SmartCentres Real Estate Investment Trust
Annual Report 2022

Plain-text annual report

COMMITTED TO CANADIAN COMMUNITIES ANNUAL REPORT 2022 MESSAGE FROM THE EXECUTIVE CHAIRMAN AND CEO DEAR FELLOW UNITHOLDERS, Our commitment to helping Canadians save money on their weekly needs, such as food and general merchandise, remains our greatest priority. From coast to coast, our network of 185 conveniently located SmartCentres shopping centres is the largest value-focused network of retail properties in the country. SmartCentres was created by Canadians, for Canadians. We offer Canadian households a wide selection of retailers that offer among the lowest prices in the country; and, we believe that value-focused goods and services are especially important now as consumers get back to basics. This long-standing dedication to Canadian communities is now augmented by our Mitchell Goldhar Executive Chairman and CEO on-site intensification program, and our diversification of asset classes delivered additional growth and solid results across the entire business in 2022. This sets the stage for an even stronger 2023. Here are a few more of our differentiating factors: • Occupancy: An industry-leading 98% occupancy level. • Walmart: No Walmart store has ever relocated from or closed in a SmartCentres shopping centre. • Stability: Cash collections of 99% driven by a tenant base that is 95% comprised of the strongest national and regional retailers in Canada. • Access: 185 properties at key intersections in every province in Canada. • Developer Expertise: In addition to being a large owner-operator, SmartCentres is a premier developer in Canada, having developed in-house more than 60 million square feet over the past 30 years. • Development Pipeline: 97 of our 185 properties have mixed-use intensification opportunities encompassing apartments, condominiums, townhomes, seniors’ residences, office buildings and self-storage facilities. • Strength of Balance Sheet: With $8.4 billion of unencumbered assets, less than 45% of debt to total assets and $750 million in liquidity, SmartCentres maintains a strong financial position. Looking back at 2022, we saw a resurgence in both customer traffic and retailer interest, driving demand across our value-oriented portfolio. We are once again welcoming new retailers to our centres in various segments – a potent form of internal growth – allowing us to provide a more compelling and diverse offering to every community we serve across Canada. Additionally, over the past five years, our tenants have adapted their product mix, complemented by strong e-commerce platforms, delivery and/or pickup channels, to seamlessly meet the ever-evolving needs of Canadian consumers. We achieved a significant 6.1 million square feet of additional mixed-use permissions in 2022, a source of great long-term strategic value creation, stemming from the REIT’s original real estate development DNA. We are tirelessly committed to unlocking the tremendous value embedded in our existing owned lands, located in highly populated communities in nearly every major market across Canada. We are confident that 2023 will see the completion of new projects in all major asset classes. Our residential initiatives, in particular, will deliver completed projects, including: condos at the SmartVMC, townhomes in Vaughan, and rental projects in Mascouche and Laval. SmartLiving, our internal residential brand, will deliver The Millway, an exciting purpose-built rental apartment project in the SmartVMC. Over 45 projects are scheduled to commence construction in the next two to five years, maximizing the huge opportunity that lies within our underutilized owned lands. Our ability to unlock this value was recently strengthened by the hiring of an experienced team of 18 high-rise and mid-rise construction professionals, providing SmartCentres with its own in-house general contracting resources to deliver our program on the most competitive and timely basis. Environmental, social and governance (ESG) principles have been part of our DNA since our inception, and these elements have been applied throughout our portfolio, for example, in our approach to building design, energy utilization, climate change, efficiencies, and social interaction with tenants and their customers (especially evident during the pandemic). ESG is embedded into our actions, guiding our vision over the past 30 years and continuing to drive our vision into the future. Moving into 2023 and beyond, we believe that our commitment to Canadians, the long-term quality of our real estate, and our strategic vision, position us on the leading edge in the evolving Canadian retail, commercial, residential and industrial markets. Yours truly, Mitchell Goldhar Executive Chairman and CEO SmartCentres REIT 1 SMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT FROM SHOPPING CENTRES SmartCentres was founded over 30 years ago, because we believed that Canadians deserved convenient and affordable access to the goods they need everyday. Starting from a single property we have since grown to: properties in all Canadian provinces 34.7 98.0% $11.7 million income producing square feet industry leading occupancy rate billion in total assets 2 SMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTTO CITY CENTRES Canadians now need transit-connected homes with urban amenities. So, SmartCentres is evolving and SmartLiving has emerged with a $14.9B transformation plan to enhance Canadian Communities. billion intensification program1 274 56.1 development projects identified million incremental square feet2 1 REIT share $10 billion 2 REIT share 41.2 million 3 SMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTTABLE OF CONTENTS 68 68 70 71 75 76 77 79 83 83 90 96 96 96 Section VII — Financing and Capital Resources Capital Resources and Liquidity Maintenance Capital Requirements Debt Interest Income and Interest Expense Financial Covenants Unitholders’ Equity Section VIII — Related Party Transactions Section IX — Accounting Policies, Risk Management and Compliance Significant Accounting Estimates and Policies Risks and Uncertainties Income Taxes and the REIT Exception Environmental, Social and Governance Disclosure Controls and Procedures and Internal Control Over Financial Reporting 97 Section X — Glossary of Terms 98 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING 99 INDEPENDENT AUDITOR’S REPORT 104 CONSOLIDATED BALANCE SHEETS 105 106 107 108 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF EQUITY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 5 6 12 14 14 15 17 Section I — About this Management’s Discussion and Analysis Presentation of Certain Terms Including Non-GAAP Measures Non-GAAP Measures Forward-Looking Statements Section II — Business Overview, Outlook and Strategic Direction Creating Exceptional Places to Shop, Live and Work in Canada Outlook Key Business Development, Financial and Operational Highlights for the Year Ended December 31, 2022 23 Quarterly Results and Trends 25 25 30 30 31 33 33 41 Section III — Development Activities Mixed-Use Development Initiatives Residential Development Inventory Properties Under Development Completed and Future Earnouts and Developments on Existing Properties Section IV — Business Operations and Performance Results of Operations – Balance Sheets, Income Statements, NOI, SPNOI, Adjusted EBITDA Other Measures of Performance – FFO, Weighted Average Units, ACFO, Distributions 51 General and Administrative Expense 52 Section V — Leasing Activities and Lease Expiries Leasing Activities Tenant Profile Lease Expiries Section VI — Asset Profile Investment Properties Equity Accounted Investments Amounts Receivable and Other, and Prepaid Expenses, Deposits and Deferred Financing Costs Mortgages, Loans and Notes Receivable 52 53 55 57 57 60 65 66 4 SMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2022 Section I — About this Management’s Discussion and Analysis This Management’s Discussion and Analysis (“MD&A”) sets out SmartCentres Real Estate Investment Trust’s (“SmartCentres” or the “Trust”) business overview and strategic direction, and provides an analysis of the financial performance and financial condition for the year ended December 31, 2022, management’s outlook and the risks facing the business. This MD&A should be read in conjunction with the Trust’s audited consolidated financial statements for the years ended December 31, 2022 and 2021, and the notes contained therein, and the Trust’s annual information form (“AIF”). Such consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). The Canadian dollar is the functional and reporting currency for purposes of preparing the consolidated financial statements for the year ended December 31, 2022 and 2021. This MD&A is dated February 8, 2023, which is the date of the press release announcing the Trust’s results for the year ended December 31, 2022. Disclosure contained in this MD&A is current to that date, unless otherwise noted. Certain definitions of terms and ratios capitalized throughout this MD&A can be found in “Non-GAAP Measures” and Section X – Glossary of Terms. Presentation of Certain Terms Including Non-GAAP Measures Readers are cautioned that certain terms used in this MD&A include non-GAAP measures and other terms. The following terms are non-GAAP measures used in this MD&A: Adjusted Cashflow From Operations (“ACFO”), ACFO with adjustments, ACFO excluding impact of SmartVMC West, ACFO with adjustments excluding impact of TRS, condominium and townhome closings, and SmartVMC West acquisition, Adjusted Debt, Adjusted Debt (excluding TRS debt), Net Debt, Adjusted Debt to Adjusted EBITDA, Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization Expense (“Adjusted EBITDA”), Adjusted Interest Expense including Capitalized Interest, Debt Service Expense, Aggregate Assets, Gross Book Value, Annual Run-Rate NOI, Debt – non-GAAP, Debt to Aggregate Assets, Debt to Aggregate Assets excluding TRS debt and receivable, Debt to Gross Book Value, Fixed Charge Coverage Ratio, Fixed Rate to Variable Rate Debt Ratio, Forecasted Annualized NOI, Funds From Operations (“FFO”), FFO with adjustments, FFO with adjustments and Transactional FFO, FFO excluding condominium profits, FFO with adjustments excluding impact of ECL, TRS, condominium and townhome closings, and SmartVMC West acquisition, FFO per Unit, FFO with adjustments per Unit, FFO with adjustments and Transactional FFO per Unit, Interest Coverage Ratio, Net Operating Income (“NOI”), Investment Properties – non-GAAP, Payout Ratio to ACFO, Proportionate Share Reconciliation, Recovery Ratio, Same Properties NOI (“SPNOI”), Same Properties NOI excluding ECL, Total Proportionate Share, Transactional FFO, Unencumbered Assets, Unencumbered Assets to Unsecured Debt, and Unsecured to Secured Debt Ratio. These non- GAAP measures are defined in this MD&A and non-GAAP financial measures have been reconciled to the closest IFRS measure in the consolidated financial statements of the Trust for the year ended December 31, 2022 in “Non-GAAP Measures”. Readers should refer to “Non-GAAP Measures” for definitions and reconciliations of the Trust’s non-GAAP financial measures. The following are other terms used in this MD&A: “COVID-19”, Net Asset Value (“NAV”), and any related measure per Variable Voting Unit of the Trust (a “Trust Unit”) and per unit of the Trust’s subsidiary limited partnerships (an “LP Unit”) (where management discloses the combination of Trust Units and LP Units, combined units are referred to as a “Unit” or “Units”). These non-GAAP measures and other terms are used by management to measure, compare and explain the operating results and financial performance of the Trust and do not have any standardized meaning prescribed under IFRS and, therefore, should not be construed as alternatives to net income or cash flow from operating activities calculated in accordance with IFRS where applicable. Such terms do not have a standardized meaning prescribed by IFRS and may not be comparable to similar measures disclosed by other issuers. For further details of these terms, see “Other Measures of Performance”, “Net Operating Income”, “Debt”, “Financial Covenants”, and “Non-GAAP Measures”. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 1 5 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTand ACFO with adjustments and ACFO excluding impact of SmartVMC West LP and ACFO with adjustments excluding impact of TRS, condominium and townhome closings, and SmartVMC West acquisition Debt – non-GAAP and Adjusted Debt and Adjusted Debt (excluding TRS debt) and Net Debt and Net Debt (excluding TRS debt) MANAGEMENT’S DISCUSSION AND ANALYSIS Non-GAAP Measures The following table details the Trust’s non-GAAP measures. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. Measure Definition and Intended Use Adjusted Cashflow From Operations (“ACFO”) ACFO may not be comparable to similar measures used by other real estate entities. The Trust calculates its ACFO in accordance with the Real Property Association of Canada’s (“REALpac”) White Paper on Adjusted Cashflow from Operations for IFRS published in February 2019. Reference to Reconciliation and/or Additional Information Section IV — Business Operations and Performance, “Other Measures of Performance” ACFO is defined as cash flows from operations adjusted for such items as, but not limited to, changes in working capital, interest expense included in cash flow from financing, capital expenditures, leasing costs, tenant improvements, non- cash interest expense and income, acquisition-related gains (losses), and distributions. ACFO with adjustments is defined as ACFO less costs associated with vaccination centres and yield maintenance costs on repayment of debt and related write-off of unamortized financing costs. ACFO excluding impact of SmartVMC West LP is defined as ACFO less earnings from SmartVMC West. ACFO and ACFO with adjustments are intended to be used by investors as sustainable, economic cash flow metrics. Management considers ACFO an input to determine the appropriate level of distributions to Unitholders as it adjusts cash flows from operations to better measure sustainable, economic cash flows. Debt – non-GAAP is defined as the Trust’s total proportionate share of debt, inclusive of the Trust’s share of debt in equity accounted investments. Adjusted Debt is defined as Debt – non-GAAP net of mortgages and loans receivable and cash-on-hand. Adjusted Debt (excluding TRS debt) is defined as Adjusted Debt net of debt borrowed concurrent with entering the TRS agreement. Net Debt is defined as Debt – non-GAAP net of cash-on-hand. Net Debt (excluding TRS debt) is defined as Net Debt less debt borrowed concurrent with entering the TRS agreement. Section VII — Financing and Capital Resources, “Debt”, “Financial Covenants” Debt – non-GAAP, Adjusted Debt, Adjusted Debt (excluding TRS debt), Net Debt and Net Debt (excluding TRS debt) are intended to be used by investors as measures of the level of indebtedness of the Trust and its ability to meet its obligations, as liabilities. Management uses Adjusted Debt, Adjusted Debt (excluding TRS debt), Net Debt and Net Debt (excluding TRS debt) to calculate certain covenant ratios, and to assess the Trust’s level of indebtedness. liquid assets are used to reduce outstanding Adjusted Debt to Adjusted EBITDA Adjusted Debt to Adjusted EBITDA is defined as Adjusted Debt divided by Adjusted EBITDA. Adjusted Debt to Adjusted EBITDA (excluding TRS debt) is defined as Adjusted Debt (excluding TRS debt) divided by Adjusted EBITDA. and Adjusted Debt to Adjusted EBITDA (excluding TRS debt) The ratios are intended to be used by investors as a measure of the level of the Trust’s debt versus the Trust’s ability to service that debt. Management uses the ratios to assess the Trust’s level of leverage and its capacity to borrow. Section VII — Financing and Capital Resources, “Financial Covenants” 2 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 6 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Non-GAAP Measures (Continued) Measure Definition and Intended Use Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization Expense (“Adjusted EBITDA”) Adjusted EBITDA is defined as the Trust’s net income and comprehensive income adjusted by income taxes, interest expense, amortization expense and depreciation expense, as well as adjustments for gains and losses on disposal of investment properties including transactional gains and losses on the sale of investment properties to a joint venture that are expected to be recurring, and the fair value changes associated with financial instruments, and excludes extraordinary items such as, but not limited to, yield maintenance on redemption of unsecured debentures and Transactional FFO – gain on sale of land to co-owners. investment properties and The measure is intended to be used by investors to help determine the Trust’s ability to service its debt, finance capital expenditures and provide for distributions to its Unitholders. Management uses this measure to assess the Trust’s profitability, as it removes the non-cash impact of the fair value changes and gains and losses on investment property dispositions. Reference to Reconciliation and/or Additional Information Section IV — Business Operations and Performance, “Results of Operations” Adjusted Interest Expense including Capitalized Interest and Debt Service Expense Adjusted Interest Expense including Capitalized Interest is defined as the Trust’s total proportionate share of interest expense, less distributions on vested deferred units and Units classified as liabilities and interest income from mortgages and loans receivable, plus capitalized interest. Debt Service Expense is defined as the Trust’s total proportionate share of interest expense, less distributions on vested deferred units and Units classified as liabilities and interest income from mortgages and loans receivable, plus capitalized interest and mortgage principal amortization payments. Adjusted Interest Expense including Capitalized Interest and Debt Service Expense are intended to be used by investors as measures of the interest expense on the Trust’s debt. Management uses these to calculate certain covenant ratios, and to assess the Trust’s ability to service its debt. Section VII — Financing and Capital Resources, “Financial Covenants” Aggregate Assets and Aggregate Assets (excluding TRS receivable) and Gross Book Value Aggregate Assets is defined as the Trust’s total proportionate share of assets, less cash-on-hand. Aggregate Assets (excluding TRS receivable) is defined as Aggregate Assets less TRS receivable. Gross Book Value is defined as the total proportionate share of debt, less cash-on-hand and fair value adjustments on investment properties net of accumulated amortization. Section VII — Financing and Capital Resources, “Financial Covenants” Aggregate Assets, Aggregate Assets (excluding TRS receivable) and Gross Book Value are intended to be used by investors as measures of the total value of assets managed by the Trust. Management uses Aggregate Assets, Aggregate Assets (excluding TRS receivable) and Gross Book Value to calculate certain covenant ratios, and to assess the Trust’s ability to continue to grow. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 3 7 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Non-GAAP Measures (Continued) Measure Definition and Intended Use Annual Run-Rate NOI Annual Run-Rate NOI is defined as an annualized measure of the current quarter’s NOI, adjusted for management’s estimate of the impact of straight-line rent and other extraordinary items including but not limited to bad debt provisions and termination fees. The measure is intended to be used by investors as an estimate of normalized and annualized profitability for future periods. Management uses this measure to assess the future profitability of the Trust based on its existing assets. Debt to Aggregate Assets and Debt to Aggregate Assets is defined as Net Debt divided by Aggregate Assets. Debt to Aggregate Assets (excluding TRS debt and receivable) is defined as Net Debt (excluding TRS debt) divided by Aggregate Assets (excluding TRS receivable). Debt to Aggregate Assets (excluding TRS debt and receivable) Debt to Gross Book Value The ratios are intended to be used by investors to assess the leverage of the Trust on a consolidated basis. Management uses the ratios to assess an acceptable level of leverage for the Trust. Debt to Gross Book Value is defined as Net Debt divided by Gross Book Value. The ratio is intended to be used by investors to assess the leverage of the Trust on a consolidated basis, while using the Trust’s cost basis for assets. Management uses this ratio to assess an acceptable level of leverage for the Trust. Fixed Charge Coverage Ratio Fixed Charge Coverage Ratio is defined as Adjusted EBITDA divided by Debt Service Expense. The ratio is intended to be used by investors to assess the Trust’s ability to service its fixed charges. Management uses this ratio to manage the Trust’s cash flows and fixed obligations. Reference to Reconciliation and/or Additional Information Section IV — Business Operations and Performance, “Results of Operations” Section VII — Financing and Capital Resources, “Financial Covenants” Section VII — Financing and Capital Resources, “Financial Covenants” Section VII — Financing and Capital Resources, “Financial Covenants” Fixed Rate to Variable Rate Debt Ratio Fixed Rate to Variable Rate Debt Ratio is defined as the percentage of Fixed Rate Debt out of total Debt compared with the percentage of Variable Rate Debt (excluding interest rate swap agreements with fixed interest rates) out of total Debt. Section VII — Financing and Capital Resources, “Debt” The ratio is intended to be used by investors to assess the Trust’s ability to service its debt against the fluctuation of interest rate. Forecasted Annualized NOI Forecasted Annualized NOI is defined as management’s estimate of NOI for the next fiscal year, based on the current period’s NOI. The measure is intended to be used by investors to project the next year’s operating income of the Trust. Management uses this measure as a benchmark of the Trust’s future profitability. Section VII — Financing and Capital Resources, “Debt” 4 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 8 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Reference to Reconciliation and/or Additional Information Section IV — Business Operations and Performance, “Other Measures of Performance” Non-GAAP Measures (Continued) Measure Definition and Intended Use Funds From Operations (“FFO”) FFO is a measure of operating performance widely used by the Canadian real estate industry based on the definition set forth by REALpac, which published a White Paper describing the intended use of FFO last revised in January 2022. It is the Trust’s view that IFRS net income does not necessarily provide a complete measure of the Trust’s economic earnings. This is primarily because IFRS net income includes items such as fair value changes of investment property that are subject to market conditions and capitalization rate fluctuations and gains and losses on the disposal of investment properties, including associated transaction costs and taxes, which are not representative of a company’s economic earnings. For these reasons, the Trust has adopted REALpac’s definition of FFO, which was created by the real estate industry as a supplemental measure of economic earnings. FFO is defined as net income and comprehensive income attributable to Unitholders adjusted for items such as, but not limited to, unrealized changes in the fair value of investment properties and financial instruments and transaction gains and losses on the acquisition or disposal of investment properties. FFO with adjustments is defined as FFO less costs associated with vaccination centres, yield maintenance costs on repayment of debt and related write-off of unamortized financing costs, ECL, TRS gain (loss), FFO sourced from condominium and townhome closings, and FFO sourced from SmartVMC West acquisition. FFO with adjustments and Transactional FFO is defined as FFO with adjustments, further adjusted for gain/(loss) on sale of land to co-owners. FFO excluding condominium profits is defined as FFO less FFO generated from sales of condominium. These measures are intended to be used by investors to assess the operating performance of the Trust. Management uses these measures to assess profitability and performance of the Trust. FFO per Unit, FFO with adjustments per Unit, and FFO with adjustments and Transactional FFO per Unit are defined as FFO, FFO with adjustments, and FFO with adjustments and Transactional FFO divided by weighted average number of Units. and FFO with adjustments and FFO with adjustments and Transactional FFO and FFO with adjustments excluding impact of ECL, TRS, condominium and townhome closings, and SmartVMC West acquisition and FFO per Unit and FFO with adjustments per Unit and FFO with adjustments and Transactional FFO per Unit Interest Coverage Ratio Interest Coverage Ratio is defined as Adjusted EBITDA divided by Adjusted Interest Expense including Capitalized Interest. The ratio is intended to be used by investors to measure the Trust’s ability to make interest payments on its existing debt. Management uses this ratio to measure an acceptable level of interest expense relative to available earnings. Investment Properties – non- GAAP Investment Properties – non-GAAP is defined as the Trust’s total proportionate share of investment properties, inclusive of the Trust’s share of investment properties in equity accounted investments. Net Operating Income (“NOI”) The measure is intended to be used by investors to measure the amount of the Trust’s entire portfolio. NOI from continuing operations is defined as: i) rentals from investment properties and other less property operating costs and other, and ii) net profit from condominium sales. In the consolidated statements of income and comprehensive income, NOI is presented as “net rental income and other”. The measure is intended to be used by investors to assess the Trust’s profitability. Management uses NOI as a meaningful measure of economic performance and profitability from continuing operations, as it excludes changes in fair value of investment properties and financial instruments. Section VII — Financing and Capital Resources, “Financial Covenants” Section VI — Asset Profile, “Investment Properties” Section IV — Business Operations and Performance, “Results of Operations” SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 5 9 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Non-GAAP Measures (Continued) Measure Definition and Intended Use Payout Ratio to ACFO Payout Ratio to ACFO is defined as distributions declared divided by ACFO. It is the proportion of earnings paid out as dividends to Unitholders. The measure is intended to be used by investors to assess the distribution rate of the Trust. Management determines the Trust’s Unit cash distribution rate by, among other considerations, its assessment of cash flow as determined using the cash certain non-GAAP measures. As such, management believes distributions are not an economic return of capital, but a distribution of sustainable cash flow from operations. Proportionate Share Reconciliation and References made to a “total proportionate share” or “the Trust’s proportionate share of EAI” represent the Trust’s proportionate interest in the financial position and operating activities of its entire portfolio, which reflect the difference in accounting treatment between joint ventures using proportionate consolidation and equity accounting. Total Proportionate Share The presentation is intended to be used by investors to assess the Trust’s financial position and performance on a consolidated basis because it represents how the Trust and its partners manage the net assets and operating performance for each of the Trust’s co-owned properties. The Trust accounts for its investments in both associates and joint ventures using the equity method of accounting. Reference to Reconciliation and/or Additional Information Section IV — Business Operations and Performance, “Other Measures of Performance” Section IV — Business Operations and Performance, “Results of Operations” Recovery Ratio The Recovery Ratio is defined as property operating cost recoveries divided by recoverable costs. The measure is intended to be used by investors and management to assess the Trust’s ability to manage recoverable operating expenses for its investment properties. Same Properties NOI (“SPNOI”) and Same Properties NOI excluding ECL To facilitate a more meaningful comparison of NOI between periods, SPNOI amounts are defined as the NOI attributable to those income properties that were owned by the Trust during the current period and the same period in the prior year. Any NOI from properties either acquired, Earnouts, developed or disposed of, outside of the periods mentioned above, are excluded from Same Properties NOI. Same Properties NOI excluding ECL is defined as SPNOI excluding the impact of provision and/or reversal of ECL. Same Properties NOI and SPNOI excluding ECL are intended to be used by investors and management as profitability growth indicators on the Trust’s existing investment property portfolio. Section IV — Business Operations and Performance, “Results of Operations” Section IV — Business Operations and Performance, “Results of Operations” Transactional FFO Transactional FFO represents the net financial/economic gain resulting from a partial sale of an investment property. Transactional FFO is calculated as the difference between the actual selling price and actual costs incurred for the subject investment property. Because the Trust intends to establish numerous joint ventures with partners in which it plans to co-develop mixed-use development initiatives, the Trust expects such gains to be recurring and therefore represent part of the Trust’s overall distributable earnings. The measure is intended to be used by investors to assist in assessing the profitability of the Trust. Management uses this measure to calculate FFO with adjustments and Transactional FFO, a profitability measure. Section IV — Business Operations and Performance, “Other Measures of Performance” 6 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 10 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Non-GAAP Measures (Continued) Measure Definition and Intended Use Unencumbered Assets Unencumbered Assets is defined as the Trust’s assets that are free and clear of any encumbrances. The measure is intended to be used by investors and management to assess the Trust’s ability to secure additional financing. Management uses this measure to calculate Unencumbered Assets to Unsecured Debt Ratio. Unencumbered Assets to Unsecured Debt Ratio Unencumbered Assets to Unsecured Debt Ratio is defined as the Trust’s Unencumbered Assets divided by the Trust’s unsecured Debt. The ratio is intended to be used by investors to assess the Trust’s ability to use investment properties to satisfy unsecured debt obligations. This ratio is a significant financial covenant pursuant to the terms of the Trust’s revolving operating facilities and other credit facilities. Unsecured to Secured Debt Ratio Unsecured to Secured Debt Ratio is defined as the Trust’s unsecured debt (including on equity accounted investments) divided by the Trust’s secured debt (including on equity accounted investments). The ratio is intended to be used by investors to assess the Trust’s composition of debt. Management uses this ratio to determine the Trust’s ability to borrow additional unsecured debt. Reference to Reconciliation and/or Additional Information Section VII — Financing and Capital Resources, “Debt” Section VII — Financing and Capital Resources, “Financial Covenants” Section VII — Financing and Capital Resources, “Financial Covenants” SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 7 11 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Forward-Looking Statements Certain statements in this MD&A are “forward-looking statements” that reflect management’s expectations regarding the Trust’s future growth, results of operations, performance, business prospects and opportunities, including those statements outlined under the headings, “Business Overview, Outlook and Strategic Direction”, “Outlook”, “Key Business Development, Financial and Operational Highlights for the Year ended December 31, 2022”, “Mixed-Use Development Initiatives”, “Residential Development Inventory”, “Properties Under Development”, “Completed and Future Earnouts and Developments on Existing Properties”, “Results of Operations”, “Other Measures of Performance”, “Leasing Activities and Lease Expiries”, “Investment Properties”, “Equity Accounted Investments”, “Amounts Receivable and Other, Deferred Financing Costs, and Prepaid Expenses and Deposits”, “Mortgages, Loans and Notes Receivable”, “Capital Resources and Liquidity”, “Maintenance Capital Requirements”, “Debt” (which includes “Unencumbered Assets”), and “Risks and Uncertainties”. More specifically, certain statements contained in this MD&A, including the Trust’s plans, expectations and intentions with respect to the collection of rent from tenants, the operation, maintenance and development of its properties and its expectations with respect to liquidity; the Trust’s future growth potential and the identification of development opportunities; future occupancy levels; plans to extract additional sources of FFO and NAV; expected replacement income to be generated by backfilling existing vacant space over time; the Trust’s maintenance capital requirements, estimated future development plans and joint venture projects, including the described type, scope, costs and other financial metrics related thereto; the Trust’s expectations regarding future potential mixed-use development opportunities, the timing of construction and costs thereof and returns therefrom; the Trust’s ability to pay future distributions to Unitholders and expectations regarding monthly cash distribution levels, view of term mortgage renewals including rates and refinancing amounts, timing of future payments of obligations, intentions to obtain additional secured and unsecured financing and potential financing sources; the Trust’s potential future pipeline and uncommitted pipeline; Forecasted Annualized NOI and Annual Run-Rate NOI; vacancy and leasing assumptions; and statements that contain words such as “could”, “should”, “can”, “anticipate”, “expect”, “believe”, “plan”, “potential”, “propose”, “schedule”, “estimate”, “intend”, “project”, “will”, “may”, “continue”, “forecast”, “outlook”, “direction”, “come” and similar expressions or negative variations thereof and statements relating to matters that are not historical facts, constitute “forward-looking statements”. These forward-looking statements are presented for the purpose of assisting Unitholders to understand the Trust’s operating environment, and may not be appropriate for other purposes. Such forward-looking statements reflect management’s current beliefs and are based on information currently available to management. However, such forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements. These risks include real property ownership and leasing/tenant risk; liquidity risk; capital requirements and access to capital; environmental and climate change risk; potential conflicts of interest; cyber security risk; debt financing; interest and financing risk; joint venture risk; development and construction risk; credit risk; litigation and regulatory risks; potential volatility of Unit prices; cash distributions are not guaranteed and will fluctuate with SmartCentres’ performance; availability of cash flow; significant Unitholder risk; and tax-related risks. These risks and others are more fully discussed under the heading “Risks and Uncertainties” and elsewhere in this MD&A, as well as under the heading “Risk Factors” in the Trust’s most recent AIF. The Trust has attempted to identify important factors that could cause actual results, performance or achievements to be other than as expected or estimated and that could cause actual results, performance or achievements to differ materially from current expectations. These factors are not intended to represent a complete list of the factors that could affect the Trust. Although the forward-looking statements contained in this MD&A are based on what management believes to be reasonable assumptions, including those discussed under the heading “Outlook” and elsewhere in this MD&A, the Trust cannot assure investors that actual results will be consistent with these forward- looking statements. 