidiary of Pure Multi-Family effective September 1, 2016. Key corporate personnel have the authority and responsibility for planning, directing and controlling the activities of Pure Multi-Family, directly or indirectly. Pure Multi-Family’s key personnel include the Chief Executive Officer, Chief Financial Officer, Vice Presidents and the Directors. Salaries, bonuses, directors’ fees and other short-term employee benefits and incentives are accrued when earned and are as follows: 90 PURE MULTI-FAMILY REIT LP ANNUAL REPORT Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) Year ended December 31, 2017 December 31, 2016 Salaries, directors’ fees, and other short-term benefits $ 1,897 $ 505 There was no unit based compensation expense incurred by Pure Multi-Family during the years ended December 31, 2017 and December 31, 2016. 17. LEASES Property Lease Revenue Pure Multi-Family, 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 $49,710,451 as at December 31, 2017 (December 31, 2016 - $33,231,374). Operating Lease Commitment During the year ended December 31, 2017, Pure Multi-Family entered into an operating lease agreement, expiring in 2025 for the lease of the US REIT corporate office located in Plano, Texas, with total payments of approximately $1.1 million required over the lease term. 18. FAIR VALUE MEASUREMENT 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: December 31, 2017 December 31, 2016 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Investment properties Mortgages payable Credit facility Convertible debentures Preferred units of subsidiary $ - - - 23,919 - $ - $ 1,133,501 $ - $ - $ 778,547 547,121 26,000 - 125 - - - - - - 25,151 440,116 - - - 125 - - - - There have been no transfers between the levels during the year. As disclosed above, the fair value methodology for Pure Multi-Family’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. Investment properties as at December 31, 2017 and December 31, 2016 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. 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, 2017: 91 ANNUAL REPORT PURE MULTI-FAMILY REIT LP Pure Multi-Family REIT LP Notes to Consolidated Financial Statements (tabular amounts expressed in thousands of United States dollars, except units and per unit amounts) Rate sensitivity + 75 basis points + 50 basis points + 25 basis points Base rate (5.17%) - 25 basis points - 50 basis points - 75 basis points OCR Sensitivity Fair value Change in fair value $ 989,527 $ (143,974) 1,033,263 1,081,057 1,133,501 1,191,313 1,255,364 1,326,726 (100,238) (52,444) - 57,812 121,863 193,225 19. 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 Diluted net income and comprehensive income allocated to Class B unitholders (2) Notes: Year ended December 31, 2017 $ 43,196 1,989 45,185 December 31, 2016 $ 48,164 1,980 50,144 43,593 47,714 $ 1,592 $ 2,430 (1) Dilutive interest expense includes the removal of the interest expense related to the dilutive 6.5% convertible debentures. (2) Diluted net income and comprehensive income allocated to Class B unitholders for the year ended December 31, 2016 is anti-dilutive and therefore not shown on the consolidated statement of income and comprehensive income. Weighted average number of Class A units - basic Dilutive effect of the conversion of convertible debentures using the treasury stock method (1) Dilutive effect of the conversion of warrants (2) Weighted average number of Class A units - dilutive Notes: Year ended December 31, 2017 68,926,987 December 31, 2016 51,553,540 4,031,858 - 72,958,845 4,069,027 116,435 55,739,002 (1) Conversion of 6.5% convertible debentures based on exercise price of $5.65 per Class A Unit. (2) Conversion of warrants based on exercise price of $5.15 per Class A Unit. 20. SUBSEQUENT EVENT A. On February 2, 2018, 10 of the remaining outstanding 22,780 6.5% convertible debentures were converted into 1,769 Class A Units. 92 PURE MULTI-FAMILY REIT LP ANNUAL REPORT THIS PAGE IS LEFT INTENTIONALLY BLANK 93 ANNUAL REPORT PURE MULTI-FAMILY REIT LPunitholder information CORPORATE HEADqUARTERS Pure Multi-Family REIT LP 925 West Georgia Street, Suite 910 Vancouver, BC, Canada V6C 3L2 t: 604-681-5959 tf: 1-888-681-5959 info@puremultifamily.com www.puremultifamily.com TRANSFER AGENT Computershare Trust Company of Canada 100 University Avenue, 9th Floor Toronto, ON M5J 2Y1 t: 514-9827555 tf: 1-800-564-6253 AUDITORS KPMG LLP Chartered Accountants PO Box 10426, 777 Dunsmuir Street Vancouver, BC V7Y 1K3 t: 604-691-3000 CORPORATE COUNSEL Clark Wilson LLP 885 West Georgia Street, Suite 800 Vancouver BC V6H 3H1 t: 604-891-7767 INvESTOR RELATIONS Andrew Greig Vice President, Investor Relations t: 604-449-5286 tf: 1-888-681-5959 STOCK ExCHANGE LISTING TSX-V: RUF. U (USD), RUF.UN (CAD) RUF.DB.U, OTCQX: PMULF ANNUAL & SPECIAL MEETING OF SHAREHOLDERS May 24, 2018 - 11:00 am KPMG, 777 Dunsmuir Street, 11th Floor Sea to Sky Room board of Directors Robert W. King, ICD.D Chair and Independent Director (AC, CC, NGC) Stephen J. Evans Director & CEO Fraser R. Berrill, C.Dir, BA, LLB Independent Director (AC, CC, NGC) Maurice (Maish) Kagan *, B.Com, CTA Independent Director (AC) John C. o’neill Independent Director (CC, NGC) James L. Redekop Independent Director (CC) James A. Speakman, ICD.D Director (NGC) Sherry D. Tryssenaar, CPA, CMA Independent Director (AC) Committee composition as at the date of this report. * Maurice (Maish) Kagan joined January 2018. AC - Audit Committee CC - Compensation Committee NGC - Nomination & Governance Committee Stoneleigh at Bear Creek, Dallas, Texas Vistas at Hackberry Creek, Dallas, Texas Fountainwood Apts, Dallas, Texas 94 PURE MULTI-FAMILY REIT LP ANNUAL REPORTManagement Team 2017 Distributions Stephen J. Evans Chief Executive Officer Samantha Adams Senior Vice President Scott Shillington Chief Financial Officer Andrew Greig Vice President, Investor Relations Lee Ann neumann Executive Vice President, US Operations Pure Multi-Family intends to make an annual cash distribution to unitholders of US$0.375 per unit. Monthly distributions are paid on or around the 15th day following the end of each month. January February March April May June July August September October November December Total Per Unit (USD) $0.03125 $0.03125 $0.03125 $0.03125 $0.03125 $0.03125 $0.03125 $0.03125 $0.03125 $0.03125 $0.03125 $0.03125 $0.37500 This annual report is printed on paper containing 10-30% recycled content. Stoneleigh Valley Ranch, Dallas, Texas Prairie Creek Villas, Dallas, Texas PURE Estates at TPC, Dallas, Texas 95 ANNUAL REPORT PURE MULTI-FAMILY REIT LP PURE Farmers Market, Dallas, Texas PURE MULTI-FAMILY REIT LP puremultifamily.com TSx-v: RUF.U (USD), RUF.UN (CAD)

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