8 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 12 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking information may include, but are not limited to: that government restrictions, due to COVID-19, on the ability of tenants to operate their businesses at the Trust’s properties will not be re-imposed in any material respects; that COVID-19 will not materially change the willingness of consumers to shop at open-format retail malls of the type operated by the Trust; that there will be a return to a reasonably stable retail environment; a rising interest rate environment; a continuing trend toward land use intensification, including residential development in urban and suburban markets; access to equity and debt capital markets to fund, at acceptable costs, future capital requirements and to enable the refinancing of debts as they mature; the availability of investment opportunities for growth in Canada; the timing and ability of the Trust to sell certain properties; the timing and ability of the Trust and its joint venture partners to pre-sell and close on the sale of condominium and townhome units as well as lease available residential rental units; and the valuations to be realized on property sales relative to current IFRS values. Certain statements included in this MD&A may be considered “financial outlook” for purposes of applicable Canadian securities laws and, as such, the financial outlook may not be appropriate for purposes other than this MD&A. The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement and readers should not place undue reliance on such forward-looking statements. These forward-looking statements are made as at the date of this MD&A and the Trust assumes no obligation to update or revise them to reflect new events or circumstances unless otherwise required by applicable securities legislation. All amounts in the MD&A are expressed in millions of Canadian dollars, except where otherwise stated. Per Unit amounts are expressed on a diluted basis, except where otherwise stated. Additional information relating to the Trust, including the Trust’s AIF can be found on the System for Electronic Document Analysis and Retrieval (“SEDAR”) (www.sedar.com). SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 9 13 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Section II — Business Overview, Outlook and Strategic Direction Creating Exceptional Places to Shop, Live and Work in Canada The Trust’s Beginnings From the Trust’s inception in 2001 to 2015, its growth was principally a result of the acquisition and Earnout of completed and fully leased open-format retail shopping centres, predominately with the Anchor or Shadow Anchor tenant (i.e., located within the shopping complex but not owned by the Trust) being Walmart. Even through the COVID-19 pandemic, the Trust’s national open- format shopping centre portfolio continued to perform well. The occupancy rate (including committed deals) was 98.0% at December 31, 2022. Furthermore, the Trust and its retail tenants are adapting to the changing needs of today’s customers who are incorporating online shopping with in-store visits, with tenants offering curbside pick-up services and similar e-commerce solutions. The Trust has Evolved into a Growth-Oriented Diversified REIT In May of 2015, a major transformative event occurred: the Trust acquired the SmartCentres platform of development expertise and the “SmartCentres” brand from Penguin. This brand has historically represented a family and value-oriented shopping experience. More significantly, this acquisition resulted in the Trust acquiring a large team of experienced professionals working in the areas of land acquisition, planning, development, leasing, construction and other complementary services. The Trust now employs a team that, over the last 25 years, was responsible for the development, leasing and construction of more than 60 million square feet of real estate development. Today, this team is focused on the development of the Trust’s large and growing mixed-use development initiatives as outlined below. The Trust recognized that it could do so much more with its large open-format shopping centre portfolio. As a result of the Trust’s 2015 purchase of the Penguin platform of development expertise, the Trust announced the commencement of development of mixed-use initiatives principally using lands already owned by the Trust. This focus on mixed-use development provides the Trust with a foundation for growth of both NAV and FFO. The Trust, together with Penguin, has designed and commenced the development of over 100 acres in its flagship Vaughan Metropolitan Centre in Vaughan, Ontario (“SmartVMC”). SmartVMC serves as a model for other city centre projects that are now in the Trust’s development pipeline. SmartVMC is an approximate 105-acre master-planned community that, once completed, is expected to have over 20 million square feet of mixed-use space. The Trust has a 50% interest in the easterly approximately 52 acres, and in December 2021, the Trust acquired a two-thirds interest from unrelated parties in approximately 53 acres of development lands in the western part of SmartVMC. By virtue of this transaction, the Trust has become the largest landowner in SmartVMC, Vaughan’s rapidly growing downtown. SmartVMC aims to serve as an example of how to better serve urban residents with a thoughtfully designed and integrated living space amidst a major transportation hub. With the completion of two AAA class office buildings, a new YMCA and community centre, and the closings of the 1,763 condo and townhome units, these projects have already delivered significant FFO with future phases expected to continue to contribute to FFO, including the Transit City 4 and 5 units which are expected to close in March 2023. The Trust is now working on planning for similar city centre developments in Oakville, Scarborough, Pickering and Cambridge, and Laval Quebec, with more to come. In addition, the Trust has commenced integrating self-storage and industrial into communities where such needs arise. An Illustration of SmartCentres’ Investment Strengths The Trust has a formidable array of investment strengths for investors to consider. First and foremost, the Trust has evolved into a diversified Real Estate Investment Trust (“REIT”) with recurring revenue from two major sources: i) core rental income from retail, office, apartments, and self-storage, and ii) development income from condominium and townhome sales. The Trust’s established national shopping centre portfolio continues to provide reliable and recurring core rental income from national well- known retailers such as Walmart, Canadian Tire, Home Depot, Costco and Loblaws. The Trust has continued to introduce new services to help ensure its open-format retail shopping centres remain vital and connected to shoppers. This includes implementing curbside pick-up services, re-purposing space for logistics, providing for expanding or contracting premises, electric vehicle charging stations and digital signage. Professional management of the Trust’s investment property portfolio is an important strength that continues to enhance the quality of shopping, working and living at its properties. As of December 31, 2022, the Trust had an occupancy rate (including committed deals) of 98.0% at its shopping centres. As SmartCentres expands its major mixed-use real estate development, it has partnered with experienced industry experts in many real estate categories, including: rental apartments, condominiums, self-storage centres, seniors’ housing, office buildings, 10 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 14 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS and recently industrial and warehouse space. The completed development of Transit City 1, 2 and 3 condominiums provided additional FFO of approximately $45 million in 2020 and $18.8 million in 2021; and additional net profit of approximately $46.2 million of additional net profit in 2020 and approximately $19.5 million in 2021. Creating entire city centres has become a major new growth avenue for SmartCentres. Workers around the world have discovered they can work productively and live away from the downtown core of major cities in suburban environments where they enjoy the convenience of nearby retail shopping centres, restaurants, recreational facilities, properly planned parkland and excellent transportation services. Executing on a Strategic Growth Plan The Trust’s retail portfolio has been well-managed through the pandemic and is continually being upgraded to meet the in-person and online shopping requirements of its tenants and their customers. Management believes the Trust continues to be well- positioned to provide reliable recurring income. But more significant to the growth of the REIT is the size and growth of the Trust’s mixed-use development initiatives. See details in “Mixed-Use Development Initiatives” section. Outlook SmartCentres delivered solid results in 2022. Notable achievements during the year include: a) an industry-leading committed occupancy rate of 98.0%, which was primarily due to the Trust’s portfolio of predominately Walmart-anchored shopping centres that has continued to create strong traffic to the Trust’s properties; b) six newly completed self-storage projects that were delivered on time and on budget, including the Aurora South facility that opened in December 2022; and c) significant progress on the pipeline of mixed-use development initiatives, with planning and zoning entitlements advancing, including several projects that were under construction over the course of 2022, all in the midst of the current inflationary cycle that has created financial pressures on tenants and consumers alike. The Trust expects that 2023 will be a similar year, with continued stability through its retail portfolio and continued strength in occupancy across all of the Trust’s shopping centres. The Trust expects to continue to fortify its balance sheet and selectively utilize its significant pool of unencumbered assets for certain funding ($8.4 billion at December 31, 2022) required to advance the Trust’s development initiatives, particularly those where construction is expected to commence in 2023. With the Canadian economy continuing to experience heightened levels of inflation and rising interest rates, the Trust remains confident in its ability to manage through these challenges. While the Trust’s retail portfolio continues to act as the anchor to cashflow, 82% of the Trust’s debt is fixed, with a staggered ladder of manageable maturities and strong relationships with Canada’s lending community that should assure strong levels of liquidity for the future. New development initiatives will only commence when market conditions permit and when appropriate financing has been arranged. Leasing The Trust’s 34.8 million square foot portfolio of predominately Walmart-anchored shopping centres continues to demonstrate strong occupancy levels. Leasing activity has been brisk and a substantial portion of the space vacated during the pandemic is either under contract or is expected to be re-leased in the near term. The Trust remains exceptionally well positioned to attract high-quality tenants with strong covenants as Canada’s largest provider of retail space in Walmart-anchored open-format shopping centres. With the significant traffic drivers, new tenants are also being attracted to each site. Mixed-Use Development on SmartVMC Since the commencement of the Trust’s SmartVMC development, a total of 1,763 condominium and townhome units have closed. As a result, SmartVMC has become a community, with approximately 3,000 new residents in occupancy. In addition, the 22 pre-sold townhomes built as part of Transit City 1 and 2 were completed and closed during 2022 with the Trust’s share of proceeds and earnings being $4.3 million and $1.4 million, and construction of the sold out 1,026 units of Transit City 4 and 5 is nearing completion, with closings expected to begin in the first half of 2023. The Millway, the Trust’s first purpose-built 458-unit residential rental building, is also expected to commence occupancy in early 2023. Upon their completion, these phases are expected to provide accommodation for over 2,000 additional residents at SmartVMC. These residents will all benefit from, among other things, the world-class YMCA, municipal library and community centre at SmartVMC which opened in Q2 2022. The Trust is now also actively designing a future phase of office development at SmartVMC which is expected to be built in conjunction with two new residential towers across from the SmartVMC Bus Terminal. SmartVMC represents the emergence of a new city, anchored by three forms of public transit infrastructure, including a TTC subway station linking the site directly to downtown Toronto, a mass urban bus hub, and an efficient arterial road system which is linked to two major high-speed highways. When fully complete, SmartVMC is expected to accommodate over 45,000 residents. Mixed-Use Development on Other Initiatives Construction is progressing on the next SmartStop project in Brampton (Kingspoint), with completion expected later in 2023. When complete, the Trust expects approximately 464,000 square feet (at its share) of self-storage space to be available. These SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 11 15 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS multi-level self-storage facilities range in size up to 140,000 square feet and will each have approximately 1,000 units. Additional self-storage facilities have been approved by the Trust’s Board of Trustees for development on its existing properties, including locations at Whitby, Markham and Stoney Creek, Ontario. In each case, existing lands have been or will be transferred to the Trust’s partnership with SmartStop when municipal approvals are received. In addition, together with SmartStop, the Trust has purchased three properties in Toronto, on Jane Street, Gilbert Avenue and Eglinton Avenue East, and one property in Burnaby, British Columbia, on which, once zoning approvals are in place, it intends to build additional self-storage facilities. During the second quarter of 2022, the Trust completed the purchase of approximately 38 acres of industrial lands in Pickering, Ontario adjacent to Hwy 407. The Trust received approval to build 241,000 square feet of industrial space for the 16-acre Phase 1 development on these lands, of which 53% has already been pre-leased and construction is well underway. Upon completion in 2023, yields from this initial phase of the project are expected to be in the range of 6.0%–6.5%. The Trust, together with its partner, Penguin, have also commenced preliminary siteworks for a 215,000 square foot retail project on Laird Avenue in Toronto. This project is expected to feature a flagship 190,000 square foot Canadian Tire store, together with 25,000 square feet of additional retail space. Canadian Tire is expected to take possession in 2024. Investment Properties – Valuation Notwithstanding recent increases in interest rates, the property market remains healthy and demand for institutional quality retail real estate continues to be strong. With the Trust’s vast pipeline of mixed-use initiatives, the Trust expects to recognize fair value enhancements over time through the planning, zoning and development progress for the intensification of many of its investment properties. No further changes were made in Q4 2022 to the Trust’s assumptions around capitalization rates used in determining the value of the retail property portfolio at December 31, 2022. This reflects the Trust’s conservative assumptions as it relates to valuations and was consistent with the assumptions used in external appraisals that the Trust regularly commissions from independent and reputable appraisal firms. Nevertheless, the Trust will continue to monitor market trends and changes in capitalization rates and other macro-assumptions, while working closely with the external appraisal community, to assess whether any changes to valuation assumptions may be appropriate in 2023. Financing Current economic pressures, principally caused by the COVID-19 pandemic, have resulted in unparalleled global supply chain constraints and an inflationary environment not experienced in almost 30 years. To combat inflation, the Bank of Canada has been active in increasing its overnight interest rate. From January 1, 2022 up to February 8, 2023, the Bank of Canada has increased its overnight rate eight times for a total of 425 bps to 4.50%. As a result of this unparalleled period of interest rate hikes, short- and long-term borrowing costs have experienced significant increases over the past several months. Accordingly, as at December 31, 2022, the Trust’s overall weighted average interest rate increased to 3.86% from 3.11% at December 31, 2021. Approximately 18% of the Trust’s debt is at variable rates, a significant portion of which is linked to development projects. In December 2022, Dominion Bond Rating Services confirmed the Trust’s BBB(high) credit rating and maintained its negative trend, consistent with its report in December 2021. The Trust is continuing to work on various financing alternatives and debt repayment initiatives with the intent to improve its credit rating further. The Trust has continued to focus on its long-term mixed-use development initiatives, of which 11 projects are under construction and 48 projects are expected to commence construction within the next two years. Each of these projects is subject to arranging appropriate financing, market conditions and completing zoning entitlements. As Canadians continue to return to a new level of “normalcy”, the Trust will continue to follow its credo of “focus on change”. Over the coming years, this continued evolution is expected to result in additional mixed-use development opportunities, which in turn are expected to contribute to substantive future growth in both FFO and NAV. 12 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 16 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Key Business Development, Financial and Operational Highlights for the Year Ended December 31, 2022 Mixed-Use Development and New Growth at SmartVMC • • • • Park Place condo pre-development is underway on the 53.0 acre SmartVMC West lands strategically acquired in December 2021. Pre-sales for this development have commenced. The Trust’s acquisition in December 2021 of a two- thirds interest in the SmartVMC West lands more than doubled the Trust’s holdings in the 105 acre SmartVMC city centre development. Construction nears completion on the 100% pre-sold Transit City 4 (45 storeys) and 5 (50 storeys) condo towers, representing 1,026 residential units. Concrete, formwork and building envelope have been completed for both towers, with interior finishes ongoing. First closings are expected to commence in March 2023. Construction of the purpose-built rental project, The Millway (36 storeys), nears completion at SmartVMC. Formwork, concrete and building envelope have been completed, with interior finishes underway. Initial occupancy is expected to commence in February 2023. ArtWalk condominium sales of 320 released units in Phase 1 are sold out with construction expected to begin in the second half of 2023. Other Business Development • • • • • • • Occupancy in the completed first phase of the two-phase, purpose-built residential rental project in Laval, Quebec, ended the year with 98% of the 171 units leased. Pre-leasing has commenced on the next phase and construction continues, with a target completion date of Q2 2023. Initial occupancy in the two purpose-built residential rental towers (238 units) in Mascouche, Quebec began in July 2022, with the final floor opened in November. More than 147 units have been leased and current lease-up activity is in line with initial expectations. All of the five developed and operating self-storage facilities (Toronto (Leaside), Vaughan NW, Brampton, Oshawa South and Scarborough East) have been very well-received by their local communities, with current occupancy levels ahead of expectations. A sixth facility, Aurora, opened in December 2022. Three self-storage facilities in Whitby, Markham and Brampton (Kingspoint) are currently under construction, with Brampton (Kingspoint) expected to be completed in early 2023. Additional self-storage facilities have been approved by the Board of Trustees and the Trust is in the process of obtaining municipal approvals in Stoney Creek and two locations in Toronto (Gilbert Ave. and Jane St.). In addition, the municipal approval process is underway in New Westminster and Burnaby, British Columbia. Construction continues on a new retirement residence and a seniors’ apartment project, totalling 402 units, at the Trust's Laurentian Place in Ottawa, with completion expected in Q1 2024. By way of a Minister’s Zoning Order, the Trust has permissions that would allow for the redevelopment of the 73-acre Cambridge retail property (which is subject to a leasehold interest with Penguin) including various forms of residential, retail, office, institutional and commercial uses providing for the creation of a vibrant urban community with the potential for over 12 million square feet of development. The Trust, together with its partner, Penguin, has also commenced preliminary siteworks for the 215,000 square foot retail project on Laird Drive in Toronto, that is expected to feature a flagship 190,000 square foot Canadian Tire store together with 25,000 square feet of additional retail space. Canadian Tire is expected to take possession in 2024. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 13 17 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Financial • Net income and comprehensive income(1) was $636.0 million in 2022 compared to $987.7 million in 2021, representing a decrease of $351.7 million. This decrease was primarily attributed to: i) $476.8 million decrease in fair value adjustment on revaluation of investment properties; and ii) $20.2 million decrease in net profit on condo and townhome unit closings; and was partially offset by i) $125.5 million increase in fair value adjustments on financial instruments; and ii) $20.6 million increase in net rental income and other mainly due to higher base rent in 2022. • • • • • • • • • • Net income and comprehensive income per Unit(1) in 2022 decreased by $2.14 or 37.7% to $3.54 as compared to the same period in 2021, primarily due to the reasons as noted above. As at December 31, 2022, the Trust increased its unsecured/secured debt ratio(2)(3) to 74%/26% (December 31, 2021 – 71%/29%). The Trust continues to add to its unencumbered pool of high-quality assets. As at December 31, 2022, this unencumbered portfolio consisted of investment properties was valued at $8.4 billion (December 31, 2021 – $6.6 billion). The Trust’s fixed rate/variable rate debt ratio(2)(3) was 82%/18% as at December 31, 2022 (December 31, 2021 – 89%/11%). FFO per Unit with adjustments excluding the impact of ECL, TRS, condominium and townhome closings, and SmartVMC West acquisition(2) was $2.14 (year ended December 31, 2021 – $2.09). During the quarter, 693,900 additional notional TRS Units were added at a weighted average price of $26.37 per Unit. For the year ended December 31, 2022, there was a surplus of cash flows provided by operating activities(1) over distributions declared of $41.2 million (year ended December 31, 2021 – surplus of $52.9 million). The Payout Ratio relating to cash flows provided by operating activities for the year ended December 31, 2022 was 88.9%, as compared to 85.8% for the year ended December 31, 2021. For the year ended December 31, 2022, there was a surplus of ACFO(2) over distributions declared of $10.5 million (year ended December 31, 2021 – surplus of $34.3 million). The Payout Ratio to ACFO(2) for the year ended December 31, 2022 was 96.9%, as compared to 90.3% for the year ended December 31, 2021. Excluding the impact of TRS, condominium and townhome closings, and SmartVMC West acquisition, the Payout Ratio to ACFO(2) for the year ended December 31, 2022 was 92.6%, as compared to 96.5% for the year ended December 31, 2021. Operational • • • Rentals from investment properties and other(1) was $804.6 million, as compared to $780.8 million in 2021, representing an increase of $23.8 million or 3.0%, primarily due to: (i) the acquisition of an additional interest in investment properties in Q1 2022; (ii) higher rental income from Premium Outlets locations in both Toronto and Montreal; and (iii) additional self-storage facility and parking rental revenue. Same Properties NOI inclusive of ECL(2) increased by $16.5 million or 3.3% in 2022 as compared to 2021. Same Properties NOI excluding ECL(2) increased by $9.5 million or 1.9% in 2022 as compared to the prior year. In-place occupancy rate and occupancy rate with committed deals were 97.6% and 98.0%, respectively, as at December 31, 2022 (December 31, 2021 – 97.4% and 97.6%, respectively). Subsequent Event • The Trust together with an entity, PCVP, which is classified as investment in associates, entered into an agreement to dispose approximately 6.4 acres of land located in Vaughan, Ontario (VMC) to an unrelated party, which closed in February 2023, for gross proceeds of $95.6 million that was satisfied with cash. The Trust’s share of such proceeds was $58.4 million, comprised of $42.3 million relating to the Trust’s two-thirds share of the 4.3 acres of land on western part of SmartVMC which were previously consolidated in the Trust’s consolidated financial statements and presented as assets held for sale at December 31, 2022, and $16.1 million relating to the Trust’s 50% share of 2.1 acres of land on eastern part of SmartVMC which were previously recorded in equity accounted investments. Proceeds from the sale were primarily used by the Trust to reduce indebtedness. (1) (2) (3) Represents a GAAP measure. Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. Net of cash-on-hand of $33.4 million as at December 31, 2022 for the purposes of calculating the applicable ratios. 14 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 18 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTSelected Consolidated Operational, Mixed-Use Development and Financial Information Key consolidated operational, mixed-use development and financial information shown in the table below includes the Trust’s proportionate share of equity accounted investments: (in thousands of dollars, except per Unit and other non-financial data) December 31, 2022 December 31, 2021 December 31, 2020 MANAGEMENT’S DISCUSSION AND ANALYSIS Portfolio Information Number of retail properties Number of office properties Number of self-storage properties Number of residential properties Number of properties under development Total number of properties with an ownership interest Leasing and Operational Information(1) Gross leasable retail and office area (in thousands of sq. ft.) Occupied retail and office area (in thousands of sq. ft.) Vacant retail and office area (in thousands of sq. ft.) In-place occupancy rate (%) In-place and committed occupancy rate (%) Average lease term to maturity (in years) Net annualized retail rental rate (per occupied sq. ft.) ($) Net annualized retail rental rate excluding Anchors (per occupied sq. ft.) ($) Mixed-Use Development Information Trust’s share of future development area (in thousands of sq. ft.) Trust’s share of estimated costs of future projects currently under construction, or for which construction is expected to commence within the next five years (in millions of dollars) Total number of residential rental projects Total number of seniors’ housing projects Total number of self-storage projects Total number of office buildings / industrial projects Total number of hotel projects Total number of condominium developments Total number of townhome developments Total number of estimated future projects currently in development planning stage 155 4 6 1 19 155 4 6 1 17 185 183 34,750 33,925 826 97.6 98.0 4.2 15.53 22.20 34,119 33,219 900 97.4 97.6 4.4 15.44 22.07 156 4 4 1 14 179 34,056 33,039 1,017 97.0 97.3 4.6 15.37 21.89 41,200 40,600 32,500 10,000 110 25 33 8 3 88 7 274 9,800 104 27 36 8 3 95 10 7,900 96 40 50 7 4 72 15 283 284 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 15 19 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS (in thousands of dollars, except per Unit and other non-financial data) December 31, 2022 December 31, 2021 December 31, 2020 Financial Information Total assets – GAAP(2) Total assets – non-GAAP(3)(4) Investment properties – GAAP(2) Investment properties – non-GAAP(3)(4) Total unencumbered assets(3) Debt – GAAP(2) Debt – non-GAAP(3)(4) Debt to Aggregate Assets (%)(3)(4)(5) Debt to Gross Book Value (%)(3)(4)(5) Unsecured to Secured Debt Ratio(3)(4)(5) Unencumbered assets to unsecured debt(3)(4)(5) Weighted average interest rate (%)(3)(4) Weighted average term of debt (in years) Interest coverage ratio(3)(4)(5) Equity (book value)(2) Weighted average number of units outstanding – diluted 11,702,153 12,083,941 10,250,392 11,223,796 8,415,900 4,983,265 5,260,053 43.6 52.0 11,293,248 11,494,377 9,847,078 10,684,529 6,640,600 4,854,527 4,983,078 42.9 50.8 10,724,492 10,874,900 8,850,390 9,400,584 5,835,600 5,210,123 5,261,360 44.6 50.1 74%/26% 71%/29% 68%/32% 2.2X 3.86 4.0 3.1X 1.9X 3.11 4.8 3.4X 1.9X 3.28 5.0 3.2X 6,163,101 179,657,455 5,841,315 5,166,975 173,748,819 172,971,603 (1) (2) (3) (4) (5) Excluding residential and self-storage area. Represents a GAAP measure. Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. Includes the Trust’s assets held for sale and the Trust’s proportionate share of equity accounted investments. As at December 31, 2022, cash-on-hand of $33.4 million was excluded for the purposes of calculating the applicable ratios (December 31, 2021 – $80.0 million, December 31, 2020 – $754.4 million). 16 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 20 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTYear-to-Date Comparison to Prior Year The following table presents key financial, per Unit, and payout ratio information for the years ended December 31, 2022 and December 31, 2021: MANAGEMENT’S DISCUSSION AND ANALYSIS (in thousands of dollars, except per Unit information) Financial Information Rentals from investment properties and other(1) Net base rent(1) Total recoveries(1) Miscellaneous revenue(1) Service and other revenues(1) Earnings from other(1) Net income and comprehensive income(1) Net income and comprehensive income excluding fair value adjustments(2)(3) Cash flows provided by operating activities(1) Net rental income and other(1) NOI from condominium and townhome closings and other adjustments(2) NOI(2) Change in net rental income and other(2) Change in SPNOI(2) Change in SPNOI excluding ECL(2) FFO(2)(3)(4)(5) Other adjustments FFO with adjustments(2)(3)(4) Adjusted for: ECL Loss (gain) on derivative – TRS FFO sourced from condominium and townhome closings FFO sourced from SmartVMC West acquisition FFO with adjustments excluding impact of ECL, TRS, condominium and townhome closings, and SmartVMC West acquisition(2)(3)(4) FFO with adjustments and Transactional FFO(2)(3)(4) ACFO(2)(3)(4)(5) Other adjustments ACFO with adjustments(2)(3)(4) Adjusted for: Loss (gain) on derivative – TRS ACFO sourced from condominium and townhome closings ACFO sourced from SmartVMC West acquisition ACFO with adjustments excluding impact of TRS, condominium and townhome closings, and SmartVMC West acquisition(2)(3)(4) Distributions declared Surplus of cash flows provided by operating activities over distributions declared(2) Surplus of ACFO over distributions declared(2) Surplus of ACFO with adjustments excluding impact of TRS, condominium and townhome closings, and SmartVMC West acquisition over distributions declared(2) Units outstanding(6) Weighted average – basic Weighted average – diluted(7) 2022 (A) 804,598 508,023 265,281 15,393 14,652 1,249 635,965 342,261 370,762 502,604 305 518,520 3.5 % 3.3 % 1.9 % 371,572 656 372,228 (3,257) 4,918 (680) (984) 372,225 379,890 340,075 656 340,731 4,918 (305) (984) 344,360 329,531 41,231 10,544 2021 (B) 780,796 494,992 253,032 17,891 14,843 38 987,676 342,609 371,624 485,840 20,471 518,122 5.4 % 3.5 % (2.0) % 380,070 3,226 383,296 3,706 (5,642) (18,747) — 362,613 385,219 353,055 3,226 356,281 (5,642) (20,471) — 330,168 318,753 52,871 34,302 Variance (A–B) 23,802 13,031 12,249 (2,498) (191) 1,211 (351,711) (348) (862) 16,764 (20,166) 398 (1.9) % (0.2) % 3.9 % (8,498) (2,570) (11,068) (6,963) 10,560 18,067 (984) 9,612 (5,329) (12,980) (2,570) (15,550) 10,560 20,166 (984) 14,192 10,778 (11,640) (23,758) 14,829 178,133,853 178,121,149 179,657,455 11,415 178,091,581 172,447,334 173,748,819 3,414 42,272 5,673,815 5,908,636 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 17 21 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS (in thousands of dollars, except per Unit information) Per Unit Information (Basic/Diluted) Net income and comprehensive income(1) Net income and comprehensive income excluding fair value adjustments(2)(3) FFO(2)(3)(4)(5) Other non-recurring adjustments FFO with adjustments(2)(3)(4) 2022 (A) 2021 (B) Variance (A–B) $3.57/$3.54 $1.92/$1.91 $2.09/$2.07 $0.00/$0.00 $2.09/$2.07 $5.73/$5.68 $-2.16/$-2.14 $1.99/$1.97 $-0.07/$-0.06 $2.20/$2.19 $-0.11/$-0.12 $0.02/$0.02 $-0.02/$-0.02 $2.22/$2.21 $-0.13/$-0.14 FFO with adjustments excluding impact of ECL, TRS, condominium and townhome closings, and SmartVMC West acquisition(2)(3)(4) $2.16/$2.14 $2.10/$2.09 $0.06/$0.05 FFO with adjustments and Transactional FFO(2)(3)(4) $2.13/$2.11 $2.23/$2.22 $-0.10/$-0.11 Distributions declared Payout Ratio Information Payout Ratio to cash flows provided by operating activities Payout Ratio to ACFO(2)(3)(4)(5) Payout Ratio to ACFO with adjustments(2)(3)(4) Payout Ratio to ACFO with adjustments excluding impact of TRS, condominium and townhome sales, and SmartVMC West acquisition(2)(3)(4) $1.850 $1.850 $— 88.9 % 96.9 % 96.7 % 92.6 % 85.8 % 90.3 % 89.5 % 96.5 % 3.1 % 6.6 % 7.2 % (3.9) % (1) (2) (3) (4) (5) (6) (7) Represents a GAAP measure. Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. Includes the Trust’s proportionate share of equity accounted investments. See “Other Measures of Performance” for a reconciliation of these measures to the nearest consolidated financial statement measure. The calculation of the Trust’s FFO and ACFO and related payout ratios, including comparative amounts, are financial metrics that were determined based on the REALpac White Paper on FFO issued in January 2022 and REALpac White Paper on ACFO issued in February 2019, respectively. Comparison with other reporting issuers may not be appropriate. The payout ratio to FFO and the payout ratio to ACFO are calculated as declared distributions divided by FFO and ACFO, respectively. Total Units outstanding include Trust Units and LP Units, including Units classified as liabilities. LP Units classified as equity in the consolidated financial statements are presented as non- controlling interests. The diluted weighted average includes the vested portion of the deferred units issued pursuant to the deferred unit plan. 18 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 22 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTQuarterly Results and Trends (in thousands of dollars, except percentage, square footage, Unit and per Unit amounts) Q4 2021 Q2 2022 Q3 2022 Q1 2022 Q4 2022 MANAGEMENT’S DISCUSSION AND ANALYSIS Q3 2021 Q2 2021 Q1 2021 Results of operations Net income and comprehensive income 100,310 3,548 161,997 370,110 652,081 178,051 96,985 60,559 Per Unit Basic Diluted(3) Net base rent(1)(2) Rentals from investment properties(1)(2) Rentals from investment properties and other NOI(1)(2) Other measures of performance FFO(2) Per Unit Basic(2) Diluted(2)(3) $0.56 $0.56 133,201 210,117 206,223 133,632 $0.02 $0.02 132,303 199,220 196,678 130,986 $0.91 $0.90 131,543 202,785 198,296 130,034 $2.08 $2.06 129,354 206,467 202,523 123,868 $3.77 $3.74 128,571 195,180 192,812 129,679 $1.03 $1.03 128,487 195,749 195,171 133,333 $0.56 $0.56 126,658 195,532 193,937 136,091 $0.35 $0.35 124,374 200,984 198,838 118,981 102,471 88,403 88,464 92,235 97,452 97,887 100,457 84,275 $0.58 $0.57 $0.50 $0.49 $0.50 $0.49 $0.52 $0.51 $0.56 $0.56 $0.57 $0.56 $0.58 $0.58 $0.49 $0.49 FFO with adjustments and Transactional FFO(2) 108,223 89,072 89,446 93,150 98,448 99,593 101,082 86,098 Per Unit Basic(2) Diluted(2)(3) Cash flows provided by operating activities ACFO(2) ACFO with adjustments(2) Distributions declared Payout ratio to ACFO with adjustments Units outstanding(4) Weighted average Units outstanding Basic Diluted(3) Total assets Total unencumbered assets(2) Debt Total leasable area (sq. ft.) In-place occupancy rate (%) Occupancy rate with committed deals (%) $0.61 $0.60 134,668 92,991 91,081 82,386 90.5 % $0.50 $0.50 97,011 81,060 81,729 82,382 $0.50 $0.50 43,970 80,871 81,853 82,422 $0.52 $0.52 $0.57 $0.56 102,819 133,673 85,154 86,069 82,339 83,313 83,973 79,725 $0.58 $0.57 96,298 90,342 92,048 79,683 $0.59 $0.58 62,168 94,248 94,873 79,685 $0.50 $0.50 79,485 85,153 85,389 79,660 100.8 % 100.7 % 95.7 % 94.9 % 86.6 % 84.0 % 93.3 % 178,133,853 178,126,285 178,122,655 178,122,655 178,091,581 172,287,950 172,280,187 172,267,483 178,129,000 178,123,918 178,122,655 178,108,771 172,983,636 172,285,503 172,275,798 172,237,982 179,696,944 179,678,009 179,662,689 179,590,588 174,380,800 173,644,091 173,543,923 173,417,020 11,702,153 11,862,633 11,905,066 11,721,953 11,293,248 10,191,592 10,036,672 10,321,117 8,415,900 4,983,265 8,383,900 8,413,000 8,364,500 6,640,600 6,002,800 5,937,900 5,910,900 5,159,860 5,128,604 4,951,171 4,854,527 4,539,594 4,492,948 4,810,106 34,750,379 34,685,033 34,660,693 34,663,687 34,118,613 34,225,087 34,185,729 34,036,704 97.6 98.0 97.6 98.1 97.2 97.6 97.0 97.2 97.4 97.6 97.3 97.6 97.1 97.3 97.0 97.3 (1) (2) (3) (4) Includes the Trust’s proportionate share of equity accounted investments. Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. Diluted metrics are adjusted for the dilutive effect of the vested Earnout options and vested portion of deferred units, unless they are anti-dilutive. Total Units outstanding include Trust Units and LP Units, including Units classified as financial liabilities. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 19 23 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Results of Operations Net income and comprehensive income, net base rent, rentals from investment properties, NOI, FFO, and related financial and operational metrics noted above are typically not materially impacted by seasonal factors. However, macroeconomic and market trends, as described under “Outlook” in this MD&A, acquisition, Earnout, development and disposition activities do have an impact on the demand for space, occupancy and collection levels and, consequently, impact net base rent, common area maintenance (“CAM”) and realty tax recoveries, property valuations and ultimately operating performance. Overall, the Trust’s income producing property portfolio is quite stable. Quarterly fluctuations in revenue and operating results are mainly attributable to ECL provisions, occupancy levels, Same Properties NOI growth, acquisitions, Earnouts, developments and dispositions. In addition, the COVID-19 pandemic has had an adverse effect on results of operations for Q1 of 2021 through Q4 of 2022. Sequentially, net income and comprehensive income increased by $96.8 million in Q4 2022 from Q3 2022. This increase was mainly attributable to the $105.5 million higher investment property revaluation adjustments, and partially offset by $11.8 million lower fair value gains on revaluation of financial instruments during Q4 2022. Year-over-year, net income and comprehensive income decreased by $551.8 million in Q4 2022 compared to Q4 2021, primarily attributable to the fair value adjustments (gains) of certain properties under development in Q4 2021 as a result of changes in the market and the progress made on planning entitlement. Other Measures of Performance FFO increased by $14.1 million in Q4 2022 from Q3 2022, mainly attributable to the higher TRS gain in Q4. Year-over-year, FFO increased by $5.0 million in Q4 2022 compared to Q4 2021, primarily due to increase in interest income and NOI, and partially offset by increase in interest expense. Units Outstanding The increase in Units outstanding in Q4 2022 from Q3 2022 and compared to Q4 2021 was mainly due to the options exercised in connection with Earnout transactions. Total Assets and Debt Total assets decreased by $160.5 million in Q4 2022 from Q3 2022, which was mainly due to: (i) a decrease in other financial assets of $117.7 million mainly attributable to cash held as collateral for the TRS which was released and used to reduce indebtedness; and (ii) a decrease of loans receivable of $100.9 million due to repayment; and partially offset by the increase of investment properties of $39.0 million which was driven by development activities and fair value gains over the quarter. Total debt decreased by $176.6 million in Q4 2022 from Q3 2022 as a result of repayment. Total assets increased by $408.9 million in Q4 2022 compared to Q4 2021, principally attributable to acquisitions and capital expenditures in investment properties, and fair value adjustments (gains) on revaluation of investment properties. Total debt increased by $128.7 million in Q4 2022 compared to Q4 2021, mainly due to new unsecured credit facilities borrowed and partially offset by repayment. Leasing The Trust’s occupancy rate (inclusive of committed deals) was 98.0% at the end of Q4 2022, representing a 10 basis point decrease as compared to Q3 2022, mainly resulting from minor vacancies during the current quarter. The Trust’s occupancy rate (inclusive of committed deals) was 98.1% and 97.6% at the end of Q3 2022 and Q2 2022, representing a 50 basis point increase and a 40 basis point increase as compared to prior quarters, respectively, mainly resulting from increased demand for high traffic shopping centres. The Trust’s occupancy rate (inclusive of committed deals) was 97.6% in Q4 2021. Strengthening retail leasing is being experienced across all provinces with improved NOI and occupancy expected throughout 2023. 20 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 24 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTSection III — Development Activities Mixed-Use Development Initiatives The following table summarizes the 274 identified mixed-use, recurring rental income and development income initiatives, which are included in the Trust’s large development pipeline: MANAGEMENT’S DISCUSSION AND ANALYSIS Description Section A Number of projects in which the Trust has an ownership interest Residential Rental Seniors’ Housing Self-storage Office Buildings / Industrial Hotels Subtotal – Recurring rental income initiatives Condominium developments Townhome developments Subtotal – Development income initiatives Total Section B Planning entitlements (#)(1) Construction expected to commence within next 2 years Active (Construction expected to commence within next 3–5 years) Future (Construction expected to commence after 5 years) Total Under construction Q4 2022 Q3 2022 Q4 2022 Q3 2022 Q4 2022 Q3 2022 Q4 2022 Q3 2022 Q4 2022 Q3 2022 3 1 3 1 5 1 3 1 — — 8 2 1 3 11 10 2 1 3 13 22 24 24 20 3 7 — — 32 15 1 16 48 3 9 — — 36 21 1 22 58 7 8 1 8 7 1 — — 40 25 2 27 67 36 20 1 21 57 61 14 15 6 3 99 46 3 58 13 16 7 3 97 46 5 110 107 25 33 8 3 25 35 9 3 179 179 88 7 89 8 97 49 51 95 148 148 274 276 11 13 38 45 47 39 86 85 182 182 Section C Project area (in thousands of sq. ft.) – at 100%(2) Recurring rental income initiatives 1,750 2,000 6,050 6,590 6,600 6,350 17,900 17,600 32,300 32,540 Development income initiatives 1,200 1,200 4,200 5,800 7,400 6,100 11,000 11,600 23,800 24,700 Total project area (in thousands of sq. ft.) – at 100% Trust’s share of project area (in thousands of sq. ft.) 2,950 3,200 10,250 12,390 14,000 12,450 28,900 29,200 56,100 57,240 Recurring rental income initiatives 1,000 1,200 4,450 4,600 4,300 3,900 12,500 11,900 22,250 21,600 Development income initiatives 400 400 3,650 4,700 4,700 3,500 10,200 9,500 18,950 18,100 Total Trust’s share of project area (in thousands of sq. ft.) Section D Total estimated costs (in millions of dollars) – at 100% based on current planning budgets(2) Trust’s share of such estimated costs (in millions of dollars) 1,400 1,600 8,100 9,300 9,000 7,400 22,700 21,400 41,200 39,700 1,200 1,250 5,700 6,900 8,000 7,100 550 550 4,450 5,250 5,000 4,050 – (3) – (3) – (3) – (3) 14,900 15,250 10,000 9,850 (1) (2) (3) Planning entitlements represent those projects whereby the official plan currently permits intended/proposed uses. Square footage and cost figures provided at 100% pertain to projects for which the Trust has an ownership interest in such projects, and do not include related-party projects to which the Trust does not have an ownership interest. The Trust has not fully determined the costs attributable to future projects expected to commence after five years and as such they are not included in this table. Status of Current Development Initiatives This section contains forward-looking statements related to expected milestones and completion dates of various development initiatives. Completion, milestone or occupancy dates of each of the projects described below may be delayed or adversely impacted. Please refer to the “Forward-Looking Statements” section for more information. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 21 25 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS The Trust’s mixed-use development initiatives have resulted in the Trust participating in various construction development projects. This includes construction at: i) SmartVMC; ii) mid- and high-rise rental residential projects in Laval and Mascouche, Quebec; iii) seniors’ apartments and retirement residences in the Greater Toronto Area and Ottawa, Ontario; iv) self-storage locations throughout Ontario; v) a townhome project in Vaughan, Ontario; and vi) an industrial project in Pickering, Ontario. In addition, the Trust is currently working on development initiatives for many other properties that will primarily consist of residential developments located in Ontario and Quebec. The following table provides additional details on the Trust’s 11 development initiatives that are currently under construction (in order of estimated initial occupancy/closing date): Projects under construction (Location/Project Name) Vaughan / Transit City 4 Vaughan / Transit City 5 Vaughan / The Millway Brampton / Kingspoint Plaza Pickering (Seaton Lands) Laval Centre Markham East / Boxgrove Whitby Ottawa SW (1) Ottawa SW (1) Vaughan NW Type Condo Apartment Self Storage Industrial Apartment Self Storage Self Storage Retirement Residence Senior Apartments Townhouse Total Capital Spend To Date at 100% (3) Estimated Cost to Complete at 100% Total Expected Capital Spend by Completion at 100% (3) Total Capital Spend To Date at Trust’s share (3) Estimated Cost to Complete at Trust’s share Total Expected Capital Spend by Completion at Trust’s share (3) Trust’s Share (%) Estimated initial occupancy / closing date % of completion GFA(2) (sq. ft.) No. of units 25 50 50 100 50 50 50 50 50 Q1 2023 87 % — 1,026 Q1 2023 Q1 2023 Q1 2023 Q2 2023 Q1 2024 Q1 2024 73 % — 91 % 133,000 79 % 241,000 58 % — 38 % 133,332 16 % 126,135 458 969 — 211 910 811 Q1 2024 26 % — 402 Q3 2024 14 % — 174 In millions of dollars 755.2 487.8 1,243.0 304.1 234.9 539.0 Figure represents capital spend of both retirement residence and senior apartments projects. (1) (2) GFA represents Gross Floor Area. (3) Total capital spent to date and total expected capital spend by completion include land value. SmartVMC Development Initiatives In December 2021, the Trust acquired a two-thirds interest in approximately 53.0 acres in SmartVMC valued at $513.0 million. Existing permissions on the property include multi-residential, condominium, seniors’ housing, office, retail, schools, recreational, entertainment and other uses; although further entitlements or permissions may be required as specific developments are planned. The Trust now has an ownership interest in approximately 105.0 acres in the Vaughan Metropolitan Centre. When completed, SmartVMC is planned to consist of approximately 20.0 million square feet (11.5 million square feet at the Trust’s share) of mixed-use development, anchored by public transit infrastructure spending by the various levels of government of over $3.0 billion including the VMC subway station. SmartVMC currently includes: i) ii) the 360,000 square foot KPMG tower, with 98% of the office space leased; the 225,000 square foot PwC-YMCA office and community-use complex, with fully occupied office space and community-use space, including a new world-class YMCA facility and municipal library, both of which opened in 2022; iii) the new 140,000 square foot Walmart store which opened in 2020; and iv) the development of high-rise residential, with details of each previously announced residential phase discussed below. 22 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 26 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS The Trust is actively pursuing additional initiatives at SmartVMC, which include: i) ii) the development of more than 4.0 million square feet (4,600 units) of residential density on the land at SmartVMC previously occupied by a Walmart store, with zoning and site plan applications submitted in 2020 for approval of Phase 1 of 550,000 square feet. Zoning was approved by the City of Vaughan in September 2021. Pre-sale of the first phase condo, ArtWalk, was launched in November 2021 and all of the 320 released units are sold; the development of 1.2 million square feet of mixed-use density – office, retail and residential – on the SmartVMC lands immediately south of the Transit City 4 and 5 towers, with the rezoning and site plan applications submitted in September 2020; and iii) Park Place condominiums pre-sales launched in May 2022 on SmartVMC West lands. The following table summarizes the associated mixed-use initiatives completed, under construction or currently being planned at SmartVMC: Project KPMG Tower KPMG Tower PwC-YMCA Complex/Tower Office Tower #3 – Proposed Office Tower #4 – Proposed The Millway Transit City 1 Transit City 2 Storeys 15 N/A 9 TBD(2) TBD(2) Type Office Retail Office Office Office 36 55 55 Apartments Condo Condo Transit City 1 and 2 Townhomes N/A Townhomes Transit City 3 Transit City 4 and 5 ArtWalk Park Place Apple Mill Road and Jane Street 55 45 and 50 Condo Condo Condo/ 38,18 and 6 Apartments 48 and 56 64 Condo Condo Estimated Total Building Area (sq. ft./units) Expected Completion Year Trust’s Share (%) 330,000 sq. ft. 30,000 sq. ft. 225,000 sq. ft. (1) 500,000 sq. ft. 500,000 sq. ft. 1,585,000 sq. ft. 458 units (3) 551 units 559 units 22 units 631 units 1,026 units (3) 627 units 1,094 units 798 units 5,766 units Completed Completed Completed 2028 2029 2023 Completed (2020) Completed (2020) Completed (2022) Completed (2021) 2023 2026–2027 2027 TBD 50 50 50 50 50 50 25 25 25 25 25 50 67 50 (1) (2) (3) Includes 112,000 square feet of YMCA, library and community-use space. The number of storeys for this project has not been finalized. Ninety-two of the 458 units attributable to the purpose-built residential rental apartment, The Millway, are located in the podiums of Transit City 4 and 5. These 92 units are anticipated to be completed commensurate with Transit City 4 and 5. Residential and Other Mixed-Use Development Initiatives In addition to the Trust’s 11 development initiatives that are currently under construction, the following table shows the mixed-use development initiatives which have been completed during the last three years: Type Estimated Total Building Area (sq. ft./units) Year of Construction Completion(1) Trust’s Share (%) Project Laval Phase 1 (QC) Mascouche N Phase 1 (QC) Residential rental Residential rental 171 units 238 units Leaside SmartStop (ON) Self-storage facility 133,714 sq. ft. (998 units) Vaughan NW SmartStop (ON) Self-storage facility 118,067 sq. ft. (875 units) Brampton SmartStop (ON) Self-storage facility 134,687 sq. ft. (1,052 units) Oshawa S SmartStop (ON) Self-storage facility 132,812 sq. ft. (948 units) Scarborough E SmartStop (ON) Self-storage facility 136,969 sq. ft. (974 units) Aurora SmartStop (ON) Self-storage facility 140,000 sq. ft. (926 units) 2020 2022 2020 2021 2021 2021 2021 2022 50 80 50 50 50 50 50 50 (1) Economic stabilization is achieved at 92% to 98% occupancy which varies by asset class and unique project-based factors. Residential rental and seniors’ housing projects are generally expected to achieve economic stabilization in 2-3 years after construction completion. Self-storage projects are generally expected to achieve economic stabilization in 4-5 years after construction completion. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 23 27 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS In addition, the Trust is currently working on initiatives for the development of many properties for which final municipal approvals have been obtained or are being actively pursued. Completion, milestone or occupancy dates of each of the projects described below may be delayed or adversely impacted. i. ii. iii. iv. v. the development of up to 5.3 million square feet of predominately residential space, in various forms, at Highway 400 & Highway 7, in Vaughan, Ontario, with a rezoning application submitted in December 2019 and a site plan application for the first four residential buildings totalling 1,742 units submitted in October 2020. Currently working with the City of Vaughan on advancement of Weston & Highway 7 Secondary Plan; the development of up to 5.0 million square feet of predominately residential space, in various forms over the long term, in Pickering, Ontario, with the zoning for five towers with a gross floor area of approximately 1,400,000 square feet and site plan application for a three-tower mixed-use phase, approximating 700,000 square feet, approved by Council in June 2022; the development of up to 5.5 million square feet of predominately residential space, in various forms, at Oakville North in Oakville, Ontario, with the official plan and zoning amendment applications for an initial two-tower 587-unit residential phase submitted in 2021, and a supporting site plan application submitted in March 2022; the development of up to 2.6 million square feet of predominately residential space, in various forms, at the Westside Mall in Toronto, Ontario, with a zoning application for the first 35-storey mixed-use tower submitted in 2021 and work continuing collaboratively with the City. The by-law is anticipated to be presented at Council in spring/summer 2023 for approval. A site plan application is being concurrently processed; the development of up to 1.5 million square feet of residential space in various forms on the Trust’s undeveloped lands at the Vaughan NW property in Vaughan, Ontario. Approximately 60% of the 174 draft plan approved townhomes have been pre-sold, lot servicing has been completed, and new home construction is soon expected to commence. Official Plan and Zoning Approval was obtained in June 2022 for five mid-rise buildings, of which Site Plan Approval was obtained for the Phase I development of a seniors’ apartment building and a separate retirement residence, both of which are to be developed in partnership with Revera; vi. the development of up to 1.5 million square feet of residential space, in various forms, in Pointe-Claire, Quebec, with the first phase, a two-tower rental project, being actively pursued, but subject to the urban planning revision process by the city of Pointe-Claire; vii. the development of up to 200,000 square feet of residential townhomes at Oakville South in Oakville, Ontario; viii. the intensification of the Toronto StudioCentre (“StudioCentre”) in Toronto, Ontario (zoning allows for up to 1.2 million square feet); ix. x. xi. the development of four high-rise purpose-built residential rental buildings comprising approximately 1,700 units with Greenwin, in Barrie, Ontario, for which a zoning application was approved by Barrie City Council in January 2021 with the site plan approved for Phase 1 by Barrie City Council in June 2021. An application for a building permit was submitted in July 2021. Environmental Risk Assessment was approved for the entire site in September 2021 and the application of Certificate of Property Use was submitted in February 2022 and approved in September 2022; the development of a 35-storey high-rise purpose-built residential rental tower containing 442 units, on Balliol Street in midtown Toronto, Ontario, with zoning and site plan applications submitted in September 2020. A second submission of these applications was made in July 2021. A third submission of these applications was made in March 2022. Zoning approval was received in July 2022 and site plan approval is expected in Q2 2023; the development of up to 1,600 residential units, in various forms, in Mascouche, Quebec, with the first phase consisting of 238 units in two 10-storey rental towers approved by municipal council in August 2020. Construction began in April 2021 and the first four floors opened in July 2022, with the remaining six floors opened in sequence until the last and 10th floor was made available on November 1, 2022. Construction of a second phase is expected to commence in Q2 2023; xii. the development of residential density at the Trust’s shopping centre at 1900 Eglinton Avenue East in Scarborough, Ontario, with Official Plan Approval obtained in August 2022 for 4.65 million square feet of density. Approval was also obtained in August 2022 of a Phase I development to include two residential towers (46 and 48 storeys), permitting 975 residential units and up to 806,000 square feet. Site plan application and approvals for Phase I are ongoing. In addition, applications for Phase II, consisting of approximately 1.4 million square feet were submitted in September 2022; 24 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 28 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS xiii. the development of the first phase, a 46-unit rental building, which is part of a multi-phase master plan in Alliston, Ontario, with a rezoning application approved by Council in December 2020, a site plan application approved in July 2022, and the full building permit received in December 2022; xiv. besides the nine self-storage projects completed or under construction, there are five additional self-storage facilities in Ontario and British Columbia with the Trust’s partner, SmartStop, in Stoney Creek, Toronto (2), New Westminster and Burnaby with zoning and/or site plan approval obtained or applications well underway. Project agreements for another three locations are being finalized; xv. the Q4 2020 acquisition of an additional 33.33% interest (new ownership structure of 66.66% held by the Trust and 33.33% held by Penguin) in 50 acres of adjacent land to the Trust’s Premium Outlets Montreal in Mirabel, Quebec, for the ultimate development of residential density of up to 4,500 units. Site plan applications for the first phase rental building with 168 units expected to be submitted in Q1 2023. Master plan of development for the site is subject to approval; xvi. the development of a new residential block consisting of three phases totalling 500 units at Laval Centre in Quebec. The application for architecture approval for Phase 1 (155 units) and Phase 2 (155 units) was submitted in Q4 2021 and approved in Q3 2022. The application for the construction permit was made in Q4 2022. Issuance of the construction permit is expected in Q2 2023; xvii. the Trust is planning the redevelopment of a portion of its 73-acre Cambridge retail property (subject to a leasehold interest with Penguin) which now allows various forms of residential, retail, office, institutional and commercial uses, providing for the creation of a vibrant urban community with the potential for over 12.0 million square feet of development on the overall property once completed. Work is underway to start the site plan approval process for an initial phase for a high-rise condominium and a mid-rise apartment. Discussions with City staff continue as a site plan application submission is anticipated in 2023; xviii.the development of a retirement living residence at the Trust’s shopping centre at Bayview and Major Mackenzie in Richmond Hill, Ontario, with a rezoning application for a nine-storey retirement residences building submitted in Q1 2021 and a site plan application submitted in Q4 2021, to be developed in partnership with the existing partner and Revera; xix. the development of 1.5 million square feet of residential density adjacent to the new South Keys light rail train station at the Trust’s Ottawa South Keys Centre, consistent with current zoning permissions. Site plan application for the first phase rental complex with 446 units was submitted and deemed complete in Q4 2021 and work is ongoing on a second submission to respond to agency comments on the application; xx. the development of up to 900,000 square feet of predominately residential space on Yonge St. in Aurora, Ontario, with rezoning applications for the entire site and site plan submitted for Phase 1 in July 2021 and resubmitted in April 2022; xxi. the Q4 2020 acquisition of a 50% interest in a property in downtown Markham for the development of a 243,000 square foot retirement residence with Revera. The rezoning application was submitted in December 2020, and an appeal was filed in July 2022 for the initial Official Plan Amendment & Zoning By-law Amendment submission; xxii. the development of approximately 900,000 square feet of residential density on the Trust’s Parkway Plaza Centre in Stoney Creek, Ontario, with a rezoning application underway that includes a Phase 1 development of a two-tower (each 20 storeys), approximately 400,000 square foot, 494-unit condo project. The proposal was presented at the Hamilton Design Review Panel in March 2022 and a public information meeting was held in May 2022. Design changes were incorporated, and the rezoning application was resubmitted in Q4 2022; and xxiii.during the second quarter of 2022, the Trust completed the purchase of approximately 38 acres of industrial lands in Pickering, adjacent to Hwy 407, on which the Trust received approval to build 241,000 square feet of space for the 16- acre Phase 1 development, of which 53% has already been pre-leased, and completion is currently scheduled for Q1 2023. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 25 29 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Residential Development Inventory Vaughan NW Residential Development As reflected in the Trust’s consolidated financial statements for the year ended December 31, 2022, residential development inventory consists of development lands, co-owned with Fieldgate, located at Vaughan NW, Ontario, for the purpose of developing and selling residential townhome units. The phased sales program for the Vaughan NW Townhomes was launched in December 2021. As of December 31, 2022, approximately 60% of the planned 174 townhomes have been pre-sold within the initial three phases of the sales program and closings are now expected in 2024. The following table summarizes the activity in residential development inventory (at the Trust’s share): (in thousands of dollars) Balance – beginning of year Development costs Capitalized interest for the period Balance – end of year Properties Under Development Year Ended December 31, 2022 Year Ended December 31, 2021 27,399 11,931 1,043 40,373 25,795 646 958 27,399 As at December 31, 2022, the fair value of properties under development including properties under development recorded in equity accounted investments totalled $2,337.4 million as compared to $1,970.4 million at December 31, 2021, resulting in a net increase of $367.0 million presented in the following table. The net increase of $367.0 million was primarily due to the $237.7 million adjustment attributed to changes in the market and the progress made on planning entitlements recorded in Q1 2022, and the $161.9 million development expenditures incurred during the year ended December 31, 2022. For additional details on the factors influencing this change, see “Investment Properties”. (in thousands of dollars) Developments Earnouts subject to option agreements(1) Total Equity accounted investments Total including equity accounted investments(2) Less: properties under development classified as held for sale Total including equity accounted investments (excluding properties classified as held for sale)(2) December 31, 2022 December 31, 2021 Variance ($) 1,698,652 54,847 1,753,499 583,898 2,337,397 (58,371) 1,391,301 307,351 60,700 (5,853) 1,452,001 518,427 1,970,428 301,498 65,471 366,969 — (58,371) 2,279,026 1,970,428 308,598 (1) (2) Earnout development costs during the development period are paid by the Trust and funded through interest-bearing secured debt provided by the vendors to the Trust. On completion of the development and the commencement of lease payments by a tenant, the Earnouts will be acquired from the vendors based on predetermined or formula-based capitalization rates ranging from 6.00% to 7.40%, net of land and development costs incurred. Penguin has contractual options to acquire Trust Units and LP Units on completion of Earnouts as shown in Note 13(b) of the consolidated financial statements for the year ended December 31, 2022. Effective December 9, 2020, pursuant to the Omnibus Agreement between the Trust and Penguin (see also “Related Party Transactions”), Penguin has the option to extend all Earnouts by two years from the previous expiry date, and the Trust has been given a right of first offer in connection with the sale of the economic and financial benefits and rights of any such development parcel during any extended period. For further details, see the Trust’s management information circular dated November 6, 2020, filed on SEDAR. Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. Future Retail Developments, Earnouts and Mezzanine Financing Total future Retail Developments, Earnouts and Mezzanine Financing could increase the existing Trust portfolio by an additional 2.2 million square feet. With respect to the future pipeline, commitments have been negotiated on 0.3 million square feet. The Trust continues to revise its estimates and adjust its plans towards mixed-use developments. The following table summarizes the expected potential future retail pipeline in properties under development as at December 31, 2022: (in thousands of square feet) Committed Years 0–2 Years 3–5 Beyond Year 5 Developments Earnouts Mezzanine Financing 242 18 260 — 260 576 26 602 — 602 620 77 697 — 697 124 — 124 488 612 (1) The estimated timing of development is based on management’s best estimates and can be adjusted based on changes in business conditions. Total(1) 1,562 121 1,683 488 2,171 26 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 30 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS During the year ended December 31, 2022, the future retail properties under development pipeline increased by 0.1 million square feet to a total of 1.7 million square feet. The change is summarized in the following table: (in thousands of square feet) Future retail properties under development pipeline – January 1, 2022 Add: Net adjustment to project densities Less: Completion of Earnouts and Developments Net change Future retail properties under development pipeline – December 31, 2022 Total Area 1,540 654 (511) 143 1,683 Uncommitted Retail Pipeline The following table summarizes the estimated future investment by the Trust in retail properties under development. It is expected the future development costs will be spent over the next five years and beyond: (in thousands of dollars) Years 0–2 Years 3–5 Beyond Year 5 Total Estimated Costs Costs Incurred Developments Earnouts 240,556 59,429 470,449 770,434 315,862 25,099 — 31,624 56,723 23,515 265,655 59,429 502,073 827,157 339,377 Future Development Costs 454,572 33,208 487,780 Approximately 6.9% of the retail properties under development, representing a proportion of gross investment cost (committed and uncommitted) relating to Earnouts ($65.7 million, divided by total estimated costs of $946.8 million), representing 121,000 square feet are lands that are under contract by vendors to develop and lease for additional proceeds when developed. In certain events, the developer may sell the portion of undeveloped land to accommodate the construction plan that provides the best use of the property. It is management’s intention to finance the costs of construction through interim financing or operating facilities and, once rental revenue is stabilized, long-term financing will be arranged. With respect to the remaining gross leasable area, it is expected that 1.6 million square feet of future space will be developed as the Trust leases space and finances the related construction costs. Completed and Future Earnouts and Developments on Existing Properties For the three months ended December 31, 2022, $87.5 million of Earnouts and Developments (including Developments relating to equity accounted investments) were completed and transferred to income properties, as compared to $9.1 million in the same period in 2021. Earnouts Retail Developments Redevelopment – transfers from properties under development to income properties Developments – equity accounted investments Self-storage facilities – equity accounted investments Three Months Ended December 31, 2022 Three Months Ended December 31, 2021 Area (sq. ft.) 26,450 7,439 47,189 165,348 140,268 386,694 Investment ($ millions) 1.1 4.0 1.1 56.4 24.9 87.5 Area (sq. ft.) — — 9,840 — 45,220 55,060 Investment ($ millions) — — 1.2 — 7.9 9.1 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 27 31 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2022, $131.6 million of Earnouts and Developments (including Developments relating to equity accounted investments) were completed and transferred to income properties, as compared to $94.6 million in the same period in 2021. Year Ended December 31, 2022 Year Ended December 31, 2021 Earnouts(1) Retail Developments Redevelopment – transfers from properties under development to income properties Developments – equity accounted investments Self-storage facilities – equity accounted investments Area (sq. ft.) 32,341 11,278 161,869 165,348 140,268 511,104 Investment ($ millions) 2.7 8.3 39.3 56.4 24.9 131.6 Area (sq. ft.) 47,631 5,379 142,217 12,032 182,752 390,011 Investment ($ millions) 14.7 3.1 30.4 13.0 33.4 94.6 (1) The Earnouts for the year ended December 31, 2022 excluded one land parcel sale totalling $5.6 million of investment and the area for this parcel sale is not reflected in the table above (for the year ended December 31, 2021: one land parcel sale totalling $4.7 million of investment was excluded). The following table summarizes future retail Developments, Earnouts and Mezzanine Financing as at December 31, 2022: Area (sq. ft.) Total Area (%) Income ($000s) Gross Commitment ($000s) Invested To Date ($000s) Net Commitment ($000s) Yield / Cap Rate (%) Developments Committed Developments 2023 2024 and beyond 71,952 4.3 1,073 170,347 10.1 4,889 Total Committed Developments 242,299 14.4 5,962 Uncommitted Developments 2023 2024 and beyond 159,919 9.5 2,063 1,159,682 68.9 24,758 Total Uncommitted Developments 1,319,601 78.4 26,821 23,270 (2) 87,329 (2) 110,599 51,287 (2) 419,162 (2) 470,449 1,561,900 92.8 32,783 581,048 11,118 (2) 29,711 (2) 40,829 33,793 (2) 120,794 (2) 154,587 195,416 (1) 12,152 57,617 69,769 17,494 298,368 315,862 4.6 (3) 5.6 (3) 5.4 4.0 (3) 5.9 (3) 5.7 385,631 5.6 Total Developments Earnouts Committed Earnouts 2022 2023 and beyond Total Committed Earnouts Uncommitted Earnouts 2022 2023 and beyond 17,205 747 17,952 9,181 93,823 1.1 — 1.1 524 23 547 0.5 5.6 6.1 138 2,045 2,183 8,656 357 9,013 2,079 29,544 31,623 4,718 1,096 5,814 421 7,687 8,108 Total Uncommitted Earnouts 103,004 Total Earnouts 120,956 7.2 2,730 40,636 13,922 (1) Total Before Non-cash Development Cost Non-cash development cost (4) Land / Intensification projects Equity accounted investments Total Options through Mezzanine Financing Total Potential Pipeline 1,682,856 100.0 35,513 621,684 1,682,856 100.0 35,513 621,684 488,440 2,171,296 209,338 16,388 (1) 1,527,773 (1) 582,875 (1) 2,336,374 (1) 3,938 (739) 3,199 1,658 21,858 23,516 26,715 412,346 6.1 6.5 6.1 6.7 6.9 6.9 6.7 5.7 412,346 5.7 (1) Under “Completed and Future Earnouts and Developments on Existing Properties” in the MD&A for the year ended December 31, 2022, Earnouts of $54.8 million, Developments of $1,698.7 million and Equity Accounted Investments of $582.9 million comprise the total amount of $2,336.4 million. The amounts in the table above have been adjusted for Earnouts that are expected to be completed after the expiry of the Earnout options being reclassified as Developments. Includes fair value adjustment for land. (2) (3) On a cost basis, the yield would be 4.5%, 5.4%, 3.5%, and 5.3%, respectively. (4) Represents net liability currently recorded. 28 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 32 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Section IV — Business Operations and Performance Results of Operations Below is a summary of selected financial information concerning the Trust’s operations for the year ended December 31, 2022. This information should be read in conjunction with the Trust’s consolidated financial statements for the year ended December 31, 2022. Proportionately Consolidated Balance Sheets (including the Trust’s interests in equity accounted investments) The following table presents the proportionately consolidated balance sheets, which includes a reconciliation of the Trust’s proportionate share of equity accounted investments: (in thousands of dollars) Year Ended December 31, 2022 Year Ended December 31, 2021 Proportionate Share Reconciliation (1) Total Proportionate Share(2) Proportionate Share Reconciliation (1) Total Proportionate Share(2) GAAP Basis GAAP Basis Assets Non-current assets Investment properties Equity accounted investments Mortgages, loans and notes receivable Other financial assets Other assets Intangible assets Current assets Assets held for sale Residential development inventory Current portion of mortgages, loans and notes receivable Amounts receivable and other Prepaid expenses, deposits and deferred financing costs Cash and cash equivalents Total assets Liabilities Non-current liabilities Debt Other financial liabilities Other payables Current liabilities Current portion of debt Accounts payable and current portion of other payables Total liabilities Equity Trust Unit equity Non-controlling interests 10,208,071 957,354 11,165,425 9,847,078 837,451 10,684,529 680,999 238,099 171,807 83,230 43,807 (680,999) — 654,442 (654,442) — (76,994) 161,105 345,089 (69,576) 275,513 — 171,807 8,977 — 92,207 43,807 97,148 80,940 45,139 — 7,465 — 97,148 88,405 45,139 11,426,013 208,338 11,634,351 11,069,836 120,898 11,190,734 42,321 40,373 86,593 57,124 14,474 35,255 16,050 113,207 58,371 153,580 — — — 27,399 67,828 95,227 — (7,033) 15,807 35,419 86,593 50,091 30,281 70,674 71,947 49,542 12,289 62,235 — (8,637) 13,118 7,922 71,947 40,905 25,407 70,157 276,140 173,450 449,590 223,412 80,231 303,643 11,702,153 381,788 12,083,941 11,293,248 201,129 11,494,377 4,523,987 212,928 4,736,915 4,176,121 93,465 4,269,586 277,400 17,265 — — 277,400 326,085 17,265 18,243 — — 326,085 18,243 4,818,652 212,928 5,031,580 4,520,449 93,465 4,613,914 459,278 63,860 523,138 678,406 35,086 713,492 261,122 720,400 105,000 168,860 366,122 253,078 72,578 325,656 889,260 931,484 107,664 1,039,148 5,539,052 381,788 5,920,840 5,451,933 201,129 5,653,062 5,126,197 1,036,904 6,163,101 — — — 5,126,197 1,036,904 4,877,961 963,354 6,163,101 5,841,315 — — — 4,877,961 963,354 5,841,315 Total liabilities and equity 11,702,153 381,788 12,083,941 11,293,248 201,129 11,494,377 (1) (2) Represents the Trust’s proportionate share of assets and liabilities in equity accounted investments. This column contains non-GAAP measures because it includes figures that are recorded in equity accounted investments. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 29 33 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Proportionately Consolidated Statements of Income and Comprehensive Income (including the Trust’s Interests in Equity Accounted Investments) The following tables present the proportionately consolidated statements of income and comprehensive income, which include a reconciliation of the Trust’s proportionate share of equity accounted investments: Quarterly Comparison to Prior Year (in thousands of dollars) Three Months Ended December 31, 2022 Three Months Ended December 31, 2021 GAAP Basis Proportionate Share Reconciliation Total Proportionate Share(1) GAAP Basis Proportionate Share Reconciliation Total Proportionate Share(1) Variance of Total Proportionate Share(1) Net rental income and other Rentals from investment properties and other 206,223 8,441 214,664 192,850 5,974 198,824 15,840 Property operating costs and other (77,062) (3,779) (80,841) (65,896) (3,144) (69,040) (11,801) 129,161 4,662 133,823 126,954 2,830 129,784 4,039 Condo and townhome closings revenue and other(2) Condo and townhome cost of sales and other — (10) (10) — (181) (181) — (191) (191) — — — — (67) (67) — (67) (67) — (124) (124) NOI 129,151 4,481 133,632 126,954 2,763 129,717 3,915 Other income and expenses General and administrative expense, net Earnings from equity accounted investments Fair value adjustment on revaluation of investment properties Gain (loss) on sale of investment properties Interest expense Interest income Supplemental costs Fair value adjustment on financial instruments Acquisition-related costs (7,790) (113) — 113 (7,790) — (8,703) (534) (9,237) 1,447 160,049 (160,049) — — 13,377 (1,418) 531 (40,342) 5,496 — — — — (3,846) 1,408 (738) — — 11,959 531 (44,188) 6,904 (738) 420,418 160,289 580,707 (568,748) (64) — (64) 595 (35,654) (1,355) (37,009) (7,179) 2,745 11 2,756 — (1,125) (1,125) 4,148 387 — — (10,873) (2,791) — — (10,873) 10,873 (2,791) 2,791 Net income and comprehensive income 100,310 — 100,310 652,081 — 652,081 (551,771) (1) (2) This column contains non-GAAP measures because it includes figures that are recorded in equity accounted investments. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. Includes additional partnership profit and other revenues. For the three months ended December 31, 2022, net income and comprehensive income (as noted in the table above) decreased by $551.8 million as compared to the same period in 2021. This decrease was primarily attributed to the following: • • $568.7 million decrease in fair value adjustments on revaluation of investment properties, including adjustments relating to assets held for sale, primarily due to increase in fair value of certain properties under development in Q4 2021 as a result of changes in the market and the progress made on planning entitlements (see details in the “Investment Property” section); and $7.2 million increase in interest expense (see further details in the “Interest Income and Interest Expense” subsection); Partially offset by the following: • $10.9 million increase in fair value adjustment on financial instruments primarily due to fluctuations in the Trust’s Unit price; $4.1 million increase in interest income mainly due to higher interest rates; $3.9 million increase in NOI (see further details in the “Net Operating Income” subsection); $2.8 million decrease in acquisition-related costs related to the SmartVMC West acquisition in 2021; and $1.4 million decrease in general and administrative expenses (net) (see further details in the “General and Administrative Expense” section). • • • • 30 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 34 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Year-to-Date Comparison to Prior Year (in thousands of dollars) Year Ended December 31, 2022 Year Ended December 31, 2021 GAAP Basis Proportionate Share Reconciliation Total Proportionate Share(1) GAAP Basis Proportionate Share Reconciliation Total Proportionate Share(1) Variance of Total Proportionate Share(1) Net rental income and other Rentals from investment properties and other Property operating costs and other Condo and townhome closings revenue and other(2) Condo and townhome cost of sales and other NOI Other income and expenses General and administrative expense, net Earnings from equity accounted investments Fair value adjustment on revaluation of investment properties Gain (loss) on sale of investment properties Interest expense Interest income Supplemental costs Fair value adjustment on financial instruments Acquisition-related costs 804,598 28,643 (301,559) (13,467) 503,039 15,176 833,241 (315,026) 518,215 780,796 21,530 802,326 30,915 (294,956) (9,719) (304,675) (10,351) 485,840 11,811 497,651 20,564 — 4,524 4,524 — 76,837 76,837 (72,313) (435) (435) (3,784) 740 (4,219) 305 — — (56,366) (56,366) 52,147 20,471 20,471 (20,166) 502,604 15,916 518,520 485,840 32,282 518,122 398 (33,269) (107) (33,376) (31,922) (610) (32,532) (844) 4,199 (4,199) — 211,420 (211,420) — — 201,834 315 624 (241) (148,702) (7,798) 18,036 453 — (4,648) 202,458 74 (156,500) 18,489 (4,648) 491,528 187,728 679,256 (476,798) 27 — 27 47 (144,540) (5,437) (149,977) (6,523) 12,341 75 12,416 6,073 — (2,618) (2,618) (2,030) 91,246 (298) — — 91,246 (34,227) (298) (2,791) — — (34,227) 125,473 (2,791) 2,493 Net income and comprehensive income 635,965 — 635,965 987,676 — 987,676 (351,711) (1) (2) This column contains non-GAAP measures because it includes figures that are recorded in equity accounted investments. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. Includes additional partnership profit and other revenues. For the year ended December 31, 2022, net income and comprehensive income (as noted in the table above) decreased by $351.7 million as compared to the same period in 2021. This decrease was primarily attributed to the following: • • • $476.8 million decrease in fair value adjustments on revaluation of investment properties primarily due to increase in fair value of certain properties under development in Q4 2021 as a result of changes in the market and the progress made on planning entitlements (see details in the “Investment Property” section); $6.5 million increase in interest expense (see further details in the “Interest Income and Interest Expense”); and $2.8 million increase in supplemental costs and in general and administrative expenses (net) (see further details in the “General and Administrative Expense” section); Partially offset by the following: • $125.5 million increase in fair value adjustment on financial instruments primarily due to fluctuations in the Trust’s Unit price and increase in fair value adjustments pertaining to interest rate swap agreements due to fluctuation in the interest rate (see further details in the “Debt” subsection); $6.1 million increase in interest income mainly due to higher interest rates; and $2.5 million decrease in acquisition-related costs related to the SmartVMC West acquisition in 2021. • • SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 31 35 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Net Operating Income The following tables summarize NOI, related ratios and recovery ratios, provide additional information, and reflect the Trust’s proportionate share of equity accounted investments, the sum of which represent a non-GAAP measure: Quarterly Comparison to Prior Year (in thousands of dollars) Three Months Ended December 31, 2022 Three Months Ended December 31, 2021 Trust portion excluding EAI Equity Accounted Investments Total Proportionate Share(1) (A) Trust portion excluding EAI Equity Accounted Investments Total Proportionate Share(1) (B) Variance of Total Proportionate Share(1) (A–B) 127,941 5,260 133,201 125,037 3,534 128,571 Net base rent Property tax and insurance recoveries Property operating cost recoveries Miscellaneous revenue Rentals from investment properties Service and other revenues Earnings from other Rentals from investment properties and other(2) Recoverable tax and insurance costs Recoverable CAM costs Property management fees and costs Non-recoverable operating costs ECL Property operating costs Other expenses Property operating costs and other(2) 42,833 25,552 4,979 201,305 4,547 371 206,223 (43,818) (28,662) (1,090) 266 792 807 1,574 1,171 8,812 — (371) 8,441 (755) (1,311) (314) (1,317) (82) (72,512) (3,779) (4,550) — (77,062) (3,779) 4,630 8,113 4,496 43,640 27,126 6,150 35,020 21,670 7,479 507 960 973 35,527 22,630 8,452 (2,302) 210,117 189,206 5,974 195,180 14,937 4,547 — 3,606 38 — — 3,606 38 941 (38) 214,664 192,850 5,974 198,824 15,840 (44,573) (29,973) (1,404) (1,051) 710 (76,291) (4,550) (80,841) (36,015) (25,165) (586) (2,094) 1,603 (547) (36,562) (1,051) (26,216) (215) (1,273) (58) (801) (3,367) 1,545 (8,011) (3,757) (603) 2,316 (835) (62,257) (3,144) (65,401) (10,890) (3,639) — (3,639) (911) (65,896) (3,144) (69,040) (11,801) Net rental income and other 129,161 4,662 133,823 126,954 2,830 129,784 4,039 Condo and townhome closings revenue Condo and townhome cost of sales Marketing and selling costs Net profit on condo and townhome closings — — (10) (10) — (181) — (181) — (181) (10) (191) — — — — — — (67) (67) — — (67) (67) — (181) 57 (124) NOI(3) 129,151 4,481 133,632 126,954 2,763 129,717 3,915 Net rental income and other as a percentage of net base rent (%) Net rental income and other as a percentage of rentals from investment properties (%) Net rental income and other as a percentage of rentals from investment properties and other (%) Recovery Ratio (including prior year adjustments) (%) Recovery Ratio (excluding prior year adjustments) (%) 101.0 88.6 100.5 101.5 80.1 100.9 64.2 52.9 63.7 67.1 47.4 66.5 62.6 55.2 94.4 115.2 91.5 132.8 62.3 94.9 92.7 65.8 47.4 65.3 92.7 91.8 92.6 92.6 114.9 93.0 (0.4) (2.8) (3.0) 2.3 (0.3) (1) (2) (3) This column contains non-GAAP measures because it includes figures that are recorded in equity accounted investments – that are not explicitly disclosed and/or presented in the consolidated financial statements for the years ended December 31, 2022 and December 31, 2021. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. As reflected under the column “Trust portion excluding EAI” in the table above, this amount represents a GAAP measure. Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. NOI for the three months ended December 31, 2022 increased by $3.9 million or 3.0% as compared to the same period in 2021. This increase was primarily attributed to the following: • • $4.6 million net increase in base rent, of which: i) $1.8 million relates to the acquisition of an additional interest in investment properties in Q1 2022, ii) $1.3 million relates to self-storage facility and apartment rentals, iii) $0.4 million relates to the Premium Outlet locations in both Toronto and Montreal, and iv) $1.1 million relates to other properties with lease-up, higher short-term and parking revenue; and $2.3 million decrease in non-recoverable operating costs mainly due to vaccination centre expenses; Partially offset by the following: • $2.3 million decrease in miscellaneous revenue mainly due to lower lease termination revenue. 32 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 36 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Year-to-Date Comparison to Prior Year (in thousands of dollars) Year Ended December 31, 2022 Year Ended December 31, 2021 Net base rent Property tax and insurance recoveries Property operating cost recoveries Miscellaneous revenue Trust portion excluding EAI Equity Accounted Investments Total Proportionate Share(1) Trust portion excluding EAI Equity Accounted Investments Total Proportionate Share(1) Variance of Total Proportionate Share(1) (A) (B) (A–B) 508,023 171,874 93,407 15,393 18,378 526,401 494,992 13,098 508,090 18,311 3,029 4,681 3,804 174,903 169,180 2,354 171,534 3,369 98,088 19,197 83,852 17,891 3,389 2,689 87,241 10,847 20,580 (1,383) Rentals from investment properties 788,697 29,892 818,589 765,915 21,530 787,445 31,144 Service and other revenues Earnings from other Rentals from investment properties and other(2) Recoverable tax and insurance costs Recoverable CAM costs Property management fees and costs Non-recoverable operating costs ECL 14,652 1,249 804,598 (176,876) (102,721) (4,288) (6,465) 3,448 (1,249) 28,643 (3,042) (4,535) (1,004) (4,695) (191) — 14,652 14,843 — 38 — — 14,843 38 (191) (38) 833,241 780,796 21,530 802,326 30,915 (179,918) (176,239) (2,360) (178,599) (1,319) (107,256) (91,468) (3,364) (94,832) (12,424) (5,292) (11,160) 3,257 (1,469) (7,246) (3,652) (688) (2,157) (3,253) (10,499) (54) (3,706) (3,135) (661) 6,963 Property operating costs (286,902) (13,467) (300,369) (280,074) (9,719) (289,793) (10,576) Other expenses Property operating costs and other(2) (14,657) — (14,657) (14,882) — (14,882) 225 (301,559) (13,467) (315,026) (294,956) (9,719) (304,675) (10,351) Net rental income and other 503,039 15,176 518,215 485,840 11,811 497,651 20,564 Condo and townhome closings revenue Condo and townhome cost of sales Marketing and selling costs Net profit on condo and townhome closings — — (435) (435) 4,524 (3,295) (489) 740 4,524 (3,295) (924) 305 — — — — 76,837 76,837 (72,313) (56,102) (56,102) 52,807 (264) (264) (660) 20,471 20,471 (20,166) NOI(3) 502,604 15,916 518,520 485,840 32,282 518,122 398 Net rental income and other as a percentage of net base rent (%) Net rental income and other as a percentage of rentals from investment properties (%) Net rental income and other as a percentage of rentals from investment properties and other (%) Recovery Ratio (including prior year adjustments) (%) Recovery Ratio (excluding prior year adjustments) (%) 99.0 82.6 63.8 50.8 62.5 53.0 94.9 101.8 94.2 100.9 98.4 63.3 62.2 95.1 94.4 98.1 90.2 97.9 63.4 54.9 63.2 62.2 54.9 62.0 94.5 100.3 94.6 0.5 0.1 0.2 0.5 94.6 103.3 94.8 (0.4) (1) (2) (3) This column contains non-GAAP measures because it includes figures that are recorded in equity accounted investments – that are not explicitly disclosed and/or presented in the consolidated financial statements for the years ended December 31, 2022 and December 31, 2021. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. As reflected under the column “Trust portion excluding EAI” in the table above, this amount represents a GAAP measure. Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. NOI for the year ended December 31, 2022 increased by $0.4 million or 0.1% as compared to the same period in 2021. This increase was primarily attributed to the following: • • $18.3 million net increase in base rent, of which: i) $6.0 million relates to the acquisition of an additional interest in investment properties in Q1 2022, ii) $3.9 million relates to self-storage facility and apartment rentals, iii) $2.1 million relates to the Premium Outlet locations in both Toronto and Montreal, and iv) $6.3 million relates to other properties with lease-up, higher short-term and parking revenue, and lower rent abatements provided in the comparable period; and $7.0 million decrease in expected credit losses principally due to settlement of certain tenant receivables; and Partially offset by the following: • • • $20.1 million decrease in net profit on condo and townhome unit closings; $3.1 million increase in property management fees and costs; and $1.4 million decrease in miscellaneous revenue mainly due to lower lease termination revenue. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 33 37 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Same Properties NOI NOI (a non-GAAP financial measure) from continuing operations represents: i) rentals from investment properties and other revenues less property operating costs and other expenses, and ii) net profit from condominium sales. Disclosing the NOI contribution from each of same properties, acquisitions, dispositions, Earnouts and Development activities highlights the impact each component has on aggregate NOI. Straight-line rent, lease terminations and other adjustments, and amortization of tenant incentives have been excluded from Same Properties NOI, as have NOI from acquisitions, dispositions, Earnouts and Development activities, and ECL. This has been done in order to more directly highlight the impact of changes in occupancy, rent uplift and productivity. Quarterly Comparison to Prior Year (in thousands of dollars) Net rental income Service and other revenues Other expenses NOI(1) NOI from equity accounted investments(1) Total portfolio NOI before adjustments(1) Adjustments: Royalties Straight-line rent Lease termination and other adjustments Net profit on condo and townhome closings(3) Amortization of tenant incentives Total portfolio NOI after adjustments(1) NOI sourced from: Acquisitions Dispositions Earnouts and Developments Same Properties NOI(1) Add back: ECL Same Properties NOI excluding ECL(1) Three Months Ended Three Months Ended December 31, 2022 December 31, 2021 Variance ($) Variance (%) 129,154 4,547 (4,550) 129,151 4,481 133,632 299 (34) (82) 190 2,026 136,031 (2,161) 3 (384) 133,489 (710) 132,779 126,987 3,606 (3,639) 126,954 2,763 129,717 285 (154) (3,476) 108 1,725 128,205 451 (280) — 128,376 (1,545) 126,831 2,167 941 (911) 2,197 1,718 3,915 14 120 3,394 82 301 7,826 (2,612) 283 (384) 5,113 835 5,948 1.7 26.1 25.0 1.7 62.2 3.0 4.9 (77.9) N/R(2) 75.9 17.4 6.1 N/R(2) (101.1) N/R(2) 4.0 (54.0) 4.7 (1) (2) (3) Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. N/R – Not representative. Includes marketing costs. “Same Properties” in the table above refers to those income properties that were owned by the Trust from October 1, 2021 to December 31, 2021 and from October 1, 2022 to December 31, 2022. The Same Properties NOI for the three months ended December 31, 2022 increased by $5.1 million or 4.0% as compared to the same period in 2021, which was primarily due to the following: • • $3.5 million increase in rental revenue mainly attributable to: i) $0.9 million higher retail rental revenue and percentage rent principally due to the Premium Outlet locations in both Toronto and Montreal, ii) $2.2 million increase in other properties due to lease-up, higher short-term and parking revenue, and iii) $0.4 million higher self-storage facility rental revenue; and $1.7 million decrease in non-recoverable operating costs primarily due to lower vaccination centre expenses. Excluding the impact of ECL, Same Properties NOI would have been $132.8 million representing an increase of $5.9 million or 4.7% as compared to the same period in 2021. 34 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 38 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT Year-to-Date Comparison to Prior Year (in thousands of dollars) Net rental income Service and other revenues Other expenses NOI(1) NOI from equity accounted investments(1) Total portfolio NOI before adjustments(1) Adjustments: Royalties Straight-line rent Lease termination and other adjustments Net profit on condo and townhome closings(3) Amortization of tenant incentives Total portfolio NOI after adjustments(1) Less NOI sourced from: Acquisitions Dispositions Earnouts and Developments Same Properties NOI(1) Add back: ECL Same Properties NOI excluding ECL(1) MANAGEMENT’S DISCUSSION AND ANALYSIS Year Ended Year Ended December 31, 2022 December 31, 2021 Variance ($) Variance (%) 502,609 14,652 (14,657) 502,604 15,916 518,520 1,115 (437) (214) (242) 7,646 526,388 (7,835) (9) (4,300) 514,244 (3,257) 510,987 485,879 14,843 (14,882) 485,840 32,282 518,122 960 (883) (5,240) (20,425) 7,614 500,148 524 (1,744) (1,142) 497,786 3,706 501,492 16,730 (191) 225 16,764 (16,366) 398 155 446 5,026 20,183 32 26,240 (8,359) 1,735 (3,158) 16,458 (6,963) 9,495 3.4 (1.3) 1.5 3.5 (50.7) 0.1 16.1 (50.5) (95.9) (98.8) 0.4 5.2 N/R(2) (99.5) N/R(2) 3.3 N/R(2) 1.9 (1) (2) (3) Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. N/R – Not representative. Includes marketing costs. “Same Properties” in the table above refers to those income properties that were owned by the Trust from January 1, 2021 to December 31, 2021 and from January 1, 2022 to December 31, 2022. The Same Properties NOI for the year ended December 31, 2022 increased by $16.5 million or 3.3% as compared to the same period in 2021, which was primarily due to the following: • • $11.4 million increase in rental revenue mainly attributable to: i) $4.7 million higher retail rental revenue and percentage rent due principally to the Premium Outlet locations in both Toronto and Montreal, ii) $5.5 million increase in other properties due to lease-up, higher short-term and parking revenue, and iii) $1.2 million higher self-storage facility rental revenue; and $7.0 million decrease in expected credit losses, which was higher in the comparative period to reflect the continued impact of the COVID-19 pandemic; Partially offset by the following: • $1.9 million increase in non-recoverable operating costs primarily due to management fees, costs related to marketing and non-retail expenses from self-storage properties and apartments. Excluding the impact of ECL, Same Properties NOI would have been $511.0 million representing an increase of $9.5 million or 1.9% as compared to the same period in 2021. Due to the various uncertainties pertaining to the COVID-19 pandemic, management is unable to reliably and accurately predict the impact it will have on certain aspects of results of operations, including Annual Run-Rate NOI and the related sensitivity analysis at this time. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 35 39 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Adjusted EBITDA The following table presents a reconciliation of net income and comprehensive income to Adjusted EBITDA: (in thousands of dollars) Net income and comprehensive income Add (deduct) the following items: Interest expense Interest income Amortization of equipment and intangible assets Amortization of tenant improvements Fair value adjustments on revaluation of investment properties Fair value adjustments on revaluation of financial instruments Fair value adjustment on TRS Adjustment for supplemental costs Gain on sale of investment properties Gain on sale of land to co-owners (Transactional FFO) Acquisition-related costs Adjusted EBITDA(1) Less: Condo and townhome closings Add: ECL 12 Months Ended 12 Months Ended December 31, 2022 December 31, 2021 635,965 987,676 Variance ($) (351,711) 156,500 (18,036) 3,604 7,474 (202,458) (91,246) (4,918) 4,648 (74) — 298 491,757 (305) (3,257) 149,977 (12,341) 3,778 7,872 (679,256) 34,227 5,642 2,618 (27) 1,923 2,791 504,880 (20,471) 3,706 6,523 (5,695) (174) (398) 476,798 (125,473) (10,560) 2,030 (47) (1,923) (2,493) (13,123) 20,166 (6,963) Adjusted EBITDA excluding condo and townhome closings and ECL(1) 488,195 488,115 80 (1) Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. 36 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 40 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Other Measures of Performance The following measures of performance are sometimes used by Canadian REITs and other reporting entities as indicators of financial performance. Because these measures are not standardized as prescribed by IFRS, they may not be comparable to similar measures presented by other reporting entities. Management uses these measures to analyze operating performance. Because one of the factors that may be considered relevant by prospective investors is the cash distributed by the Trust relative to the price of the Units, management believes these measures are useful supplemental measures that may assist prospective investors in assessing an investment in Units. The Trust analyzes its cash distributions against these measures to assess the stability of the monthly cash distributions to Unitholders. These measures are not intended to represent operating profits for the year; nor should they be viewed as an alternative to net income and comprehensive income, cash flows from operating activities or other measures of financial performance calculated in accordance with IFRS. The calculations are derived from the consolidated financial statements for the years ended December 31, 2022 and December 31, 2021, unless otherwise stated, do not include any assumptions and forward-looking information, and are consistent with prior reporting years. Funds From Operations FFO is a non-GAAP financial measure of operating performance widely used by the Canadian real estate industry based on the definition set forth by REALpac, which published a White Paper describing the intended use of FFO, last revised in January 2022. It is the Trust’s view that IFRS net income does not necessarily provide a complete measure of the Trust’s recurring operating performance. This is primarily because IFRS net income includes items such as fair value changes of investment property that are subject to market conditions and capitalization rate fluctuations and gains and losses on the disposal of investment properties, including associated transaction costs and taxes, which management believes are not representative of a company’s economic earnings. For these reasons, the Trust has adopted REALpac’s definition of FFO, which was created by the real estate industry as a supplemental measure of operating performance. FFO is computed as IFRS consolidated net income and comprehensive income attributable to Unitholders adjusted for items such as, but not limited to, unrealized changes in the fair value of investment properties and financial instruments and transaction gains and losses on the acquisition or disposal of investment properties calculated on a basis consistent with IFRS. FFO should not be construed as an alternative to net income and comprehensive income or cash flows provided by or used in operating activities determined in accordance with IFRS. The Trust’s method of calculating FFO is in accordance with REALpac’s recommendations, but may differ from other issuers’ methods and, accordingly, may not be comparable to FFO reported by other issuers. The following tables present FFO excluding anomalous transactions: (in thousands of dollars) FFO with adjustments(1) Adjusted for: ECL Three Months Ended December 31 Year Ended December 31 2022 2021 Variance ($) 2022 2021 Variance ($) 100,561 98,112 2,449 372,228 383,296 (11,068) (710) (1,545) 835 (3,257) 3,706 (6,963) Loss (gain) on derivative – TRS (6,221) (4,180) (2,041) 4,918 (5,642) FFO sourced from condominium and townhome closings FFO sourced from SmartVMC West acquisition 180 (371) 66 — 114 (371) (680) (18,747) (984) — (984) 10,560 18,067 FFO with adjustments excluding impact of ECL, TRS, condominium and townhome closings, and SmartVMC West acquisition(1) 93,439 92,453 986 372,225 362,613 9,612 (1) Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. Per Unit Information (Basic/Diluted) FFO with adjustments(1) FFO with adjustments and Transactional FFO(1) FFO with adjustments excluding impact of ECL, TRS, condominium and townhome closings, and SmartVMC West acquisition(1) Three Months Ended December 31 Year Ended December 31 2022 2021 Variance ($) 2022 2021 Variance ($) $0.56/$0.56 $0.57/$0.56 $-0.01/$0.00 $2.09/$2.07 $2.22/$2.21 $-0.13/$-0.14 $0.61/$0.60 $0.57/$0.56 0.04/0.04 $2.13/$2.11 $2.23/$2.22 -0.10/-0.11 $0.54/$0.54 $0.54/$0.53 $0.00/$0.01 $2.16/$2.14 $2.10/$2.09 $0.06/$0.05 (1) Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 37 41 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS The tables and analyses below illustrate a reconciliation of the Trust’s net income and comprehensive income (GAAP measures) to FFO (non-GAAP measures). Quarterly Comparison to Prior Year (in thousands of dollars, except per Unit amounts) December 31, 2022 December 31, 2021 Variance ($) Variance (%) Net income and comprehensive income 100,310 652,081 (551,771) (84.6) Three Months Ended Three Months Ended Add (deduct): Fair value adjustment on revaluation of investment properties(1) Fair value adjustment on financial instruments(2) (Loss) gain on derivative – TRS Loss (gain) on sale of investment properties Amortization of intangible assets Amortization of tenant improvement allowance and other Distributions on Units classified as liabilities recorded as interest expense Distributions on vested deferred units recorded as interest expense Salaries and related costs attributed to leasing activities(3) Acquisition-related costs Adjustments relating to equity accounted investments: Rental revenue adjustment – tenant improvement amortization Indirect interest with respect to the development portion(4) Fair value adjustment on revaluation of investment properties Adjustment for supplemental costs FFO(5) Other non-recurring adjustments(6) FFO with adjustments(5) Transactional FFO – gain on sale of land to co-owners FFO with adjustments and Transactional FFO(5) (13,377) (420,418) 407,041 — 6,221 (531) 333 2,005 1,083 724 1,514 — 98 1,935 1,418 738 102,471 (1,910) 100,561 7,662 108,223 10,873 4,180 64 333 1,608 1,008 1,045 1,063 2,791 (10,873) 2,041 (595) — 397 75 (321) 451 (2,791) 62 1,926 36 9 (160,289) 161,707 1,125 97,452 660 98,112 336 98,448 (387) 5,019 (2,570) 2,449 7,326 9,775 (96.8) N/R(7) 48.8 N/R(7) — 24.7 7.4 (30.7) 42.4 N/R(7) 58.1 0.5 N/R(7) (34.4) 5.2 N/R(7) 2.5 N/R(7) 9.9 (1) (2) (3) (4) (5) (6) (7) Fair value adjustment on revaluation of investment properties is described in “Investment Properties”. Fair value adjustment on financial instruments comprises the following financial instruments: units classified as liabilities, Earnout options, deferred unit plan (“DUP”), equity incentive plan (“EIP”), long term incentive plan (“LTIP”), TRS, interest rate swap agreement(s), and loans receivable and Earnout options recorded in the same period in 2021. The significant assumptions made in determining the fair value and fair value adjustments for these financial instruments are more thoroughly described in the Trust’s consolidated financial statements for the year ended December 31, 2022. For details, please see discussion in “Results of Operations” above. Salaries and related costs attributed to leasing activities of $1.5 million were incurred in the three months ended December 31, 2022 (three months ended December 31, 2021 – $1.1 million) and were eligible to be added back to FFO based on the definition of FFO, in the REALpac White Paper published in January 2022, which provided for an adjustment to incremental leasing expenses for the cost of salaried staff. This adjustment to FFO results in more comparability between Canadian publicly traded real estate entities that expensed their internal leasing departments and those that capitalized external leasing expenses. Indirect interest is not capitalized to properties under development and residential development inventory of equity accounted investments under IFRS but is a permitted adjustment under REALpac’s definition of FFO. The amount is based on the total cost incurred with respect to the development portion of equity accounted investments multiplied by the Trust’s weighted average cost of debt. Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. Represents adjustments relating to $1.9 million of reversal of costs associated with COVID-19 vaccination centres (three months ended December 31, 2021 – $0.7 million of costs associated with COVID-19 vaccination centres). N/R – Not representative. For the three months ended December 31, 2022, FFO increased by $5.0 million or 5.2% to $102.5 million. This increase was primarily attributed to: ; • • • • $4.1 million increase in interest income; $3.9 million increase in NOI (see details in the “Net Operating Income” subsection); $2.0 million decrease in net general and administrative expense; and $2.0 million increase in gain on TRS resulting from fluctuations in the Trust’s Unit price; Partially offset by: • $7.2 million net increase in interest expense. 38 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 42 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS For the three months ended December 31, 2022, FFO with adjustments increased by $2.4 million or 2.5% to $100.6 million as compared to the same period in 2021, which was primarily due to the items previously identified plus the $2.6 million decrease in the other adjustments. The following table presents per Unit FFO and per Unit FFO with certain adjustments (non-GAAP measure): Three Months Ended Three Months Ended December 31, 2021 December 31, 2022 Variance ($) Variance (%) Per Unit – basic/diluted(1): FFO(2) FFO excluding impact of TRS(2) FFO with adjustments(2) FFO with adjustments and Transactional FFO(2) FFO with adjustments excluding impact of ECL, TRS, condominium and townhome closings, and SmartVMC West acquisition(2)(3) $0.58/$0.57 $0.54/$0.54 $0.56/$0.56 $0.61/$0.60 $0.56/$0.56 0.02/0.01 $0.54/$0.54 —/— $0.57/$0.56 -0.01/— $0.57/$0.56 0.04/0.04 3.6/1.8 —/— -1.8/— 7.0/7.1 $0.54/$0.54 $0.54/$0.53 —/0.01 —/1.9 (1) (2) (3) Diluted FFO is adjusted for the dilutive effect of vested deferred units, which are not dilutive for net income purposes. The calculation of diluted FFO is a non-GAAP measure and does not consider the impact of unvested deferred units. To calculate diluted FFO for the three months ended December 31, 2022, 1,567,944 vested deferred units are added back to the weighted average Units outstanding (three months ended December 31, 2021 – 1,397,164 vested deferred units). Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. For the three months ended December 31, 2022, FFO with adjustments excludes the earnings from SmartVMC West of $0.4 million, and the per Unit calculation excludes the corresponding 5,797,101 SmartVMC West LP Class D Units (three months ended December 31, 2021 – 693,131 SmartVMC West LP Class D Units). Year-to-Date Comparison to Prior Year (in thousands of dollars, except per Unit amounts) Net income and comprehensive income Add (deduct): Fair value adjustment on revaluation of investment properties(1) Fair value adjustment on financial instruments(2) (Loss) gain on derivative – TRS Loss (gain) on sale of investment properties Amortization of intangible assets Amortization of tenant improvement allowance and other Distributions on Units classified as liabilities recorded as interest expense Distributions on vested deferred units recorded as interest expense Adjustment on debt modification Salaries and related costs attributed to leasing activities(3) Acquisition-related costs Adjustments relating to equity accounted investments: Rental revenue adjustment – tenant improvement amortization Indirect interest with respect to the development portion(4) Adjustment to capitalized interest with respect to Transit City condo closings(4) Fair value adjustment on revaluation of investment properties Loss on sale of investment properties Adjustment for supplemental costs FFO(5) Other non-recurring adjustments(6) FFO with adjustments(5) Transactional FFO – gain on sale of land to co-owners FFO with adjustments and Transactional FFO(5) Year Ended December 31, 2022 Year Ended December 31, 2021 Variance ($) Variance (%) 635,965 987,676 (351,711) (35.6) (201,834) (91,246) (4,918) (315) 1,332 7,203 4,293 2,847 (1,960) 7,508 298 387 7,747 — (624) 241 4,648 371,572 656 372,228 7,662 379,890 (491,528) 289,694 34,227 (125,473) 5,642 (10,560) (271) 1,331 7,038 3,919 2,424 — 5,196 2,791 360 7,050 (675) (44) 1 165 374 423 (1,960) 2,312 (2,493) 27 697 675 (187,728) 187,104 — 2,618 380,070 3,226 241 2,030 (8,498) (2,570) 383,296 (11,068) 1,923 385,219 5,739 (5,329) (58.9) N/R(7) N/R(7) 16.2 0.1 2.3 9.5 17.5 N/R(7) 44.5 (89.3) 7.5 9.9 N/R(7) (99.7) N/R(7) 77.5 (2.2) (79.7) (2.9) N/R(7) (1.4) (1) (2) (3) Fair value adjustment on revaluation of investment properties is described in “Investment Properties”. Fair value adjustment on financial instruments comprises the following financial instruments: units classified as liabilities, Earnout options, DUP, EIP, LTIP, TRS, interest rate swap agreement(s), and loans receivable and Earnout options recorded in the same period in 2021. The significant assumptions made in determining the fair value and fair value adjustments for these financial instruments are more thoroughly described in the Trust’s consolidated financial statements for the year ended December 31, 2022. For details, please see discussion in “Results of Operations” above. Salaries and related costs attributed to leasing activities of $7.5 million were incurred in the year ended December 31, 2022 (year ended December 31, 2021 – $5.2 million) and were eligible to be added back to FFO based on the definition of FFO, in the REALpac White Paper published in January 2022, which provided for an adjustment to incremental leasing SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 39 43 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS expenses for the cost of salaried staff. This adjustment to FFO results in more comparability between Canadian publicly traded real estate entities that expensed their internal leasing departments and those that capitalized external leasing expenses. Indirect interest is not capitalized to properties under development and residential development inventory of equity accounted investments under IFRS but is a permitted adjustment under REALpac’s definition of FFO. The amount is based on the total cost incurred with respect to the development portion of equity accounted investments multiplied by the Trust’s weighted average cost of debt. Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. Represents adjustments relating to $0.7 million of costs associated with COVID-19 vaccination centres (year ended December 31, 2021 – $0.9 million of compensation costs relating to previous CEO and $2.3 million of costs associated with COVID-19 vaccination centres). N/R – Not representative. (4) (5) (6) (7) For the year ended December 31, 2022, FFO decreased by $8.5 million or 2.2% to $371.6 million. This decrease was primarily attributed to: • • $10.6 million decrease in gain on TRS resulting from fluctuations in the Trust’s Unit price; and $20.2 million decrease in Net Condo and townhome closing income; Partially offset by:; • $20.6 million increase in Net Rental Income from investment properties. For the year ended December 31, 2022, FFO with adjustments decreased by $11.1 million or 2.9% to $372.2 million as compared to the same period in 2021, which was primarily due to the items previously identified. The following table presents per Unit FFO and per Unit FFO with certain adjustments (non-GAAP measure): Per Unit – basic/diluted(1): FFO(2) FFO excluding impact of TRS(2) FFO with adjustments(2) FFO with adjustments and Transactional FFO(2) FFO with adjustments excluding impact of ECL, TRS, condominium and townhome closings, and SmartVMC West acquisition(2)(3) Year Ended Year Ended December 31, 2022 December 31, 2021 Variance ($) Variance (%) $2.09/$2.07 $2.11/$2.10 $2.09/$2.07 $2.13/$2.11 $2.20/$2.19 -0.11/-0.12 $2.17/$2.16 -0.06/-0.06 $2.22/$2.21 -0.13/-0.14 $2.23/$2.22 -0.10/-0.11 -5.0/-5.5 -2.8/-2.8 -5.9/-6.3 -4.5/-5.0 $2.16/$2.14 $2.10/$2.09 0.06/0.05 2.9/2.4 (1) (2) (3) Diluted FFO is adjusted for the dilutive effect of vested deferred units, which are not dilutive for net income purposes. The calculation of diluted FFO is a non-GAAP measure and does not consider the impact of unvested deferred units. To calculate diluted FFO for the year ended December 31, 2022, 1,536,306 vested deferred units are added back to the weighted average Units outstanding (year ended December 31, 2021 – 1,301,485 vested deferred units). Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. For the year ended December 31, 2022, FFO with adjustments excludes the earnings from SmartVMC West of $1.0 million, and the per Unit calculation excludes the corresponding 5,797,101 SmartVMC West LP Class D Units (year ended December 31, 2021 – 174,707 SmartVMC West LP Class D Units). 40 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 44 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Weighted Average Number of Units The weighted average number of Trust Units and exchangeable LP Units is used in calculating the Trust’s net income and comprehensive income per Unit, net income and comprehensive income excluding fair value adjustments per Unit, and FFO per Unit. The corresponding diluted per Unit amounts are adjusted for the dilutive effect of the vested portion of deferred units granted under the Trust’s DUP unless they are anti-dilutive. To calculate diluted FFO per Unit for the years ended December 31, 2022 and December 31, 2021, vested deferred units are added back to the weighted average Units outstanding because they are dilutive. The following table sets forth the weighted average number of Units outstanding including and excluding SmartVMC West LP Class D Units for the purposes of FFO per Unit and net income and comprehensive income per Unit calculations in this MD&A: (number of Units) Trust Units Class B LP Units Class D LP Units Class F LP Units Class B LP II Units Class B LP III Units Class B LP IV Units Class B Oshawa South LP Units Class D Oshawa South LP Units Class B Oshawa Taunton LP Units Three Months Ended December 31 Year Ended December 31 2022 2021 Variance 2022 2021 Variance 144,625,322 144,621,347 3,975 144,625,322 144,619,385 16,424,430 16,424,430 — 16,424,430 16,419,964 311,022 311,022 8,708 8,708 756,525 756,525 — — — 311,022 311,022 8,708 8,708 756,525 756,525 4,057,948 4,039,184 18,764 4,052,908 4,034,079 3,112,565 3,093,910 18,655 3,109,754 3,087,565 710,416 260,417 374,223 710,416 260,417 374,223 — — — 710,416 260,417 374,223 710,416 260,417 374,223 5,937 4,466 — — — 18,829 22,189 — — — Class D Series 1 VMC West LP Units Class D Series 2 VMC West LP Units (A) (B) 3,623,188 433,207 3,189,981 3,623,188 109,192 3,513,996 2,173,913 259,924 1,913,989 2,173,913 65,515 2,108,398 Class B Boxgrove LP Units Class B Series ONR LP Units Class B Series 1 ONR LP I Units Class B Series 2 ONR LP I Units Total Exchangeable LP Units Total Units – Basic Vested deferred units Total Units and vested deferred units – Diluted 170,000 170,000 1,248,140 1,248,140 132,881 139,302 132,881 139,302 — — — — 170,000 170,000 1,248,140 1,248,140 132,881 139,302 132,881 139,302 — — — — 33,503,678 28,362,289 5,141,389 33,495,827 27,827,949 5,667,878 (C) 178,129,000 172,983,636 5,145,364 178,121,149 172,447,334 5,673,815 1,567,944 1,397,164 170,780 1,536,306 1,301,485 234,821 (D) 179,696,944 174,380,800 5,316,144 179,657,455 173,748,819 5,908,636 Total Units excluding SmartVMC West LP Class D Units – Basic (E = C - A - B) Total Units and vested deferred units excluding SmartVMC West LP Class D Units – Diluted (F = D - A - B) 172,331,899 172,290,505 41,394 172,324,048 172,272,627 51,421 173,899,843 173,687,669 212,174 173,860,354 173,574,112 286,242 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 41 45 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Adjusted Cashflow From Operations ACFO is a non-GAAP financial measure of operating performance and may not be comparable to similar measures used by other real estate entities. The Trust calculates its ACFO in accordance with REALpac’s “White Paper on Adjusted Cashflow From Operations (ACFO)” for IFRS published in February 2019. The purpose of the White Paper is to provide reporting issuers and stakeholders with greater guidance on the definitions of ACFO and to help promote more consistent disclosure from reporting issuers. ACFO is intended to be used as a sustainable and economic cash flow metric. The Trust considers ACFO an input to determine the appropriate level of distributions to Unitholders as it adjusts cash flows from operations to better measure sustainable, economic cash flows. Prior to the initial issuance of the February 2017 White Paper on ACFO, there was no industry standard to calculate a sustainable, economic cash flow metric. While the Trust calculates ACFO in accordance with the White Paper, other issuers may not. Accordingly, the Trust’s method of calculating ACFO may differ from the methods used by other issuers. The following table presents ACFO excluding anomalous transactions: (in thousands of dollars) ACFO with adjustments(1) Adjusted for: Three Months Ended December 31 Year Ended December 31 2022 2021 Variance ($) 2022 2021 Variance ($) 91,081 83,973 7,108 340,731 356,281 (15,550) Loss (gain) on derivative – TRS (6,221) (4,180) (2,041) 4,918 (5,642) 10,560 ACFO sourced from condominium and townhome closings ACFO sourced from SmartVMC West acquisition 191 (371) 67 — 124 (305) (20,471) 20,166 (371) (984) — (984) ACFO with adjustments excluding impact of TRS, condominium and townhome closings, and SmartVMC West acquisition(1) 84,680 79,860 4,820 344,360 330,168 14,192 (1) Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. 42 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 46 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT The tables and analyses below illustrate a reconciliation of the Trust’s cash flows provided by operating activities (GAAP measure) to ACFO (non-GAAP measure). MANAGEMENT’S DISCUSSION AND ANALYSIS Three Months Ended December 31, 2022 Three Months Ended December 31, 2021 Variance ($)/ (%) 994 133,674 Quarterly Comparison to Prior Year (in thousands of dollars) Cash flows provided by operating activities Adjustments to working capital items that are not indicative of sustainable cash available for distribution(1) Distributions on Units classified as liabilities recorded as interest expense Distributions on vested deferred units recorded as interest expense Expenditures on direct leasing costs and tenant incentives Expenditures on tenant incentives for properties under development Actual sustaining capital expenditures Actual sustaining leasing commissions Actual sustaining tenant improvements Non-cash interest expense, net of other financing costs Non-cash interest income Acquisition-related costs, net Gain on sale of land to co-owners Distributions from equity accounted investments Adjustments relating to equity accounted investments: Cash flows from operating activities including working capital adjustments Notional interest capitalization(2) Actual sustaining capital and leasing expenditures Non-cash interest expense ACFO(3) Other non-recurring adjustments(4) ACFO with adjustments(3) ACFO(3) Distributions declared Surplus of ACFO over distributions declared Payout Ratio Information: Payout Ratio to ACFO(3) Payout Ratio to ACFO with adjustments(3) Payout Ratio to ACFO with adjustments excluding impact of TRS, condominium and townhome closings, and SmartVMC West acquisition(3)(5) 134,668 (35,451) 1,083 724 3,108 (646) (11,434) (800) (2,587) 10,238 (29,571) — 7,662 12,406 1,658 1,935 1 (3) 92,991 (1,910) 91,081 92,991 82,386 10,605 88.6 % 90.5 % 94.1 % (48,678) 13,227 1,008 1,045 2,050 — (10,323) (742) (1,217) 9,594 (7,110) 2,791 336 (732) (236) 1,926 (103) 30 83,313 660 83,973 83,313 79,725 3,588 75 (321) 1,058 (646) (1,111) (58) (1,370) 644 (22,461) (2,791) 7,326 13,138 1,894 9 104 (33) 9,678 (2,570) 7,108 9,678 2,661 7,017 95.7 % 94.9 % (7.1) % (4.4) % 99.8 % (5.7) % (1) (2) (3) (4) (5) Adjustments to working capital items include, but are not limited to, changes in prepaid expenses and deposits, accounts receivables, accounts payables and other working capital items that are not indicative of sustainable cash available for distribution. See the “Indirect interest with respect to the development portion” as presented in the “Funds From Operations” subsection above for more information. Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. Represents adjustments relating to $1.9 million of reversal of costs associated with COVID-19 vaccination centres (three months ended December 31, 2021 – $0.7 million of costs associated with COVID-19 vaccination centres). For the three months ended December 31, 2022, excludes $2.7 million of distributions declared in connection with SmartVMC West LP Class D Units (three months ended December 31, 2021 – $0.04 million). For the three months ended December 31, 2022, ACFO with adjustments increased by $7.1 million, which was primarily due to the increase of FFO with adjustments and Transactional FFO, offset by increases in actual sustaining capital expenditures, leasing commissions and tenant improvements. The Payout Ratio to ACFO for the three months ended December 31, 2022 decreased by 7.1% to 88.6% as compared to the same period in 2021, which was primarily due to the items previously identified. The Payout Ratio to ACFO with adjustments excluding impact of TRS, condominium and townhome closings, and the SmartVMC West acquisition for the three months ended December 31, 2022 decreased by 5.7% to 94.1% as compared to the same period in 2021. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 43 47 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Year-to-Date Comparison to Prior Year (in thousands of dollars) Cash flows provided by operating activities Adjustments to working capital items that are not indicative of sustainable cash available for distribution(1) Distributions on Units classified as liabilities recorded as interest expense Distributions on vested deferred units recorded as interest expense Expenditures on direct leasing costs and tenant incentives Expenditures on tenant incentives for properties under development Actual sustaining capital expenditures Actual sustaining leasing commissions Actual sustaining tenant improvements Non-cash interest expense, net of other financing costs Non-cash interest income Acquisition-related costs, net Gain on sale of land to co-owners Distributions from equity accounted investments Adjustments relating to equity accounted investments: Cash flows from operating activities including working capital adjustments Notional interest capitalization(2) Adjustment to capitalized interest with respect to Transit City condo closings(2) Actual sustaining capital and leasing expenditures Non-cash interest expense ACFO(3) Other non-recurring adjustments(4) ACFO with adjustments(3) ACFO(3) Distributions declared Surplus of ACFO over distributions declared Payout Ratio Information: Payout Ratio to ACFO(3) Payout Ratio to ACFO with adjustments(3) Payout Ratio to ACFO with adjustments excluding impact of TRS, condominium and townhome closings, and SmartVMC West acquisition(3)(5) Year Ended December 31, 2022 Year Ended December 31, 2021 370,762 371,624 Variance ($)/ (%) (862) (2,293) 4,293 2,847 9,860 1,897 (19,111) (2,389) (7,796) (9,156) (26,083) 298 7,662 (4,784) 6,662 7,747 — (329) (12) 340,075 656 340,731 340,075 329,531 10,544 (40,796) 38,503 3,919 2,424 5,927 730 (17,331) (3,071) (2,903) 7,160 (5,307) 2,791 1,923 (4,072) 23,819 7,050 (675) (207) 50 353,055 3,226 356,281 353,055 318,753 34,302 374 423 3,933 1,167 (1,780) 682 (4,893) (16,316) (20,776) (2,493) 5,739 (712) (17,157) 697 675 (122) (62) (12,980) (2,570) (15,550) (12,980) 10,778 (23,758) 96.9 % 96.7 % 92.6 % 90.3 % 89.5 % 6.6 % 7.2 % 96.5 % (3.9) % (1) (2) (3) (4) (5) Adjustments to working capital items include, but are not limited to, changes in prepaid expenses and deposits, accounts receivables, accounts payables and other working capital items that are not indicative of sustainable cash available for distribution. See the “Indirect interest with respect to the development portion” as presented in the “Funds From Operations” subsection above for more information. Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. Represents adjustments relating to $0.7 million of costs associated with COVID-19 vaccination centres (year ended December 31, 2021 – $0.9 million of compensation costs relating to previous CEO, and $2.3 million of costs associated with COVID-19 vaccination centres). For the year ended December 31, 2022, excludes $10.7 million of distributions declared in connection with SmartVMC West LP Class D Units (year ended December 31, 2021 – $0.04 million). For the year ended December 31, 2022, ACFO with adjustments decreased by $15.6 million, which was primarily due to the decrease of FFO with adjustments and Transactional FFO as well as increases in actual sustaining capital expenditures, leasing commissions and tenant improvements, and other. The Payout Ratio to ACFO for the year ended December 31, 2022 increased by 6.6% to 96.9% as compared to the same period in 2021, which was primarily due to the items previously identified. The Payout Ratio to ACFO with adjustments excluding impact of TRS, condominium and townhome closings, and the SmartVMC West acquisition for the year ended December 31, 2022 decreased by 3.9% to 92.6% as compared to the same period in 2021. 44 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 48 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Determination of Distributions Pursuant to the Trust’s declaration of trust (the “Declaration of Trust”) the Trust endeavours to distribute annually such amount as is necessary to ensure the Trust will not be subject to tax on its net income under Part I of the Income Tax Act (Canada). The Board of Trustees determines the Trust’s Unit cash distribution rate by, among other considerations, its assessment of cash flow as determined using certain non-GAAP measures. As such, management believes the cash distributions are not an economic return of capital, but a distribution of sustainable cash flow from operations. Given both existing ACFO and distribution levels, and current facts and assumptions, the Board of Trustees has indicated that barring any unexpected events, the Trust currently intends to maintain its monthly cash distribution levels. In any given period, the distributions declared may differ from cash provided by operating activities, primarily due to seasonal fluctuations in non-cash operating items (amounts receivable, prepaid expenses, deposits, accounts payable and accrued liabilities). These seasonal or short-term fluctuations are funded, if necessary, by the Trust’s revolving operating facility. In addition, the distributions declared previously included a component funded by the DRIP which was suspended by the Board of Trustees effective April 13, 2020. The Board of Trustees anticipates that distributions declared will, in the foreseeable future, continue to vary from net income and comprehensive income because net income and comprehensive income include fair value adjustments to investment properties, fair value changes in financial instruments, and other adjustments, and also because distributions are determined based on non-GAAP cash flow measures, which include consideration of the maintenance capital requirements. Accordingly, the Trust does not use IFRS net income and comprehensive income as a proxy for distributions. Distributions and ACFO Highlights (in thousands of dollars) 2022 2021 Variance ($) 2022 2021 Variance ($) Three Months Ended December 31 Year Ended December 31 Cash flows provided by operating activities 134,668 133,674 994 370,762 371,624 Distributions declared ACFO(1) Surplus of cash flows provided by operating activities over distributions declared Surplus of ACFO over distributions declared Cash flows provided by operating activities excluding impact of SmartVMC West LP Distributions declared excluding impact of SmartVMC West LP Class D distributions ACFO excluding impact of SmartVMC West LP(1) Surplus of cash flows provided by operating activities over distributions declared excluding impact of SmartVMC West LP Class D distributions Surplus of ACFO over distributions declared excluding impact of SmartVMC West LP Class D distributions 82,386 92,991 52,282 10,605 79,725 83,313 53,949 3,588 2,661 329,531 318,753 9,678 340,075 353,055 (1,667) 41,231 7,017 10,544 52,871 34,302 (862) 10,778 (12,980) (11,640) (23,758) 134,297 133,674 623 369,778 371,624 (1,846) 79,705 92,620 79,687 83,313 18 318,806 318,715 91 9,307 339,091 353,055 (13,964) 54,592 53,987 605 50,972 52,909 (1,937) 12,915 3,626 9,289 20,285 34,340 (14,055) (1) Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. For the three months and year ended December 31, 2022, there was a surplus of cash flows provided by operating activities over distributions declared, and a surplus of ACFO over distributions declared. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 45 49 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS The following tables illustrate: i) the annualized surplus of cash flows provided by operating activities over distributions declared, ii) ACFO, and iii) ACFO-related payout ratios, for the rolling 24 months ended December 31, 2022 and December 31, 2021: (in thousands of dollars) Cash flows provided by operating activities Distributions declared ACFO(1) Surplus of cash provided by operating activities over distributions declared Surplus of ACFO over distributions declared Payout Ratio to Cash flows provided by operating activities Payout Ratio to ACFO(1) Cash flows provided by operating activities excluding impact of SmartVMC West LP Distributions declared excluding impact of SmartVMC West LP Class D distributions ACFO excluding impact of SmartVMC West LP(1) Surplus of cash provided by operating activities over distributions declared excluding impact of SmartVMC West LP Class D distributions Surplus of ACFO over distributions declared excluding impact of SmartVMC West LP Class D distributions Payout Ratio to Cash flows provided by operating activities excluding impact of SmartVMC West LP Class D Units Payout Ratio to ACFO excluding impact of SmartVMC West LP Class D Units(1) (A) (B) (C) (A – B) (C – B) (D) (E) (F) (D – E) (F – E) Rolling 24 Months Ended December 31, 2022 December 31, 2021 750,092 648,282 693,132 101,810 44,850 86.4 % 93.5 % 749,108 637,557 692,148 111,551 54,591 85.1 % 92.1 % 667,606 637,511 706,464 30,095 68,953 95.5 % 90.2 % 667,606 637,511 706,464 30,095 68,953 95.5 % 90.2 % (1) Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. 46 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 50 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT General and Administrative Expense The following tables summarize general and administrative expense before allocation, and general and administrative expense, net (as presented in the consolidated statements of income and comprehensive income for the year ended December 31, 2022): MANAGEMENT’S DISCUSSION AND ANALYSIS Note(1) December 31, 2022 December 31, 2021 Variance ($) Year Ended Year Ended 61,833 54,260 7,573 Year-to-Date Comparison to Prior Year (in thousands of dollars) Salaries and benefits Performance compensation (EIP, LTIP) DUP Services fee – by Penguin Professional fees Public company costs Amortization of intangible assets Office rent, information technology, marketing, communications and other employee expenses Other costs(2) Subtotal Previously capitalized general and administrative costs – Transit City phases Previously capitalized general and administrative expenses on sale of real estate assets Total general and administrative expense before allocation Less: Allocated to property operating costs Capitalized to properties under development and other assets Total amounts allocated and capitalized Time billings, leasing, management fees, development fees and other fees Shared service costs charged to Penguin Total amounts charged 20 8 20 20 (A) (B) (C) 8,192 3,582 7,416 6,172 1,343 1,332 10,655 479 101,004 60 332 8,095 3,990 7,062 6,338 1,681 1,331 97 (408) 354 (166) (338) 1 9,546 1,109 2,702 (2,223) 95,005 5,999 1,050 (990) 946 (614) 101,396 97,001 4,395 (18,558) (35,394) (53,952) (12,982) (1,193) (14,175) (68,127) 33,269 (15,434) (3,124) (36,465) 1,071 (51,899) (2,053) (12,034) (1,146) (13,180) (948) (47) (995) (65,079) (3,048) 31,922 1,347 Total amounts allocated, capitalized and charged General and administrative expense, net (D = B + C) (E = A + D) (1) (2) The Note reference relates to the corresponding Note disclosure in the consolidated financial statements for the year ended December 31, 2022. Other costs represent previously capitalized general and administrative costs for development projects that have been discontinued. Total general and administrative expense before allocation For the year ended December 31, 2022, total general and administrative expense before allocation was $101.4 million, representing an increase of $4.4 million or 4.5% as compared to the same period in 2021. This increase can be attributed primarily to: • • $7.6 million increase in salaries and related costs; and $1.1 million increase in rent, information technology, marketing, communications and other employee expenses; Partially offset by: • • $2.2 million decrease in costs previously capitalized for development projects which have been discontinued; and $1.6 million net decrease in previously capitalized expenses on completed condo developments relating to VMC Residences (equity accounted investments) and other real estate assets sold. Total amounts allocated, capitalized and charged For the year ended December 31, 2022, total amounts allocated, capitalized and charged to Penguin and others was $68.1 million, representing an increase of $3.0 million or 4.7% as compared to the same period in 2021. This increase can be attributed primarily to $3.1 million higher general and administrative expense being allocated to property operating costs. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 47 51 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Section V — Leasing Activities and Lease Expiries Leasing Activities Occupancy The Trust’s value-oriented portfolio continued to provide an attractive place to shop as tenants witnessed customer traffic returning to pre-pandemic levels. With most if not all COVID-19-related measures now lifted, tenants have retained many of the strategic changes established during the pandemic including reconfigured store layouts and click and collect to enhance the customer shopping experience. Tenant confidence continued to grow with the improving customer traffic resulting in demand for new locations in all markets and for all store sizes. In addition to the regular staple of value-oriented tenants continuing to seek more space in Walmart-anchored sites, new uses are also enhancing each centre’s offering with entertainment/experiential, pet supplies, furniture and specialty and takeout food all growing their store counts. U.S.-based tenants are also re-engaging their search for new store openings in Canada. As at December 31, 2022, the Trust’s occupancy levels inclusive of in-place and committed leases was 98.0% (versus 97.6% as at December 31, 2021). The increase in occupancy was principally driven by the higher demand for high traffic shopping centres, anchored by Walmart, Canadian Tire, TJX banners, grocery and home improvement anchors. Occupancy Total leasable area (in sq. ft.) In-place occupancy rate (%) In-place and committed occupancy rate (%) December 31, 2022 December 31, 2021 Variance 34,750,379 34,118,613 631,766 97.6 98.0 97.4 97.6 0.2 0.4 New Leasing Activity During the three months ended December 31, 2022, the Trust completed new leases with a wide variety of tenants, with uses such as sporting goods and apparel, dollar stores and food service. Many of the Trust’s existing tenants continued their growth plans with retailers in furniture, general merchandise and pet stores expanding their brick-and-mortar footprint nationally. During the fourth quarter of 2022, the Trust executed 94,256 square feet of new leasing. The following table presents a continuity of the Trust’s in-place occupancy rate for the three months ended December 31, 2022: (in square feet) Vacant Area Occupied Area Leasable Area In-place Occupancy Rate (%) Beginning balance – October 1, 2022 842,034 33,842,999 34,685,033 97.6 New vacancies New leases Subtotal Transferred from properties under development to income properties Other including unit area remeasurements 81,328 (94,256) (81,328) 94,256 — — 829,106 33,855,927 34,685,033 — (3,575) 65,785 3,136 65,785 (439) Ending balance – December 31, 2022 825,531 33,924,848 34,750,379 97.6 The following table presents a continuity of the Trust’s in-place occupancy rate for the year ended December 31, 2022: (in square feet) Beginning balance – January 1, 2022 New vacancies New leases Subtotal Acquisitions Vacant Area Occupied Area Leasable Area In-place Occupancy Rate (%) 899,989 536,049 (612,531) 823,507 22,300 33,218,624 34,118,613 97.4 (536,049) 612,531 — — 33,295,106 34,118,613 442,534 464,834 Transferred from properties under development to income properties Transferred from income properties to properties under development Other including unit area remeasurements — 177,616 177,616 (14,411) (5,865) — 9,592 (14,411) 3,727 Ending balance – December 31, 2022 825,531 33,924,848 34,750,379 97.6 48 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 52 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT Renewal Activity For the year ended December 31, 2022, the Trust achieved a tenant renewal rate of 88.3% (December 31, 2021 – 85.4%) for tenants with expiring leases. MANAGEMENT’S DISCUSSION AND ANALYSIS Renewal Summary Space expiring in calendar year (in sq. ft.) Renewed (in sq. ft.) Near completion (in sq. ft.) Total renewed and near completion (in sq. ft.) Renewal rate (including near completion) (%) Renewed rental rate (in dollars per sq. ft.) – including Anchors Renewed rental rate (in dollars per sq. ft.) – excluding Anchors Renewed rent change (including Anchors, %) Renewed rent change (excluding Anchors, %) Tenant Profile December 31, 2022 December 31, 2021 Variance 5,059,578 4,303,022 164,736 4,467,758 88.3 13.19 19.51 3.0 3.6 4,330,499 729,079 3,586,309 716,713 113,122 51,614 3,699,431 768,327 85.4 13.32 19.08 0.9 0.7 2.9 (0.13) 0.43 2.1 2.9 The Trust’s portfolio is represented in all major markets across Canada particularly in the Greater-VECTOM markets (Vancouver, Edmonton, Calgary, Toronto, Ottawa and Montreal). While the Greater-VECTOM and primary markets have in-place occupancy of 97.2% and 97.9%, respectively, and account for 88.4% of revenue and 89.8% of fair value, properties in the secondary markets reflect a higher in-place occupancy rate of 99.3%. Portfolio Summary by Market Type Market Greater-VECTOM Primary Secondary Total Number of Income Producing Properties Area (000 sq. ft.) Gross Revenue (%) Income Property Fair Value (%) In-place Occupancy (%) 108 31 27 166 23,383 6,624 4,743 34,750 71.8 16.6 11.6 100.0 76.3 13.5 10.2 100.0 97.2 97.9 99.3 97.6 Tenant Categories The portfolio is represented by strong individual shopping centres in every major market in Canada, with a diverse mix of tenant and service offerings, reflecting almost every retail category. Annualized Gross Rent by Category for Tenants In-place as at December 31, 2022 Category General merchandise including in-store grocery & pharmacy Apparel Home improvement & housewares Stand-alone grocery & liquor Restaurant Leisure (sporting goods, toys) Specialty (fitness, electronics, pet) Pharmacy & personal services Financial services Other Total Total (%) Greater-VECTOM (%) Primary (%) Secondary (%) 28.6 14.8 9.2 9.3 9.2 6.6 6.2 5.7 4.5 5.9 24.2 15.3 9.7 9.8 10.3 6.6 6.0 6.6 5.0 6.5 35.6 13.6 8.7 8.4 6.6 8.0 6.7 3.9 4.0 4.5 46.1 13.4 6.8 8.1 5.8 4.1 6.9 2.5 2.5 3.8 100.0 100.0 100.0 100.0 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 49 53 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS The following graph represents the Trust’s portfolio exposure by annualized gross rent by category as at December 31, 2022. Other, 5.9% Financial services, 4.5% Pharmacy & personal services, 5.7% General merchandise including in-store grocery & pharmacy, 28.6% Specialty (fitness, electronics, pet), 6.2% Leisure (sporting goods, toys), 6.6% Restaurant, 9.2% Apparel, 14.8% Stand-alone grocery & liquor, 9.3% Home improvement & housewares, 9.2% Top 25 Tenants The 25 largest tenants (by annualized gross rental revenue) accounted for 61.8% of portfolio revenue as at December 31, 2022 and are presented in the following table: # 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Tenant Walmart(1) Canadian Tire, Mark's and FGL Sports Winners, HomeSense, Marshalls Loblaws, Shoppers Drug Mart Sobeys Dollarama Lowes, RONA LCBO Michaels Best Buy Recipe Unlimited Staples Gap Inc. Reitmans Bulk Barn Bonnie Togs GoodLife Fitness Clubs CIBC Toys R Us The Brick Sleep Country Metro Dollar Tree, Dollar Giant PetSmart Bank of Nova Scotia Number of Stores Annualized Gross Rental Revenue ($ millions) Percentage of Total Annualized Gross Rental Revenue (%) Leased Area (sq. ft.) 100 205.1 25.2 14,182,181 Leased Area as a % of Total Gross Leasable Area (%) 40.8 72 55 25 16 59 8 38 24 18 56 21 26 59 52 42 11 27 7 9 38 9 26 16 23 36.3 35.6 22.7 16.8 16.2 15.2 13.4 12.4 12.0 11.8 10.3 9.1 8.7 8.3 7.5 7.5 7.5 7.4 7.1 6.8 6.7 6.6 6.5 5.9 4.5 4.4 2.8 2.1 2.0 1.9 1.6 1.5 1.5 1.4 1.3 1.1 1.1 1.0 0.9 0.9 0.9 0.9 0.9 0.8 0.8 0.8 0.8 0.7 1,433,435 1,406,180 909,054 722,818 576,410 870,545 356,427 478,041 437,074 278,785 449,599 269,742 309,446 245,545 255,759 196,183 149,560 268,880 258,244 181,572 315,438 217,286 209,678 123,002 4.1 4.0 2.6 2.1 1.7 2.5 1.0 1.4 1.3 0.8 1.3 0.8 0.9 0.7 0.7 0.6 0.4 0.8 0.7 0.5 0.9 0.6 0.6 0.4 (1) The Trust has a total of 100 Walmart locations under lease, of which 98 are Supercentres that represent stores that carry all merchandise that Walmart department stores offer including a full assortment of groceries. The Trust also has another 14 shopping centres with Walmart as Shadow Anchors, all of which are Supercentres. 837 503.4 61.8 25,100,884 72.2 50 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 54 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT Lease Expiries The following table presents total retail and office lease expiries for the portfolio as at December 31, 2022: MANAGEMENT’S DISCUSSION AND ANALYSIS Year of Expiry Month-to-month and holdovers 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Beyond Vacant Total retail Total office Total retail and office Total Area (sq. ft.) 513,786 2,878,354 5,226,031 4,744,594 4,105,895 5,231,025 3,205,829 2,299,611 1,005,519 1,073,901 1,859,577 615,267 817,710 825,531 34,402,630 347,749 34,750,379 Percentage of Total Area (%) 1.5 8.3 15.0 13.6 11.8 15.1 9.2 6.6 2.9 3.1 5.3 1.8 2.4 2.4 99.0 1.0 100.0 Annualized Base Rent ($000s) Average Base Rent psf(1) ($) 11,222 43,960 80,748 68,377 60,643 72,053 55,408 38,864 20,208 19,780 30,027 9,450 10,699 — 521,439 21.77 15.27 15.45 14.41 14.77 13.77 17.28 16.90 20.10 18.42 16.15 15.36 13.08 — 15.53 (1) The total average base rent per square foot excludes vacant space of 825,531 square feet. The following table presents total retail and office lease expiries for the portfolio excluding Anchor tenants as at December 31, 2022: Total Area (excluding Anchor tenants) Percentage of Total Area (including Anchor tenants) Percentage of Total Area (excluding Anchor tenants) Year of Expiry Month-to-month and holdovers 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Beyond Vacant Total retail Total office Total retail and office (sq. ft.) 395,538 1,609,108 2,395,262 2,186,087 1,527,891 1,615,671 1,633,255 752,404 442,322 458,765 540,916 260,805 93,420 664,708 14,576,152 161,902 14,738,054 (%) 1.1 4.6 6.9 6.3 4.4 4.6 4.7 2.2 1.3 1.3 1.6 0.8 0.3 1.9 42.0 0.5 42.5 (%) 2.7 10.9 16.2 14.8 10.4 11.0 11.1 5.1 3.0 3.1 3.7 1.8 0.6 4.5 98.9 1.1 100.0 (1) The total average base rent per square foot excludes vacant space of 664,708 square feet. Annualized Base Rent ($000s) Average Base Rent psf(1) ($) 9,397 31,369 51,509 45,648 34,835 36,249 36,674 20,072 11,551 11,059 13,110 5,586 1,763 — 308,822 23.65 19.49 21.50 20.88 22.80 22.44 22.45 26.68 26.12 24.11 24.24 21.42 18.87 — 22.20 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 51 55 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Retail Lease Expiries (in millions of square feet) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 M T M V acant 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 B eyond Walmart Other Anchors Non-Anchor 52 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 56 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Section VI — Asset Profile Investment Properties The following table summarizes the changes in fair values of investment properties including the Trust’s proportionate share of equity accounted investments for the years ended December 31, 2022 and December 31, 2021: (in thousands of dollars) Investment properties Opening balance Transfer from properties under development to income properties Transfer from income properties to properties under development Transfer from properties under development to equity accounted investments Acquisitions, Earnouts, and related adjustments of investment properties Dispositions Fair value adjustment Others Ending balance Investment properties classified as equity accounted investments Year Ended December 31, 2022 Year Ended December 31, 2021 Income Properties Properties Under Development Total Investment Properties Income Properties Properties Under Development Total Investment Properties 8,395,077 1,452,001 9,847,078 8,267,429 582,960 8,850,389 39,707 (39,707) (7,887) 7,887 — — 40,555 (40,555) (2,400) 2,400 — — — (25,000) (25,000) — (6,850) (6,850) 101,993 (777) (54,122) 22,902 28,679 (40,726) 255,956 114,409 130,672 (41,503) 201,834 137,311 22,015 (62,865) 107,416 22,927 499,700 521,715 (37,285) (100,150) 384,112 67,519 491,528 90,446 8,496,893 1,753,499 10,250,392 8,395,077 1,452,001 9,847,078 Opening balance 319,024 518,427 837,451 234,566 315,628 550,194 Transfer from properties under development to income properties Transfer from properties under development to equity accounted investments Acquisitions, Earnouts, and related adjustments of investment properties Dispositions Fair value adjustment Others Ending balance Total balance (including investment properties classified as equity accounted investments) – end of period (Investment Properties – non- GAAP)(1) Investment properties(1) Investment properties classified as held for sale(1) 24,736 (24,736) — 46,579 (46,579) — — — (8) 624 45,130 389,506 12,500 12,500 5,325 5,325 (14,805) (14,813) — 87,187 583,898 624 132,317 973,404 — — 74 37,666 139 319,024 4,505 4,505 14,136 14,136 — 150,062 80,675 518,427 74 187,728 80,814 837,451 8,886,399 2,337,397 11,223,796 8,714,101 1,970,428 10,684,529 8,886,399 2,279,026 11,165,425 8,714,101 1,970,428 10,684,529 — 58,371 58,371 — — — 8,886,399 2,337,397 11,223,796 8,714,101 1,970,428 10,684,529 (1) Represents a non-GAAP measure. The Trust’s method of calculating non-GAAP measures may differ from other reporting issuers’ methods and, accordingly, may not be comparable. For definitions and basis of presentation of the Trust’s non-GAAP measures, refer to “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 53 57 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS The gross leasable retail and office area consists of 34.8 million square feet. In addition, the Trust may acquire 1.7 million square feet of future potential gross leasable retail area and has the option to acquire an additional 50.0% interest in four investment properties and a 25.0% interest in another investment property (0.5 million square feet) on their completion pursuant to the terms of Mezzanine Financing. The portfolio is located across Canada, with assets in each of the ten provinces. By selecting well- located centres, the Trust seeks to attract high-quality tenants at market rental rates. Valuation Methodology From January 1, 2020 to December 31, 2022, the Trust has had approximately 67.0% (by value) or 53.4% (by number of properties) of its operating portfolio appraised externally by independent national real estate appraisal firms with representation and expertise across Canada. Management internally appraises the entire portfolio of properties. In addition, the determination of which properties are externally appraised to support management’s internal valuation process is based on a combination of factors, including property size, property type, tenant mix, strength and type of retail node, age of property and location. Commencing in the first quarter of 2014, the Trust, on an annual basis, has had external appraisals performed on 15%–20% of the portfolio, rotating properties to ensure that at least 50% (by value) of the portfolio is valued externally over a three-year period. The portfolio is valued internally by management utilizing valuation methodologies that are consistent with the external appraisals. Management performed these valuations by updating cash flow information reflecting current leases, renewal terms, ECL and market rents and applying updated discount rates determined, in part, through consultation with various external appraisers and available market data. In addition, the fair value of properties under development reflects the impact of development agreements (see Note 4 in the consolidated financial statements for the year ended December 31, 2022 for further discussion). Fair values were primarily determined through the discounted cash flows approach, which is an estimate of the present value of future cash flows over a specified horizon. For land, development and construction costs recorded at market value, fair values were marked to market, factoring in development risks such as planning, zoning, timing and market conditions. Investment properties (including properties under development and properties classified as held for sale) as recorded in the Trust’s consolidated financial statements for the year ended December 31, 2022, with a total carrying value of $1,454.9 million (December 31, 2021 – $2,195.9 million) were valued by external national appraisers, and investment properties with a total carrying value of $8,795.5 million (December 31, 2021 – $7,651.2 million) were internally valued by the Trust. Based on these valuations, the weighted average discount rate on the Trust’s income properties portfolio as at December 31, 2022 was 6.43% (December 31, 2021 – 6.34%). The following table summarizes significant assumptions in Level 3 valuations along with corresponding fair values for income properties (excluding investment properties recorded in equity accounted investments): (in thousands of dollars) December 31, 2022 Valuation Method Discounted cash flow Terminal Capitalization Rate Discount Rate Carrying Value Weighted Average (%) Range (%) Weighted Average (%) Range (%) 8,496,893 5.92 4.18 – 7.53 6.43 4.58 – 8.03 (in thousands of dollars) December 31, 2021 Valuation Method Discounted cash flow Terminal Capitalization Rate Discount Rate Carrying Value Weighted Average (%) Range (%) Weighted Average (%) Range (%) 8,395,077 5.83 4.18 – 7.43 6.34 4.58 – 7.93 54 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 58 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS The following table summarizes significant assumptions in Level 3 valuations along with corresponding fair values for properties under development (excluding properties under development recorded in equity accounted investments): (in thousands of dollars) December 31, 2022 Valuation Method Land, development and construction costs recorded at market value Discounted cash flow Total Carrying Value Weighted Average (%) 1,627,880 125,619 1,753,499 N/A 6.06 Range (%) N/A 5.53 – 7.40 Weighted Average (%) Range (%) N/A 6.66 N/A 6.03 – 7.90 Terminal Capitalization Rate Discount Rate (in thousands of dollars) December 31, 2021 Valuation Method Land, development and construction costs recorded at market value Discounted cash flow Total Terminal Capitalization Rate Discount Rate Carrying Value Weighted Average (%) Range (%) Weighted Average (%) Range (%) 1,324,263 127,738 1,452,001 N/A 5.92 N/A 4.89 – 7.30 N/A 6.53 N/A 5.64 – 7.80 During the year ended December 31, 2022, due to changes in the market and the progress made on planning entitlements, the Trust increased the fair value of certain properties under development by $237.7 million, which is in addition to the increase in fair value of $496.8 million realized in Q4 2021 (which includes the Trust’s share of related fair value adjustments for equity accounted investments). As driven by the Trust’s vast pipeline of mixed-use initiatives, the Trust expects to continue to recognize fair value increments through the planning, zoning and development progress of its investment properties. Management’s reassessment of the valuation of certain investment properties based on the Trust’s continued ability to lease and generate NOI in the foreseeable future, has resulted in a net fair value adjustment (loss) on revaluation of investment properties of $35.9 million (excluding fair value adjustments on properties under development as noted above, and investment properties recorded in equity accounted investments) for the year ended December 31, 2022, which was primarily attributed to: i) In Q2 2022, the Trust applied an increase in cap rate of 50 bps for enclosed shopping malls, which resulted in a value decrease of $14.9 million for the properties; ii) In Q3 2022, the Trust applied an increase in cap rate of 10 bps across most retail properties in the portfolio, with certain exclusions relating to intensification projects, outlet centres and offices, which resulted in a fair value decrease of approximately $123.5 million; and iii) The loss was primarily offset by a fair value gain of $102.5 million due to leasing activities throughout the year (of which $41.7 million was attributed to the Premium Outlets in Toronto and Montreal emanating from robust leasing performance). Acquisitions of Investment Properties In January 2022, the Trust acquired, from its unrelated partner, a 50% interest in each of three co-owned properties located in Ottawa (Laurentian), Ontario, Edmonton Capilano, Alberta, and Lachenaie, Quebec, for a total purchase price of $100.0 million and adjusted for costs of acquisition and other working capital amounts, which was paid in cash and funded from the Trust’s existing operating facilities. Upon completion of the acquisition, the Trust became the 100% owner of these properties. In January 2022, the Trust acquired a 25% interest in parcels of land from its unrelated partner located in Mirabel, Quebec, for a purchase price of $2.6 million, paid in cash and adjusted for costs of acquisition. Upon completion of the acquisition, the Trust’s interest in these parcels of land increased to 50%. In June 2022, the Trust acquired a parcel of land in Pickering, Ontario, for investment property development for gross proceeds of $16.6 million, paid in cash and adjusted for costs of acquisition and other working capital amounts. See also Note 3, “Acquisitions and Earnouts”, in the Trust’s consolidated financial statements for the year ended December 31, 2022. In addition, see “Equity Accounted Investments” below for acquisitions completed during the year ended December 31, 2022 that are recorded in investment in joint ventures. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 55 59 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Dispositions of Investment Properties In January 2022, the Trust sold its 40% interest in a parcel of land totalling 1.39 acres located in Markham, Ontario, for gross proceeds of $0.8 million to a joint venture, Boxgrove Self Storage Limited Partnership, for development of a self-storage facility (see also, Note 5(b) in the Trust’s consolidated financial statements for the year ended December 31, 2022). In March 2022, the Trust sold a parcel of land totalling 4.62 acres located in Laval East, Quebec, for gross proceeds of $5.6 million, which was satisfied by cash. In April 2022, the Trust sold a parcel of land totalling 6.48 acres located in Stouffville, Ontario, for gross proceeds of $18.4 million, which was satisfied by cash. In September 2022, the Trust sold a parcel of land totalling 6.86 acres located in London, Ontario, for gross proceeds of $15.2 million, which was satisfied by cash. In December 2022, the Trust contributed its interest in a parcel of land totalling 2.31 acres located in Vaughan, Ontario, for a value of $25.0 million to a joint venture, Vaughan NW RR PropCo LP, for development of a retirement residence (see also, Note 5(b) in the Trust’s consolidated financial statements for the year ended December 31, 2022). Investment properties held for sale As at December 31, 2022, investment properties classified as held for sale in amount of $58.4 million include land parcels located in Vaughan, Ontario (VMC), of which $42.3 million represented the Trust’s interests in co-ownership and was proportionately consolidated in the Trust’s consolidated financial statements and $16.1 million was recorded in equity accounted investments. Equity Accounted Investments The following table summarizes key components relating to the Trust’s equity accounted investments: Investment – beginning of year 489,230 165,212 654,442 354,992 108,212 463,204 Year Ended December 31, 2022 Year Ended December 31, 2021 Investment in Associates Investment in Joint Ventures Investment in Associates Investment in Joint Ventures Total Total Operating Activities: Earnings (losses) Distributions – VMC Residences condominium unit closings(1) Distributions – operating activities Financing Activities: 4,932 (733) 4,199 183,431 27,989 211,420 (24,322) (4,550) — (24,322) (52,824) — (52,824) (234) (4,784) (3,358) (714) (4,072) Fair value adjustment on loan 3,690 — 3,690 3,995 — 3,995 Investing Activities: Cash contribution Property contribution Development distributions Investment – end of year 23,154 — (33,362) 32,982 25,000 56,136 25,000 6,355 29,589 — 6,850 35,944 6,850 — (33,362) (3,361) (6,714) (10,075) 458,772 222,227 680,999 489,230 165,212 654,442 (1) During the year ended December 31, 2022, the distribution in the amount of $24.3 million was satisfied by a non-cash settlement of the Residence III LP loan payable (for the year ended December 31, 2021 – $52.8 million). See also the “Debt” section. 56 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 60 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT As at December 31, 2022 (in thousands of dollars) Rental Residential Self-storage facilities Retail Office Mixed-use The following table summarizes the asset profile (at 100%) of the Trust’s equity accounted investments, grouped by their business focus: MANAGEMENT’S DISCUSSION AND ANALYSIS Income Properties Properties Under Development Residential Development Inventory Other Assets Total Assets 145,603 190,331 160,844 131,020 219,975 68,770 7,742 — 130,792 870,529 — — — — — 37,457 6,201 3,335 21,369 138,296 (1) 59,698 (2) 373,391 235,815 142,097 241,344 1,139,617 472,006 2,604,270 Condominium and townhome residential development inventory — — 412,308 (1) Consists of loans receivable of $129.2 million in connection with the 700 Applewood purchase (see also the “Debt” section), and cash and cash equivalents of $8.2 million. (2) Consists of notes receivable of $2.3 million in connection with the Transit City condominium closings, and cash and cash equivalents of $50.5 million. 788,234 1,137,372 412,308 266,356 As at December 31, 2021 (in thousands of dollars) Rental Residential Self-storage facilities Retail Office Mixed-use Condominium and townhome residential development inventory Income Properties Properties Under Development Residential Development Inventory Other Assets Total Assets 74,025 139,300 135,611 132,795 220,002 45,494 4,533 — 128,732 801,559 — — — — — 11,382 2,082 2,732 23,778 224,707 183,187 140,060 243,780 167,930 (1) 1,098,221 — — 269,714 103,978 (2) 691,165 990,886 269,714 311,882 373,692 2,263,647 (1) Consists of loans receivable of $158.1 million in connection with the 700 Applewood purchase (see also the “Debt” section), and cash and cash equivalents of $6.5 million. (2) Consists of notes receivable of $87.7 million in connection with the Transit City condominium closings, and cash and cash equivalents of $6.9 million. Investment in associates The following table summarizes the Trust’s ownership interest in investment in associates as reflected in the Trust’s consolidated financial statements for the year ended December 31, 2022: Business Focus Partner(s) Principal Intended Activity December 31, 2022 December 31, 2021 Ownership Interest (%), As at Mixed-use real estate development Penguin-Calloway Vaughan Partnership (“PCVP”) Penguin(1) Residential condominium developments VMC Residences Limited Partnership (“Residences LP”) Residences III LP East Block Residences LP Penguin(1), CentreCourt Penguin(1), CentreCourt Penguin(1), CentreCourt Residences (One) LP Penguin(1) Residences (Two) LP Penguin(1) Own, develop and operate investment properties in the SmartVMC (Eastern 52.0 acres) 50.0 50.0 Own, develop and sell two residential condominium towers and 22 townhomes (Transit City 1 and 2) at SmartVMC Own, develop and sell a residential condominium tower (Transit City 3) at SmartVMC Own, develop and sell two residential condominium towers (Transit City 4 and 5) at SmartVMC Own, develop and sell residential condominium towers (ArtWalk) Own, develop and sell residential condominium towers (Park Place) 25.0 25.0 25.0 50.0 66.7 25.0 25.0 25.0 50.0 — (1) See also Note 22, “Related party transactions” in the Trust’s consolidated financial statements for the year ended December 31, 2022. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 57 61 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS In December 2019, the Trust acquired, as part of a 50:50 joint arrangement with Penguin, through PCVP, a 50% interest in a parcel of land (“700 Applewood”) with approximately 15.5 acres in Vaughan, Ontario, proximate to SmartVMC to relocate Walmart from SmartVMC and for other future developments, for a purchase price of $109.2 million paid in cash, adjusted for other working capital amounts. In connection with this acquisition, an interest-free loan with a principal amount of $81.4 million and a maturity of December 2029 was extended to Penguin to finance its interest in PCVP’s acquisition of 700 Applewood. In March 2020, the Trust assumed this loan receivable from Penguin (see also Note 6(b), footnote 3 in the Trust’s consolidated financial statements for the year ended December 31, 2022), along with an offsetting non-interest-bearing note payable of an equal amount (see Note 12(b)(iv), footnote 2 in the Trust’s consolidated financial statements for the year ended December 31, 2022). Note that the limited partnerships involved in residential condominium developments, as noted in the above table: Residences LP, Residences III LP, East Block Residences LP, Residences (One) LP and Residences (Two) LP, are herein collectively referred to as “VMC Residences”. For details on SmartVMC residential development, see the “Mixed-Use Development Initiatives” section. Summary of development credit facilities The development financing relating to PCVP and VMC Residences comprise pre-development, construction and letters of credit facilities. With respect to the development credit facilities relating to PCVP, the obligations are joint and several to each of the PCVP limited partners; however, by virtue of an indemnity agreement between the PCVP limited partners, the obligations are effectively several. From time to time, the original facility amounts are reduced through repayments and through amended agreements with the financial institutions from which the facilities were obtained. PCVP and VMC Residences had the following credit facilities available: As at (in thousands of dollars) PCVP Development credit facility Construction credit facility Letters of credit facility(2) VMC Residences Development credit facility Development credit facility Development facilities – end of year Amount drawn on development credit facilities Letters of credit – outstanding Remaining unused development credit facilities Maturity in Annual Interest Rate (%)(1) February 2023 BA + 1.35 June 2027 BA + 1.20 May 2023 N/A April 2022 BA + 1.75 September 2023 BA + 1.60 December 31, 2022 December 31, 2021 Facility Amount Facility Amount 15,876 400,000 60,000 475,876 — 279,264 279,264 755,140 (515,287) (63,083) 176,770 15,876 386,766 60,000 462,642 11,656 279,264 290,920 753,562 (317,105) (42,832) 393,625 Trust’s share of remaining unused development credit facilities 67,634 146,742 (1) Annual interest rate is a function of Canadian Banker’s Acceptance rate (“BA”) plus a premium. (2) Letter of credit fee rate is 0.75%. 58 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 62 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT Investment in joint ventures The following table summarizes the Trust’s ownership interest in each joint venture investment grouped by their principal intended activities as reflected in the Trust’s consolidated financial statements for the year ended December 31, 2022: MANAGEMENT’S DISCUSSION AND ANALYSIS As at Business Focus Retail investment properties Joint Venture: 1500 Dundas East LP Fieldgate Self-storage facilities Joint Ventures: Leaside SAM LP, Oshawa South Self Storage LP, Bramport SAM LP, Vaughan NW SAM LP, Dupont Self Storage LP, Aurora Self Storage LP, Scarborough East Self Storage LP, Kingspoint Self Storage LP, Jane Self Storage LP, Gilbert Self Storage LP, Boxgrove Self Storage LP, Whitby Self Storage LP and Regent Self Storage LP SmartStop December 31, 2022 December 31, 2021 Joint Venture Partner Number of Projects Ownership Interest (%) Number of Projects Ownership Interest (%) 1 13 30 50 Seniors’ apartments — — Joint Venture: Vaughan NW SA PropCo LP Revera Retirement residences Joint Ventures: Vaughan NW RR (PropCo and OpCo LPs), Baymac RR PropCo LP, Oakville Garden Drive RR PropCo LP and Markham Main Street RR PropCo LP Joint Ventures: Ottawa SW (PropCo and OpCo LPs)(1) Residential apartments Joint Venture: Laval C Apartments LP Joint Venture: Balliol/Pailton LP Joint Venture: Mascouche North Apartments LP Total Revera Groupe Sélection Jadco Greenwin Cogir 4 1 1 1 1 22 50 –(1) 50 75 80 1 10 1 5 1 1 1 1 21 30 50 50 50 50 50 75 80 (1) According to the limited partnership agreement entered into by the Trust and Groupe Sélection in April 2020, the ownership of this joint venture was 50:50. As at December 31, 2022, the Trust contributed $24.4 million to this partnership, of which $5.3 million was characterized as special contributions. These special contributions have resulted in a corresponding increase to the Trust’s equity entitlements in respect of the partnership. Acquisitions/new property contributions completed during the year ended December 31, 2022 In January 2022, pursuant to a 50:50 joint venture formed with SmartStop known as Boxgrove Self Storage Limited Partnership, each joint venture party contributed $1.0 million into the joint venture to fund the purchase of a parcel of land located in Markham, Ontario, totalling 1.39 acres, in which the Trust had a 40% interest, with the intention to develop and operate a self- storage facility. In May 2022, the Trust formed a 50:50 joint venture with SmartStop known as Regent Self Storage Limited Partnership, and pursuant to the joint venture agreement, each joint venture party contributed $3.5 million into the joint venture to fund the purchase of a parcel of land located in Burnaby, British Columbia, totalling 0.89 acres with the intention to develop and operate a self-storage facility. In December 2022, pursuant to the 50:50 joint venture previously formed with Revera known as Vaughan NW RR PropCo Limited Partnership, the Trust contributed its interest in a parcel of land totalling 2.31 acres to the joint venture for a value of $25.0 million, while Revera contributed cash, with the intention to develop and operate a retirement residence which is located in Vaughan, Ontario. See also Note 4, “Investment properties”, in the Trust’s consolidated financial statements for the year ended December 31, 2022. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 59 63 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Summary of credit facilities Development financing includes credit facilities relating to Laval C Apartments, Mascouche and Main Street Markham, comprising pre-development and construction facilities, and a construction facility relating to additional self-storage facilities. From time to time, the facilities amounts may be reduced through repayments and through amended agreements with the financial institutions from which the facilities were obtained. As at December 31, 2022 and December 31, 2021, the Trust’s joint ventures had the following credit facilities: As at December 31, 2022 December 31, 2021 (in thousands of dollars) Laval C Apartments LP Construction facility – Tower A Construction facility – Tower B(2) SmartStop Construction facility Markham Main Street Development facility Mascouche North Apartments LP Construction facility Amount drawn on development credit facilities Letters of credit – outstanding Remaining unused development credit facilities Maturity in Annual Interest Rate (%)(1) February 2022 BA + 1.60 November 2024 BA + 1.60 Facility Amount — 48,822 Facility Amount 35,417 — May 2024 BA + 2.20 136,900 118,100 December 2023 BA + 1.75 11,000 11,000 August 2025 BA + 1.50 55,000 251,722 (181,610) (1,648) 68,464 — 164,517 (130,630) (887) 33,000 Trust’s share of remaining unused development credit facilities 40,234 16,500 (1) Annual interest rate is a function of BA rates plus a premium. (2) Management is renegotiating the facility. 60 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 64 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Amounts Receivable and Other, and Prepaid Expenses, Deposits and Deferred Financing Costs The timely collection of amounts receivable is a critical component associated with the Trust’s cash and treasury management functions. The following table presents the components of amounts receivable and other, deferred financing costs, and prepaid expenses and deposits: (in thousands of dollars) Amounts receivable and other Tenant receivables Unbilled other tenant receivables Receivables from related party – excluding equity accounted investments Receivables from related party – equity accounted investments Other non-tenant receivables Other(1) Allowance for ECL Amounts receivable and other, net of allowance for ECL Prepaid expenses, deposits and deferred financing costs December 31, 2022 December 31, 2021 Variance ($) 26,735 11,100 11,899 616 1,954 13,591 65,895 (8,771) 57,124 14,474 71,598 36,305 11,847 6,966 581 1,414 11,383 68,496 (18,954) 49,542 12,289 61,831 (9,570) (747) 4,933 35 540 2,208 (2,601) 10,183 7,582 2,185 9,767 (1) The amount includes a related party amount of $6.8 million (December 31, 2021 – $8.0 million). ‘ As at December 31, 2022, total amounts receivable and other, net of allowance for ECL, and prepaid expenses, deposits and deferred financing costs increased by $9.8 million as compared to December 31, 2021. This increase was primarily attributed to the following: • • • $5.7 million increase in non-tenant receivables; $4.4 million increase in other amounts receivable, prepaid expenses, deposits and deferred financing costs; and $0.6 million decrease in tenant receivables net of allowance for ECL due to improving existing and expected collections on tenant receivables. Tenant receivables Approximately 60% of the Trust’s tenant base are businesses offering “essential” services and approximately 98.4% of the Trust’s tenant billings for the year ended December 31, 2022 have been collected. The Trust and its tenants are well-positioned for an expected return of the economy to pre-pandemic levels and as the Trust identifies tenants for its vacant space, it also continues to work with its existing tenants on rent collections and payment solutions. The table below represents a summary of total tenant receivables and ECL balances as at December 31, 2022 and December 31, 2021: (in thousands of dollars) Tenant receivables Unbilled other tenant receivables Total tenant receivables Less: Allowance for ECL Total tenant receivables net of allowance for ECL December 31, 2022 December 31, 2021 26,735 11,100 37,835 8,771 29,064 36,305 11,847 48,152 18,954 29,198 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 61 65 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Mortgages, Loans and Notes Receivable The following table summarizes mortgages, loans and notes receivable: (in thousands of dollars) Mortgages, loans and notes receivable Mortgages receivable (Mezzanine Financing)(1) Loans receivable(2) Notes receivable(1) December 31, 2022 December 31, 2021 Variance ($) 39,456 282,312 2,924 324,692 139,589 (100,133) 274,523 7,789 2,924 — 417,036 (92,344) (1) (2) The amount is due from Penguin. Includes $100.3 million due from Penguin (December 31, 2021 – $117.0 million), see “Loans Receivable” subsection. Mortgages Receivable (Mezzanine Financing) The following table presents the details of the mortgages receivable (by maturity date) provided to Penguin: (in thousands of dollars) Property Caledon (Mayfield), ON(1)(3)(5) Salmon Arm, BC(2)(3) Aurora (South), ON(3)(5) Innisfil, ON(2)(3) Vaughan (7 & 427), ON(1)(3)(5) Toronto (StudioCentre), ON(2)(4)(5) Pitt Meadows, BC(1)(4)(5) Amount Outstanding ($) Including: Interest Accrued ($) Amount Guaranteed by Penguin ($) Committed ($) Maturity Date including Extension Period Annualized Variable Interest Rate at Year-End (%) — — — — — 15,862 23,594 39,456 — — — — — 15,498 13,398 15,155 16,011 15,781 — — — — — August 2028 August 2028 August 2028 October 2023 August 2028 98 39,224 15,862 August 2028 234 75,653 23,594 August 2028 332 190,720 39,456 7.00 6.50 6.75 7.00 6.75 6.90 6.90 6.90 Potential Area Upon Exercising Purchase Option (sq. ft.) 101,865 — 57,741 — 76,000 227,831 25,003 488,440 (1) (2) (3) (4) (5) Caledon, Vaughan and Pitt Meadows mortgages have original maturity dates of April 2024, December 2023 and November 2023, respectively. Their maturity dates are automatically extended to August 31, 2028 unless written notice is delivered from the borrower. During the extended maturity period, the mortgages receivable accrue interest at a variable rate based on the Canadian Banker's Acceptance rate plus 4.00% to 5.00%. The Trust owns a 50% interest in these properties, with the other 50% interest owned by Penguin. These loans are secured against Penguin’s interest in the property. Penguin fully repaid the outstanding balance of the mortgages in October 2022. The weighted average interest rate on this mortgage is subject to an upper limit of 6.90%. The Trust has a purchase option from the borrower in these properties upon a certain level of development and leasing being achieved. As at December 31, 2022, it is management’s expectation that the Trust will exercise these purchase options. The purchase option for Aurora (South), ON, Pitt Meadows, BC, Vaughan (7 & 427), ON, and Caledon (Mayfield), ON are each 50%. The purchase option for Toronto (StudioCentre), ON is 25%. The mortgage security includes a first or second charge on properties, assignments of rents and leases and general security agreements. In addition, the outstanding balance is guaranteed by Penguin. The loans are subject to individual loan guarantee agreements that provide additional guarantees for all interest and principal advanced on outstanding amounts. The amounts that are guaranteed decrease on achievement of certain specified value-enhancing events. Management considers all mortgages receivable to be fully collectible. The following table illustrates the activity in mortgages receivable: (in thousands of dollars) Balance – beginning of year Interest accrued Interest payments Principal advances Principal repayments Balance – end of year Year Ended December 31 2022 139,589 6,143 (36,510) 3,800 (73,566) 39,456 2021 144,205 5,363 (10,766) 2,003 (1,216) 139,589 62 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 66 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Loans Receivable The following table summarizes loans receivable: (in thousands of dollars) Issued to Penguin(1) Penguin(2) Penguin(3) Penguin(4) Penguin PCVP(5) Self-storage facilities(6) Equity accounted investments Other(7) Greenwin(8) Greenwin(9) Other(10) Unrelated parties Committed Maturity Date Interest Rate (%) December 31, 2022 December 31, 2021 12,493 26,227 January 2023 January 2023 Variable 2.76 % N/A December 2029 Interest-free 18,450 August 2030 Variable N/A January 2023 120,700 May 2024 N/A January 2023 11,694 September 2024 1,280 N/A January 2025 October 2023 2.76 % Variable 5.00 % Variable Variable 4.00 % 7,389 13,266 62,986 16,638 100,279 48,532 116,096 164,628 2,308 — — 15,097 17,405 282,312 9,707 14,027 77,828 15,404 116,966 47,214 91,938 139,152 3,308 — — 15,097 18,405 274,523 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) This loan receivable was provided pursuant to a development management agreement with Penguin with a total loan facility of $12.5 million. Repayment of the pro rata share of the outstanding loan amount is due upon the completion of each Earnout event. The loan bears interest at ten basis points plus the lower of: i) the Canadian prime rate plus 45 basis points, and ii) the Canadian Dealer Offer Rate plus 145 basis points. In March 2019, the Trust entered into a loan agreement with Penguin for a non-revolving principal advance facility of $13.2 million and a non-revolving construction facility of $13.0 million, which combine for a total loan facility of $26.2 million, bearing interest accruing at a fixed rate of 2.76% and a variable rate based on Canadian Banker's Acceptance rate plus 150 basis points, respectively. The loan security includes a first or second charge on the property, assignments of rents and leases and general security agreements, and is guaranteed by Penguin. This loan receivable relates to the acquisition of a parcel of land in Vaughan, Ontario through PCVP in December 2019 (“700 Applewood purchase”). In March 2020, the Trust assumed this loan receivable from Penguin in regard to PCVP. The loan has a principal amount outstanding of $81.4 million, is non-interest-bearing, and is repayable at the end of ten years. As at December 31, 2022, the loan balance of $63.0 million is net of a cumulative fair value adjustment totalling $18.5 million. See also 12(b)(iv) “Debt” in the consolidated financial statements for the year ended December 31, 2022 reflecting the corresponding loan payable amount. This loan receivable was provided in December 2021 in connection with the acquisition of a 50% interest in development lands in Toronto (Leaside), Ontario. The loan bears interest at: i) the Canadian Banker’s Acceptance rate plus 220 basis points, up to 60% of the facility limit, and ii) the Canadian Banker’s Acceptance rate plus 370 basis points, for the remainder. In April 2019, the Trust entered into a loan agreement with PCVP (in which the Trust has a 50% interest) for a total loan facility of $90.6 million, bearing interest accruing at 2.76% per annum. The loan security includes a first or second charge on properties, assignments of rents and leases and general security agreements, and is guaranteed by Penguin up to its 50% share of the loan. The Trust reflects the activity from the PCVP as an equity accounted investment (see also Note 5, “Equity accounted investments”) and 100% of the loan provided to the PCVP is recorded in the consolidated financial statements for the year ended December 31, 2022. In July 2020, the Trust entered into a master credit loan agreement with its partner SmartStop to provide funding for the development of self-storage facilities. The master credit loan agreement matures in July 2023 and bears interest at a variable rate based on the Canadian Banker’s Acceptance rate plus 245 basis points. In April 2021, this master credit loan agreement was amended which resulted in an increase to total committed amounts from $65.5 million to $80.8 million, and the maturity was extended to May 2024. Also in April 2021, the Trust entered into a second master credit loan agreement with SmartStop to provide funding for the development of additional self-storage facilities. This second master credit loan agreement matures in May 2024 with a committed amount of $34.3 million. See further details in Note 5(b) “Equity accounted investments” in the consolidated financial statements for the year ended December 31, 2022. In January 2021, the Trust entered into a loan agreement pursuant to the closing of the Niagara Falls parcel sale to a third party. The Trust agreed to take back a first charge as security for the loan, which bears interest at 5.0% per annum, calculated semi-annually. Subsequently, the loan was fully repaid in January 2023. In September 2019, the Trust entered into a loan agreement with Greenwin in connection with the acquisition of a 50% interest in development lands in Barrie, Ontario. As at December 31, 2022, the total remaining credit facility was $11.7 million. The loan security includes a first charge on the development lands and is guaranteed by Greenwin. This loan matures in September 2024, and bears interest at the greater of: i) 7.0% per annum, and ii) the Trust’s weighted average cost of capital plus 1.25% per annum. In August 2020, Greenwin repaid this loan in advance of the maturity date. In January 2020, the Trust entered into a loan agreement with Greenwin, whereby the Trust assisted Greenwin to fund the acquisition of its 25% interest in development lands in Toronto, Ontario. As at December 31, 2022, the total remaining non-revolving term acquisition credit facility was $1.3 million. The loan agreement also includes a non-revolving put exercise credit facility in an amount equal to the put purchase price plus any associated closing costs at the time of exercise. The loan security includes a first charge on the development lands and is guaranteed by Greenwin. This loan matures in January 2025, and bears interest at the greater of: i) 7.0% per annum, and ii) the Trust’s weighted average cost of capital plus 1.25% per annum. In August 2020, Greenwin repaid this loan in advance of the maturity date. In October 2021, the Trust entered into a loan agreement pursuant to the sale of the Innisfil property to a third party. The Trust agreed to take back a first charge as security for the loan. The loan matures in October 2023 and bears interest at 4.00% per annum, calculated annually. Penguin has assigned its 50% interest in the vendor take-back loan to the Trust as security for the mortgage receivable. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 63 67 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS The following table illustrates the activity in loans receivable: (in thousands of dollars) Balance – beginning of year Loans issued Principal advances Interest accrued Fair value adjustments(1) Principal repayments Balance – end of year Year Ended December 31 2022 274,523 30,300 16,384 5,366 4,114 (48,375) 282,312 2021 241,683 33,790 50,983 3,986 4,440 (60,359) 274,523 (1) $4.1 million recorded during the year ended December 31, 2022 (year ended December 31, 2021 – $4.4 million) in connection with the loan issued as part of the 700 Applewood purchase. Notes Receivable Notes receivable of $2.9 million (December 31, 2021 – $2.9 million) have been granted to Penguin (see also, “Related Party Transactions”). These secured demand notes bear interest at 9.00% per annum (December 31, 2021 – 9.00%). Section VII — Financing and Capital Resources Capital Resources and Liquidity The following table presents the Trust’s capital resources available: (in thousands of dollars) Cash and cash equivalents Remaining operating facilities(1) Operating facility – accordion feature December 31, 2022 December 31, 2021 Variance ($) 35,255 553,343 588,598 250,000 838,598 62,235 341,715 403,950 250,000 653,950 (26,980) 211,628 184,648 — 184,648 (1) Excludes the Trust’s development facilities which have been arranged to fund project-specific development and related costs. On the assumption that cash flow levels permit the Trust to obtain financing on reasonable terms, the Trust anticipates meeting all current and future obligations. Management expects to finance future acquisitions, committed Earnouts, Developments, Mezzanine Financing commitments and maturing debt from: i) existing cash balances; ii) funds received from the closings of mixed-use development initiatives, including condominium and townhome sales; iii) a mix of mortgage debt secured by investment properties, operating facilities and issuances of equity and unsecured debentures; iv) repayments of mortgages receivable; and v) the sale of non-core assets. The Trust’s ability to meet these future obligations may be impacted by the liquidity risk associated with receiving repayments of its mortgages, loans, and notes receivable, amounts receivable and other, deposits, and cash equivalents on time and in full, and infrequently, the realization of fair value on the disposition of the Trust’s non-core assets. Cash flow generated from operating activities is the primary source of liquidity to pay Unit distributions and sustain capital expenditures and leasing costs. See also the “Distributions and ACFO Highlights” subsection. As at December 31, 2022, the Trust’s cash and cash equivalents decreased by $27.0 million as compared to December 31, 2021, which is primarily due to the following: • • • • $1,046.9 million representing net repayment of debt, which is principally due to the $282.0 million repayment of secured debt, $610.0 million repayment of revolving operating facility and $154.9 million repayment of other unsecured debt; $319.6 million of distributions paid on Trust Units, non-controlling interests and Units classified as liabilities; $283.8 million representing net additions to investing activities including investment properties, equity accounted investments, equipment, and Earnouts and Developments; and $1.9 million relating to the payment of lease liabilities; Partially offset by the following: • • • • • • $700.0 million new unsecured debt relating to both the establishment of a new financing facility for SmartVMC West and draws on existing construction facilities; $392.0 million relating to the proceeds from revolving unsecured debt facility; $370.8 million of cash provided by operating activities; $70.3 million repayments of mortgages and loans receivable net of advances; $50.3 million net decrease in cash held as collateral pertaining to TRS purchase;and $41.8 million of net proceeds from sale of investment properties. The Trust manages its cash flow from operating activities by maintaining a target debt level. The Debt to Gross Book Value, as defined in the Declaration of Trust, as at December 31, 2022 is 52% (December 31, 2021 – 50.8%). Including the Trust’s capital resources as at December 31, 2022, the Trust could invest an additional $1,309.0 million (December 31, 2021 – $1,511.0 million) 64 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 68 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS in new investments and developments and remain at the midpoint of the Trust’s target Debt to Gross Book Value range of 55% to 60%. Future obligations total $5.7 billion, as identified in the following table. Other than contractual maturity dates, the timing of payment of these obligations is management’s best estimate based on assumptions with respect to the timing of leasing, construction completion, occupancy and Earnout dates at December 31, 2022. The following table presents the estimated amount and timing of certain of the Trust’s future obligations including development obligations as at December 31, 2022: (in thousands of dollars) Secured debt Unsecured debt Revolving operating facilities Interest obligations(1) Accounts payable Other payable Long term incentive plan Total 2023 2024 2025 2026 2026 Thereafter 970,237 239,894 151,031 411,341 98,121 5,473 64,377 3,979,281 213,153 370,000 933,232 400,000 850,000 1,212,896 81,283 7,000 74,283 — — — — 202,010 4,471 113,742 95,743 76,884 (32,724) (56,106) 259,352 259,352 — 27,011 8,147 8,730 580 580 — — 134 — — — — — — — — 10,000 — 5,519,754 732,597 717,786 1,440,450 575,005 822,749 1,231,167 Mortgage receivable advances (repayments)(2) Development obligations (commitments) 151,264 1,015 1,130 (15,880) 1,034 378 163,587 20,669 20,669 — — — — — Total 5,691,687 754,281 718,916 1,424,570 576,039 823,127 1,394,754 (1) (2) Interest obligations represent expected interest payments on secured debt, unsecured debt, and revolving operating facilities under the assumption that the balances are repaid at maturity, and do not represent a separate contractual obligation. Mortgages receivable of $39.5 million at December 31, 2022, and further forecasted commitments of $151.3 million, mature over a period extending to 2028 if the Trust does not exercise its option to acquire the investment properties. Refer to Note 6, “Mortgages, loans and notes receivable”, in the Trust’s consolidated financial statements for the year ended December 31, 2022, for timing of principal repayments. The following table presents the estimated amount and timing of certain of the equity accounted investments’ future obligations including development obligations as at December 31, 2022: (in thousands of dollars) Total 2023 2024 2025 Secured and unsecured debt Development obligations (commitments)(1) 803,228 200,956 224,908 125,596 339,210 70,528 50,904 4,832 2026 7,452 — 2027 Thereafter 51,252 — 129,502 — Total 1,004,184 350,504 409,738 55,736 7,452 51,252 129,502 (1) The Trust is in the process of refining its estimates of development obligations for the years subsequent to 2022. This total does not include expected costs associated with the Trust’s mixed-use development initiatives except for current amounts outstanding for active projects currently underway. The following table presents the estimated amount and timing of certain of the Trust’s proportionate share of equity accounted investments’ future obligations including development obligations as at December 31, 2022: (in thousands of dollars) Total 2023 2024 2025 2026 2027 Thereafter Secured and unsecured debt Development obligations (commitments)(1) 354,933 63,860 169,091 38,036 3,163 16,337 64,446 90,161 53,049 34,668 2,444 — — — Total Trust’s share 445,094 116,909 203,759 40,480 3,163 16,337 64,446 (1) The Trust is in the process of refining its estimates of development obligations for the years subsequent to 2022. This total does not include expected costs associated with the Trust’s mixed-use development initiatives except for current amounts outstanding for active projects currently underway. The following table presents the Trust’s net working capital deficiency: (in thousands of dollars) Current assets Less: Current liabilities Working capital deficiency Adjusted by: Current portion of debt included in current liabilities Net working capital surplus (deficiency) December 31, 2022 December 31, 2021 276,140 (720,400) (444,260) (459,278) 15,018 223,412 (931,484) (708,072) (678,406) (29,666) As at December 31, 2022 the Trust experienced a working capital deficiency of $444.3 million (December 31, 2021 – $708.1 million deficiency). This deficiency includes mortgages, unsecured debentures and operating lines of credit of $459.3 million (December 31, 2021 – $678.4 million) that have maturity dates within 12 months of the balance sheet date. It is management’s intention to either repay or refinance these maturing liabilities with cash and cash equivalents, newly issued secured or SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 65 69 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS unsecured debt, equity or, in certain circumstances not expected to occur frequently, the disposition of certain assets. Without mortgages, unsecured debentures and operating lines of credit, the Trust experienced a net working capital deficiency of $15.0 million as at December 31, 2022 (December 31, 2021 – $29.7 million deficiency). The Trust has an unencumbered asset pool (a non-GAAP financial measure) with an approximate fair value totalling $8.4 billion, which could generate gross financing proceeds on income properties of approximately $5.4 billion using a 65% loan to value. It is anticipated that requirements for secured and unsecured debt, mortgage receivable advances and development obligations will be funded by additional term mortgages, net proceeds on the sale of certain assets, existing cash or operating lines, the issuances of unsecured debentures, and equity, as necessary. Maintenance Capital Requirements Differentiating between those costs incurred to achieve the Trust’s longer-term goals to produce increased cash flows and Unit distributions, and those costs incurred to maintain the level and quality of the Trust’s existing cash flows is key in the Trust’s consideration of capital expenditures. Acquisitions of investment properties and the development of new and existing investment properties (see also “Completed and Future Earnouts and Developments on Existing Properties” in this MD&A) are the two main areas of capital expenditures that are associated with increasing or enhancing the productive capacity of the Trust (revenue enhancing capital expenditures). In addition, there are capital expenditures incurred on existing investment properties to maintain the productive capacity of the Trust (“sustaining capital expenditures”). The sustaining capital expenditures are those of a capital nature that are not considered to increase or enhance the productive capacity of the Trust, but rather maintain the productive capacity of the Trust. Leasing and related costs, which include tenant improvements, leasing commissions and related costs, vary with the timing of new leases, renewals, vacancies, tenant mix and market conditions. Leasing and related costs are generally lower for renewals of existing tenants when compared to new leases. Leasing and related costs also include internal expenses for leasing activities, primarily salaries, which are eligible to be added back to FFO based on the definition of FFO in the REALpac White Paper last revised in January 2022. The sustaining capital expenditures and leasing costs are based on actual costs incurred during the period. FFO is a non-GAAP measure (see “Presentation of Certain Terms Including Non-GAAP Measures” and “Other Measures of Performance”). The following table and discussion present an analysis of capital expenditures of a maintenance nature (actual sustaining recoverable and non-recoverable capital expenditures and leasing costs). Earnouts, Acquisitions and Developments are discussed elsewhere in this MD&A. Given that a significant proportion of the Trust’s portfolio is relatively new, management does not believe that actual sustaining capital expenditures will have an impact on the Trust’s ability to pay distributions at their current level. (in thousands of dollars, except per Unit and other Unit amounts) Adjusted salaries and related costs attributed to leasing Actual sustaining leasing commissions Actual sustaining tenant improvements Total actual sustaining leasing and related costs Actual sustaining capital expenditures (recoverable and non-recoverable) Total actual sustaining leasing costs and capital expenditures Weighted average number of Units outstanding – diluted Per Unit – diluted ($) Three Months Ended December 31 Year Ended December 31 2022 2021 Variance 2022 2021 Variance 1,514 800 2,587 4,901 1,063 742 1,217 3,022 451 58 1,370 1,879 7,508 2,389 7,796 5,196 3,071 2,903 17,693 11,170 2,312 (682) 4,893 6,523 11,434 10,323 1,111 19,111 17,331 1,780 16,335 13,345 2,990 36,804 28,501 8,303 179,696,944 174,380,800 5,316,144 179,657,455 173,748,819 5,908,636 0.09 0.08 0.01 0.20 0.16 0.04 For the year ended December 31, 2022, the total sustaining leasing costs and capital expenditures were $36.8 million, as compared to $28.5 million in the same period in 2021, representing an increase of $8.3 million. This increase is primarily due to the following: • • $6.5 million net increase in both tenant improvements and leasing and related costs (note that the decrease in actual sustaining leasing commissions of $0.7 million is attributed to a similar increase that occurred in the same period of 2021); and $1.8 million increase in both recoverable and non-recoverable capital expenditures which primarily relate to the costs associated with parking lot resurfacing, roof replacement and HVAC improvements. These capital expenditures were incurred to sustain rental revenue from income properties and may vary widely from period to period and from year to year. 66 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 70 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT Debt The following table summarizes total debt including debt associated with equity accounted investments: As at December 31, 2022 December 31, 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS Weighted Average Term of Debt (in years) Weighted Average Interest Rate of Debt (%) Weighted Average Term of Debt (in years) Weighted Average Interest Rate of Debt (%) (in thousands of dollars) Secured debt Unsecured debt Unsecured loan from equity accounted investments Revolving operating facilities Total debt before equity accounted investments Less: Unsecured loan from equity accounted investments(1) Subtotal Share of secured debt (equity accounted investments) Share of unsecured debt (equity accounted investments) Share of debt classified as equity accounted investments Balance 969,054 3,791,797 141,131 81,283 4,983,265 (78,145) 4,905,120 193,525 161,408 354,933 Total debt including equity accounted investments 5,260,053 (1) This represents the Trust’s share of a loan from equity accounted investments. 2.8 4.1 N/A 1.3 N/A N/A 3.8 8.1 1.8 5.2 4.0 Balance 1,294,546 3,066,794 195,562 297,625 3.91 3.74 — 5.59 — 4,854,527 — (111,484) 3.75 4,743,043 3.2 5.4 N/A 3.4 N/A N/A 4.7 4.91 117,946 11.5 5.92 122,089 5.37 240,035 3.86 4,983,078 2.2 6.7 4.8 3.49 3.24 — 1.49 — — 3.14 3.26 1.87 2.55 3.11 The following table summarizes the activities in debt including debt recorded in equity accounted investments, for the year ended December 31, 2022: (in thousands of dollars) Balance – January 1, 2022 Borrowings Reclassification to unsecured debt Scheduled amortization Repayments Amortization of acquisition fair value adjustments Financing costs incurred, net of additions Adjustment Currency translation Secured Debt Unsecured Debt Revolving Operating Facilities Equity Accounted Investments Loan from Equity Accounted Investments Total 1,294,546 3,066,794 297,625 240,035 84,078 4,983,078 109,948 700,000 377,000 135,923 4,114 1,326,985 (143,232) 143,232 (43,087) — — — — (2,398) — — — (45,485) (249,457) (117,000) (610,000) (18,500) (18,956) (1,013,913) (460) 796 — — — (1,229) — — — — — 16,658 (140) 13 — — — — (600) (420) (6,250) (6,250) — 16,658 Balance – December 31, 2022 969,054 3,791,797 81,283 354,933 62,986 5,260,053 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 67 71 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Secured Debt The Trust believes it will have continued access to secured debt due to its strong tenant base and high occupancy levels at mortgage loan levels ranging from 60% to 70% of loan to value. The following table summarizes future principal payments as a percentage of total secured debt: (in thousands of dollars) 2023 2024 2025 2026 2027 Thereafter Total Acquisition date fair value adjustment Unamortized financing costs Instalment Payments Lump Sum Payments at Maturity 38,599 32,336 21,736 11,240 5,473 16,176 125,560 201,295 118,696 (1) 389,605 86,881 — 48,200 844,677 Total 239,894 151,032 411,341 98,121 5,473 64,376 % 24.73 15.57 42.40 10.11 0.56 6.63 970,237 100.00 554 (1,737) 969,054 Weighted Average Interest Rate of Maturing Debt (%) 4.46 3.63 3.96 3.86 — 4.84 4.06 3.91 (1) Includes construction loans in the amount of $20.1 million, which bear interest at Canadian Banker's Acceptance rate plus 170 basis points. Unsecured Debt The following table summarizes the components of unsecured debt: (in thousands of dollars) Unsecured debentures (a) Credit facilities (b) TRS debt Other unsecured debt from equity accounted investments (c) December 31, 2022 December 31, 2021 2,652,327 996,238 2,650,571 416,223 3,648,565 3,066,794 143,232 141,131 3,932,928 — 195,562 3,262,356 a) Unsecured debentures As at December 31, 2022, unsecured debentures totalled $2,652.3 million (December 31, 2021 – $2,650.6 million). The unsecured debentures mature at various dates between 2023 and 2030, with interest rates ranging from 1.74% to 3.99%, and a weighted average interest rate of 3.17% as at December 31, 2022 (December 31, 2021 – 3.17%). Unsecured debenture activities for the year ended December 31, 2022 There is no significant activity relating to unsecured debentures during the year ended December 31, 2022. Credit rating of unsecured debentures Dominion Bond Rating Services (“DBRS”) provides credit ratings of debt securities for commercial issuers that indicate the risk associated with a borrower’s capabilities to fulfil its obligations. An investment-grade rating must exceed “BB”, with the highest rating being “AAA”. In December 2022, DBRS confirmed the Trust’s BBB(high) rating and maintained the negative trend. 68 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 72 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS b) Credit facilities The following table summarizes the activity for unsecured credit facilities: (in thousands of dollars) (Issued in) Initial Maturity Date Extended Maturity Date Annual Interest Rate (%) Facility Amount December 31, 2022 December 31, 2021 Non-revolving: August 2018(1) March 2019(1) May 2019(1) January 2022(2) December 2022(1) December 2022 January 31, 2025 N/A 2.980 80,000 July 31, 2026 July 31, 2028 June 24, 2024 December 24, 2030 January 19, 2027 December 1, 2025 December 1, 2025 N/A N/A N/A 3.520 150,000 3.146 170,000 BA + 1.20 300,000 4.370 100,000 BA + 1.20 100,000 80,000 150,000 170,000 300,000 100,000 100,000 December 2022 December 20, 2025 December 20, 2026 BA + 1.20 or CAD Prime 100,000 100,000 Revolving: May 2020 May 11, 2024 May 11, 2026 BA + 1.20 100,000 — 1,100,000 1,000,000 80,000 150,000 170,000 — — — — 17,000 417,000 Less: Unamortized financing costs Unamortized debt modification adjustments (1,802) (1,960) (777) — 996,238 416,223 (1) The Trust entered into interest rate swap agreements to convert the variable interest rate of the Canadian Banker’s Acceptance rate plus 1.20% into a weighted average fixed interest rate of 2.62% per annum. The weighted average term to maturity of the interest rate swaps is 2.39 years. Hedge accounting has not been applied to the interest rate swap agreements. See additional details in the table below. (2) The proceeds of this loan were mainly used for the acquisition of SmartVMC West in December 2021. The following table summarizes the fair value gain (loss) as at December 31, 2022 and December 31, 2021, relating to the mark to market adjustments associated with the interest rate swap agreements: Facility Amount 170,000 150,000 80,000 100,000 11,403 Maturity Date June 24, 2024 July 31, 2026 January 31, 2025 December 1, 2025 November 3, 2025 Fixed Interest Rate (%) Variable Interest Rate December 31, 2022 December 31, 2021 3.146 3.520 2.980 4.370 3.470 BA + 1.20 BA + 1.20 BA + 1.20 BA + 1.20 BA + 1.20 16,225 10,151 6,161 1,120 624 34,281 (2,822) (4,801) (40) — (91) (7,754) c) Other unsecured debt from equity accounted investments Other unsecured debt net of fair value adjustments totalling $141.1 million (December 31, 2021 – $195.6 million) at the Trust’s share pertains to loans received from equity accounted investments in connection with contribution agreements relating to joint ventures. The loans are non-interest-bearing with repayment terms based on the distributions that are to be paid pursuant to the limited partnership agreements. The balances of the loans are expected to be paid at the end of their respective terms. Revolving Operating Facilities The following table summarizes components of the Trust’s revolving operating facilities: Revolving facility maturing August 2026 Revolving facility maturing February 2024(1) Annual Interest Rate (%) Facility Amount Amount Drawn Outstanding Letters of Credit Remaining Undrawn Facilities December 31, 2022 December 31, 2021 BA + 1.20 500,000 7,000 15,374 477,626 341,715 US$ LIBOR + 1.20 150,000 74,283 — 81,283 75,717 553,343 — 341,715 (1) The Trust has drawn in US$54.9 million which was translated to $74.3 million as at December 31, 2022 (December 31, 2021 – drawn in US$116.8 million which was translated to $147.6 million). SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 69 73 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS In addition to the letters of credit outstanding on the Trust’s revolving operating facilities (see above), the Trust also has $32.9 million of letters of credit outstanding with other financial institutions as at December 31, 2022 (December 31, 2021 – $26.5 million). Unencumbered Assets As at December 31, 2022, the Trust had $8.4 billion of unencumbered assets (a non-GAAP financial measure) (December 31, 2021 – $6.6 billion), which reflects the Trust’s share of the value of investment properties. Expressed as a percentage, the Trust earned approximately 71.1% of its NOI from unencumbered assets (December 31, 2021 – 62.6%). In connection with this pool of unencumbered assets, management estimates the total Forecasted Annualized NOI for 2023 to be $368.8 million (December 31, 2021 – $327.9 million). Forecasted Annualized NOI is computed by annualizing the current quarter NOI for the Trust’s income properties that are not encumbered by secured debt, and is a forward-looking non-GAAP measure. See “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures”. Debt Maturities The following graph illustrates the debt maturities(1) as at December 31, 2022: Debt Maturities (in $ millions) 1250 1000 750 500 250 0 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 Secured Debt Unsecured Debentures Unsecured Credit Facilities (1) Excludes revolving operating facilities of $81.3 million. 70 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 74 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTInterest Income and Interest Expense Interest Income The following table summarizes the components of interest income: Three Months Ended December 31 Year Ended December 31 MANAGEMENT’S DISCUSSION AND ANALYSIS (in thousands of dollars) Mortgage interest Loan interest Notes receivable interest TRS deposit interest Bank interest 2022 938 2,936 66 988 568 2021 Variance ($) 1,318 1,214 66 90 57 (380) 1,722 — 898 511 2022 6,143 8,459 263 2,223 2021 Variance ($) 5,363 780 4,575 3,884 263 271 — 1,952 (921) 948 1,869 For the year ended December 31, 2022, interest income increased by $5.7 million as compared to the year ended December 31, 2021. This increase was primarily attributed to the additional loans issued under self-storage facilities and higher interest rates. 5,496 2,745 2,751 18,036 12,341 5,695 Interest Expense The following table summarizes the components of interest expense: (in thousands of dollars) Interest at stated rates Amortization of acquisition date fair value adjustments on assumed debt Adjustment on debt modification Amortization of deferred financing costs Distributions on Units classified as liabilities – excluding SmartVMC West Distributions on Units classified as liabilities – SmartVMC West Distributions on vested deferred units Total interest expense before capitalized interest Less: Interest capitalized to properties under development – excluding SmartVMC West Interest capitalized to properties under development – SmartVMC West Interest capitalized to residential development inventory Distributions capitalized to properties under development – SmartVMC West Three Months Ended December 31 Year Ended December 31 2022 2021 Variance ($) 2022 2021 Variance ($) 46,082 36,512 9,570 166,181 150,187 15,994 (94) — 851 (127) — 898 33 — (47) (460) (527) 67 (1,960) 3,606 — (1,960) 3,828 (222) 970 1,008 (38) 3,842 3,919 (77) 2,681 — 2,681 10,725 — 10,725 724 1,045 (321) 2,847 2,424 423 (A) 51,214 39,336 11,878 184,781 159,831 24,950 (4,146) (3,440) (706) (14,836) (14,333) (503) (3,870) — (3,870) (9,926) — (9,926) (287) (242) (45) (1,043) (958) (85) (2,569) — (2,569) (10,274) — (10,274) Total capitalized interest (B) (10,872) (3,682) (7,190) (36,079) (15,291) (20,788) Interest expense net of capitalized interest expense Capitalized interest as a percentage of interest expense (C = A + B) 40,342 35,654 4,688 148,702 144,540 4,162 (D = B / A) 21.2 % 9.4 % 11.8 % 19.5 % 9.6 % 9.9 % For the year ended December 31, 2022, interest expense net of capitalized interest totalled $148.7 million, representing an increase of $4.2 million as compared to the year ended December 31, 2021, which was primarily due to the increase in interest at the stated rates due to combined impact of increased interest rates and additional use of operating facilities and other bank facilities. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 71 75 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Financial Covenants The Trust’s revolving operating facilities and unsecured debt contain numerous terms and covenants that limit the discretion of management with respect to certain business matters. These covenants could in certain circumstances place restrictions on, among other things, the ability of the Trust to create liens or other encumbrances, to pay distributions on its Units or make certain other payments, investments, loans and guarantees and to sell or otherwise dispose of assets and merge or consolidate with another entity. In addition, the Trust’s revolving operating facilities and unsecured debt contain a number of financial covenants that require the Trust to meet certain financial ratios and financial condition tests. A failure to comply with the financial covenants in the revolving operating facilities and unsecured debt could result in a default, which, if not cured or waived, could result in a reduction, suspension or termination of distributions by the Trust and permit acceleration of the relevant indebtedness. The following table presents ratios which the Trust monitors. These ratios are either requirements stipulated by the Declaration of Trust or significant financial covenants pursuant to the terms of revolving operating facilities and other credit facilities or indentures, or indicators monitored by the Trust to manage an acceptable level of leverage. These ratios are not considered measures in accordance with IFRS; nor is there an equivalent IFRS measure and may not be comparable to similarly titled measures presented by other publicly traded entities. See “Presentation of Certain Terms Including Non-GAAP Measures” and “Non-GAAP Measures.” For the year ended December 31, 2022, the Trust was in compliance with all financial covenants. Ratio Interest coverage ratio(1) Fixed charge coverage ratio(3) Debt to aggregate assets(3)(4)(5) Calculation Threshold December 31, 2022 December 31, 2021 Adjusted EBITDA / Adjusted interest expense including capitalized interest(6) Adjusted EBITDA / Debt service expense(7) Net debt / Aggregate assets(8) ≥ 1.65X ≥ 1.5X ≤ 65% 3.1X 2.3X 3.4X 2.6X 43.6 % 42.9 % Debt to aggregate assets (excluding TRS debt and receivable)(2)(5) Net debt (excluding TRS debt)/ Aggregate assets (excluding TRS receivable)(8) ≤ 65% 42.9 % 42.7 % Debt to Gross Book Value (excluding convertible debentures)(1)(4)(5) Debt to Gross Book Value (including convertible debentures)(1)(4)(5) Secured debt to aggregate assets(3)(5) Unsecured to secured debt ratio(2)(5) Unencumbered assets to unsecured debt(3)(5) Unitholders’ equity (in thousands)(1)(3) Units classified as liabilities (in thousands) Total Unitholders’ equity including Units classified as liabilities (in thousands) Net debt / Gross book value(9) ≤ 60% 52.0 % 50.8 % Net debt / Gross book value(10) ≤ 65% 52.0 % 50.8 % Secured debt including EAI / Aggregate assets(11) Unsecured debt including EAI / Secured debt including EAI(12) Unencumbered assets / Unsecured debt including EAI(13) ≤ 40% 11.2 % 12.4 % N/A 74%/26% 71%/29% ≥ 1.3X 2.2X 1.9X ≥ $2,000,000 $6,163,101 $5,841,315 N/A $211,497 $254,223 N/A $6,374,598 $6,095,538 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) This ratio is required by the Trust’s indentures. This ratio is disclosed for informational purposes only. This ratio is a significant financial covenant pursuant to the terms of the Trust’s revolving operating facilities and other credit facilities. This ratio is stipulated by the Declaration of Trust. As at December 31, 2022, cash-on-hand of $33.4 million (December 31, 2021 – $80.0 million) was excluded for the purposes of calculating the ratios. This ratio is calculated as: Adjusted EBITDA/Adjusted interest expense including capitalized interest. The calculation of Adjusted EBITDA and Adjusted interest expense including capitalized interest are referenced in the “Non-GAAP Measures.” This ratio is calculated as: Adjusted EBITDA/Debt service expense. The calculation of Adjusted EBITDA is referenced in the “Non-GAAP Measures.” Debt service expense is calculated as total interest expense as per the proportionate income statement, less distributions on vested deferred units and Units classified as liabilities and interest income from mortgages and loans receivable, plus capitalized interest and mortgage principal amortization payments. This ratio is calculated as: Net debt/Aggregate assets. Net debt is calculated as total debt including equity accounted investments as referenced in “Debt,” less excess cash-on-hand. Aggregate assets is calculated as total assets as per the proportionate balance sheet, less excess cash-on-hand. When calculating this ratio excluding TRS receivable and debt, Net debt as calculated above further minus debt borrowed concurrent with entering the TRS agreement as referenced in “Debt”. Aggregate assets as calculated above further minus TRS receivable as referenced in “Total Return Swap Receivable”. This ratio is calculated as: Net debt/Gross Book Value. Net debt is calculated as total debt including equity accounted investments as referenced in “Debt,” less excess cash-on-hand. Gross Book Value is calculated as total assets as per the proportionate balance sheet, less excess cash-on-hand and fair value adjustment net of accumulated amortization. This ratio is calculated as: Net debt/Gross Book Value. Net debt is calculated as total debt including equity accounted investments as referenced in “Debt,” less excess cash-on-hand. Gross Book Value is calculated as total assets as per the proportionate balance sheet, less excess cash-on-hand and fair value adjustment net of accumulated amortization. This ratio is calculated as: Secured debt including EAI/Aggregate assets. Secured debt is calculated as the Trust’s secured debt plus secured debt on equity accounted investments as referenced in “Debt.” Aggregate assets is calculated as total assets as per the proportionate balance sheet, less excess cash-on-hand. This ratio is calculated as: Unsecured debt including EAI/Secured debt including EAI. Unsecured debt is calculated as the Trust’s unsecured debt plus unsecured debt on equity accounted investments as referenced in “Debt.” Secured debt is calculated as the Trust’s secured debt plus secured debt on equity accounted investments as referenced in “Debt.” This ratio is calculated as: Unencumbered assets/Unsecured debt including EAI. Unencumbered assets is calculated as referenced in “Debt.” Unsecured debt is calculated as the Trust’s unsecured debt plus unsecured debt on equity accounted investments as referenced in “Debt.” 72 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 76 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Unitholders’ Equity The Unitholders’ equity of the Trust is calculated based on the equity attributable to the holders of Trust Units and LP Units (“Exchangeable Securities”) that are exchangeable into Trust Units on a one-for-one basis. These LP Units consist of certain Class B Units of the Trust’s subsidiary limited partnerships. Certain of the Trust’s subsidiary limited partnerships also have Units classified as liabilities that are exchangeable on a one-for-one basis for Units. The following table is a summary of the number of Units outstanding: Type Trust Units Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership II Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership IV Smart Oshawa South Limited Partnership Class and Series N/A Class B Series 1 Class B Series 2 Class B Series 3 Class B Class B Series 4 Class B Series 5 Class B Series 6 Class B Series 7 Class B Series 8 Class B Series 1 Class B Series 1 Smart Oshawa Taunton Limited Partnership Class B Series 1 Smart Boxgrove Limited Partnership Class B Series 1 Total Units classified as equity Smart Limited Partnership Smart Limited Partnership Smart Oshawa South Limited Partnership ONR Limited Partnership ONR Limited Partnership I ONR Limited Partnership I SmartVMC West Limited Partnership SmartVMC West Limited Partnership Total Units classified as liabilities Class D Series 1 Class F Series 3 Class D Series 1 Class B Class B Series 1 Class B Series 2 Class D Series 1 Class D Series 2 December 31, 2022 December 31, 2021 144,625,322 14,746,176 957,822 720,432 756,525 706,591 583,535 640,059 434,598 1,698,018 3,112,565 710,416 374,223 170,000 170,236,282 311,022 8,708 260,417 1,248,140 132,881 139,302 3,623,188 2,173,913 7,897,571 144,625,322 14,746,176 957,822 720,432 756,525 706,591 572,337 627,640 434,598 1,698,018 3,093,910 710,416 374,223 170,000 Variance (#) — — — — — — 11,198 12,419 — — 18,655 — — — 170,194,010 42,272 311,022 8,708 260,417 1,248,140 132,881 139,302 3,623,188 2,173,913 7,897,571 — — — — — — — — — Total Units 178,133,853 178,091,581 42,272 As of February 8, 2023, the Trust has 170,236,282 Units outstanding which are classified as equity, and 7,897,571 Units outstanding which are classified as liabilities. The following table is a summary of the activities having an impact on Unitholders’ equity: (in thousands of dollars) Unitholders’ Equity – beginning of year Unit issuance costs Deferred Units exchanged for Trust Units Issuance of LP Units classified as equity Net income and comprehensive income Distributions Unitholders’ Equity – end of year LP Units classified as liabilities – beginning of year Issuance of LP Units Change in carrying value LP Units classified as liabilities – end of year Year Ended Year Ended December 31, 2022 December 31, 2021 5,841,315 5,166,975 (250) — 1,279 635,965 (315,208) 6,163,101 254,223 — (42,726) 211,497 (18) 198 1,738 987,676 (315,254) 5,841,315 48,479 181,236 24,508 254,223 Unitholders’ Equity and LP Units classified as liabilities – end of period 6,374,598 6,095,538 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 73 77 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Distributions The Trust’s Board of Trustees is responsible for approving distributions. See also details in the “Determination of Distributions” subsection. For the year ended December 31, 2022, the Trust paid $329.8 million in cash distributions (for the year ended December 31, 2021 – $319.2 million in cash distributions). The following table summarizes declared distributions: (in thousands of dollars) Distributions declared on: Trust Units LP Units Other non-controlling interest Distributions on Units classified as equity Distributions on LP Units classified as liabilities – excluding SmartVMC West Distributions on LP Units classified as liabilities – SmartVMC West Distributions on LP Units classified as liabilities Year Ended December 31 2022 2021 267,563 47,363 282 315,208 3,881 10,725 14,606 267,552 47,282 420 315,254 3,881 38 3,919 Total distributions declared 329,814 319,173 Normal Course Issuer Bid The normal course issuer bid (“NCIB”) program terminated on March 30, 2022. During the year ended December 31, 2022, the Trust did not purchase for cancellation any Trust Units under this NCIB program. 74 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 78 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Section VIII — Related Party Transactions Pursuant to the Declaration of Trust, provided certain ownership thresholds are met, the Trust is required to issue such number of additional Special Voting Units to Penguin that will entitle Penguin to cast 25.0% of the aggregate votes eligible to be cast at a meeting of the Unitholders and Special Voting Unitholders (“Voting Top-Up Right”). As at December 31, 2022, there were 10,053,123 additional Special Voting Units outstanding (December 31, 2021 – 8,163,976). These Special Voting Units are not entitled to any interest or share in the distributions or net assets of the Trust, nor are they convertible into any Trust securities. There is no value assigned to the Special Voting Units. A five-year extension of the Voting Top-Up Right was approved by Unitholders at the Trust’s annual general and special meeting held on December 9, 2020. For further details, see the Trust’s management information circular dated November 6, 2020, filed on SEDAR. As at December 31, 2022, Penguin owned 20.8% of the aggregate issued and outstanding Trust Units in addition to the Special Voting Units previously noted above. Penguin’s ownership of Trust Units would increase to 24.6% if Penguin exercised all remaining options to purchase Units pursuant to existing development and exchange agreements (Earnouts). In addition, the Trust has entered into property management, leasing, development and exchange, and co-ownership agreements with Penguin. Pursuant to its rights under the Declaration of Trust, as at December 31, 2022, Penguin has appointed two of the eight trustees. The Trust entered into various agreements with Penguin in November 2020 coincident with the extension of the term of the Voting Top-Up Right. For further details, see the Trust’s management information circular dated November 6, 2020, filed on SEDAR and below. Supplement to Development Services Agreement between the Trust and its Affiliates and Penguin The following represent the key elements of this agreement which is effective from July 1, 2020 until December 31, 2025: i) ii) Penguin shall be reimbursed for 50% of disposition fees otherwise payable pursuant to the Development Services Agreement related to Penguin’s interest in properties sold by the Trust, for future SmartVMC commercial phases and certain properties currently owned by Penguin (for which the Trust has historically assisted with development and planning requirements), all development fees are payable to Penguin and all other fees (management, leasing, etc.) are payable to the Trust, iv) iii) when Penguin utilizes employees of the Trust to assist with its development projects, Penguin will pay for these services provided by employees of the Trust based on annual estimates of time billings related to these projects, charged at estimated total cost, including compensation, for a property owned by a third party which is managed by Penguin in Richmond, British Columbia, the Trust will be paid 50% of the management and leasing fees, and 100% of costs associated with the Trust’s employees/personnel who service this particular property, for Penguin’s 50% interest in a property in Toronto co-owned with Revera to develop a retirement home, Penguin will pay 50% of the development fees it earns to the Trust for the development services provided by the Trust, and the Trust will continue to manage and develop all other Penguin properties. vi) v) Support services are provided for a fee based on an allocation of the Trust’s relevant costs of the support services to Penguin. Such relevant costs include: office administration, human resources, information technology, insurance, legal and marketing. Penguin Services Agreement The amended and restated services agreement entered into on November 5, 2020 (the “Penguin Services Agreement”), and effective from February 2018 reflects the additional services provided by Penguin since that time. Under the agreement, Penguin provides specified services to the Trust in connection with the development of its projects. In return for those services, Penguin is entitled to receive: i) a fixed quarterly fee of $1.0 million (subject to inflation-related increments after 2018) and ii) an annual variable fee between $1.5 million and $3.5 million (also inflation-adjusted after 2018) that is based on the achievement of the Trust-level targets for “New Development Initiatives” and “New Projects” that the Trust uses to measure the performance of its executive officers and other annual targets (other than such Trust-level targets) of a similar nature that the Trust uses to measure the performance of its executive officers as determined by the Board of Trustees from time to time. Omnibus Agreement between the Trust and Penguin Effective December 9, 2020, pursuant to an omnibus agreement between the Trust and Penguin (the “Omnibus Agreement”), Penguin has the option to extend all Earnouts by two years from the previous expiry date, and the Trust has been given a right of first offer in connection with the sale of the economic and financial benefits and rights of any such development parcel during any extended period. In addition, this agreement provides for the payment of certain outstanding amounts between the parties. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 75 79 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Mezzanine Loan Amending Agreements between the Trust and its Affiliates and Penguin Effective November 5, 2020, all loan maturity dates have been extended to August 31, 2028, with a new rate structure for the extension period of each mortgage receivable (see also Note 6, “Mortgages, loans and notes receivable” in the Trust’s consolidated financial statements for the year ended December 31, 2022). The Trust’s purchase option periods have been extended and because these properties may now be subject to mixed-use development projects, the agreements provide that the parties establish a new framework for the purchase options for the Trust related to mixed-use development. Non-Competition Agreement A non-competition agreement with Penguin entered into in 2020 replaced and superseded the previous non-competition agreement extending the term by five years and broadening restricted competing initiatives to include various forms of mixed-use development. Executive Employment Agreement This agreement confirms Mr. Goldhar’s position as Executive Chairman of the Trust for the period from February 14, 2018, to December 31, 2025, for which Mr. Goldhar receives a salary, bonus, customary benefits, and is eligible to participate in the Trust’s DUP and the EIP (see below). Equity Incentive Plan In January 2021, the Trust granted 900,000 performance units to Mitchell Goldhar pursuant to the EIP adopted by Unitholders effective December 9, 2020, which are subject to the achievement of Unit price thresholds (ranging from $26.00 to $34.00). The performance period for this award granted under the EIP is from January 1, 2021 to December 31, 2027. The vesting period for these performance units will commence on the date that the applicable performance measure is achieved, and will end on the earlier of the third anniversary of the date that the applicable performance measure is achieved and the end of the performance period. Distributions on these performance units will accumulate from January 1, 2021. Provided the various performance measures are achieved, the performance units will be exchanged for Trust Units or paid out in cash (see also Note 22, “Related party transactions”, in the Trust’s consolidated financial statements for the year ended December 31, 2022). Under the award granted to Mitchell Goldhar, the $26.00 Unit price threshold was achieved on April 5, 2021, and the $28.00 Unit price threshold was achieved on May 18, 2021, and under the awards granted to Mitchell Goldhar and other eligible associates in 2021, the $30.00 Unit price threshold was achieved on September 22, 2021, and the $32.00 Unit price threshold was achieved on April 5, 2022. The performance units for these Unit price thresholds will vest on April 4, 2024, May 17, 2024, September 21, 2024 and April 4, 2025, respectively. The following table summarizes the change in the carrying value of the EIP award granted to Mitchell Goldhar: Balance – beginning of year Amortization costs capitalized to properties under development(1) Fair value adjustment to financial instruments Balance – end of year Year Ended December 31, 2022 Year Ended December 31, 2021 8,500 5,182 (302) 13,380 — 5,198 3,302 8,500 (1) These amounts were capitalized to properties under development in connection with Mitchell Goldhar’s role in leading and completing development activities. Related party transactions and balances are also disclosed elsewhere in the Trust’s consolidated financial statements for the year ended December 31, 2022, which include: • • • • • • • • • • • Note 3(c) referring to the purchase of Earnouts Note 4(c) referring to Leasehold property interests Note 5(a)(ii) referring to a supplemental development fee agreement Note 6 referring to Mortgages, loans and notes receivable Note 7 referring to Other assets Note 11 referring to Amounts receivable and other Note 13 referring to Other financial liabilities Note 14 referring to Accounts and other payables (including future land development obligations) Note 18 referring to Rentals from investment properties and other Note 19 referring to Property operating costs and other, and Note 20 relating to General and administrative expense, net. 76 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 80 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT The following table summarizes related party transactions and balances with Penguin and other related parties, including amounts relating to the Trust’s share in equity accounted investments: MANAGEMENT’S DISCUSSION AND ANALYSIS (in thousands of dollars) Related party transactions with Penguin Acquisitions and Earnouts: Earnouts Revenues: Service and other revenues: Management fee and other services revenue pursuant to the Development and Services Agreement Supplement to the Development Services Agreement fees – time billings Support services Interest income from mortgages and loans receivable Rents and operating cost recoveries included in rentals from income properties (includes rental income from Penguin Pick-Up of $355 (year ended December 31, 2021 – $271)) Expenses and other payments: Fees paid – capitalized to properties under development EIP – capitalized to properties under development Development fees and interest expense (capitalized to investment properties) Opportunity fees capitalized to properties under development(1) Marketing, time billings and other administrative costs (included in general and administrative expense and property operating costs) Disposition fees (included in general and administrative expense) Expenditures on tenant inducement Related party transactions with PCVP Revenues: Interest income from mortgages and loans receivable Expenses and other payments: Year Ended December 31 2022 2021 9,210 16,274 3,670 8,042 1,192 12,904 7,857 893 21,654 7,416 5,182 354 60 76 612 — 6,309 5,097 1,466 12,872 6,209 828 19,909 7,062 5,198 115 1,839 84 979 77 13,700 15,354 1,318 1,935 Rent and operating costs (included in general and administrative expense and property operating costs) 2,720 2,625 (1) These amounts include prepaid land costs that will offset the purchase price of future Earnouts. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 77 81 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS (in thousands of dollars) December 31, 2022 December 31, 2021 Related party balances with Penguin disclosed elsewhere in the financial statements Receivables: Amounts receivable and other(1) Mortgages receivable Loans receivable Notes receivable Total receivables Payables and other accruals: Accounts payable and accrued liabilities Future land development obligations Total payables and other accruals 18,734 39,456 100,280 2,924 161,394 3,504 17,646 21,150 14,953 139,589 116,966 2,924 274,432 3,370 18,931 22,301 (1) Excludes amounts receivable presented below as part of balances with equity accounted investments. This amount includes amounts receivable of $11.9 million and other of $6.8 million (December 31, 2021 – $7.0 million and other of $8.0 million). The following table summarizes the related party balances with the Trust’s equity accounted investments: (in thousands of dollars) December 31, 2022 December 31, 2021 Related party balances disclosed elsewhere in the financial statements Amounts receivable(1) Loans receivable(2) Other unsecured debt(3) 616 164,628 141,131 581 139,152 195,562 (1) (2) (3) Amounts receivable includes Penguin’s portion, which represents $0.03 million (December 31, 2021 – $0.004 million) relating to Penguin’s 50% investment in PCVP and 25% investment in Residences LP. Loans receivable includes Penguin’s portion, which represents $24.3 million (December 31, 2021 – $23.6 million) relating to Penguin’s 50% investment in PCVP. Other unsecured debt includes Penguin’s portion, which represents $0.2 million (December 31, 2021 – $6.2 million) relating to Penguin’s 25% investment in Residences LP. Other related party transactions: The following table summarizes other related party transactions: (in thousands of dollars) Legal fees incurred from a law firm in which a partner is a Trustee: Capitalized to investment properties Included in general and administrative expense Year Ended December 31 2022 1,919 846 2,765 2021 2,628 2,129 4,757 78 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 82 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS Section IX — Accounting Policies, Risk Management and Compliance Significant Accounting Estimates and Policies In preparing the Trust’s consolidated financial statements and accompanying notes, it is necessary for management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses during the period. The significant accounting policies of the Trust are as follows: Investment properties Investment properties include income properties and properties under development (land or building, or part of a building, or both) that are held by the Trust, or leased by the Trust as a lessee, to earn rentals or for capital appreciation or both. Acquired investment properties are measured initially at cost, including related transaction costs in connection with asset acquisitions. Certain properties are developed by the Trust internally, and other properties are developed and leased to third parties under development management agreements with Penguin and other vendors (“Earnouts”). Earnouts occur when the vendors retain responsibility for managing certain developments on land acquired by the Trust for additional proceeds paid on completion calculated based on a predetermined, or formula-based, capitalization rate, net of land and development costs incurred by the Trust (see Note 4(d)(ii) in the Trust’s consolidated financial statements for the year ended December 31, 2022). The completion of an Earnout is reflected as an additional purchase in Note 3, “Acquisitions and Earnouts” in the Trust’s consolidated financial statements for the year ended December 31, 2022. Costs capitalized to properties under development include direct development and construction costs, Earnout Fees (“Earnout Fees”), borrowing costs, property taxes and other carrying costs, as well as capitalized staff compensation and other costs directly attributable to properties under development. Borrowing costs that are incurred for the purpose of, and are directly attributable to, acquiring or constructing a qualifying investment property are capitalized as part of its cost. The amount of borrowing costs capitalized is determined first by reference to borrowings specific to the project, where relevant, and otherwise by applying a weighted average cost of borrowings to eligible expenditures after adjusting for borrowings associated with other specific developments. Borrowing costs are capitalized while acquisition or construction is actively underway and cease once the asset is ready for use as intended by management, or suspended if the development of the asset is suspended, as identified by management. After the initial recognition, investment properties are recorded at fair value, determined based on comparable transactions, if any. If comparable transactions are not available, the Trust uses alternative valuation methods such as: i) the discounted cash flow valuation method, and ii) land, development and construction costs recorded at market value. Valuations, where obtained externally, are performed during the year with quarterly updates on capitalization rates by professional valuers who hold recognized and relevant professional qualifications and have recent experience in the location and category of the investment property being valued. Related fair value gains and losses are recorded in the consolidated statements of income and comprehensive income in the period in which they arise. Investment property held by the Trust under a lease is classified as investment property when the definition of an investment property is met and the Trust accounts for the lease as a right-of-use asset. The Trust accounts for all leasehold property interests that meet the definition of investment property held by the Trust as right-of-use assets. Subsequent expenditure is capitalized to the investment property’s carrying amount only when it is probable that future economic benefits associated with the expenditure will flow to the Trust and the cost of the item can be measured reliably. All other repairs and maintenance costs are expensed when incurred. When part of an investment property is replaced, the carrying amount of the replaced part is derecognized. Initial direct leasing costs incurred by the Trust in negotiating and arranging tenant leases are added to the carrying amount of investment properties. An investment property is classified as held for sale when it is expected that its carrying amount will be recovered principally through a sale transaction rather than through continuing use. For an investment property to be classified as held for sale: i) it must be available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such property, and ii) the sale must be highly probable, management must be committed to a plan to sell the assets, and the sale is expected generally within one year of classification. The Trust continues to measure investment properties, including those classified as held for sale, at fair value. Assets held for sale are presented separately on the consolidated balance sheets. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 79 83 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Revenue Recognition Rentals from investment properties and other The Trust’s rental from investment properties and other comes from different sources and is accounted for in accordance with IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) and IFRS 16, “Leases” (“IFRS 16”). a) Rentals from investment properties The Trust’s lease agreements may contain both lease and non-lease elements. IFRS 16 requires lessors to allocate consideration in the contracts between lease and non-lease components based on their relative standalone prices. Rentals from investment properties accounted for using IFRS 16 (lease components) include rents from tenants under leases, recoveries of property tax and operating costs that do not relate to additional services provided to lessees, percentage participation rents, lease cancellation fees, parking income and some incidental lease-related income. Rents from tenants may include free rent periods and rental increases over the term of the lease and are recognized in revenue on a straight-line basis over the term of the lease. The difference between revenue income recognized and the cash received is included in other assets as straight-line rent receivable. Lease incentives provided to tenants are deferred and are amortized against revenue rental income over the term of the lease. Percentage participation rents are recognized after the minimum sales level has been achieved with each lease. Lease cancellation fees are recognized as revenue income once an agreement is completed with the tenant to terminate the lease and the collectibility is probable. Rentals from investment properties also include certain amounts accounted for under IFRS 15 (non-lease components) where the Trust provides lessees or others with a distinct service. Non-lease components include revenue in a form of recoveries of operating costs where services are provided to tenants (common area maintenance recoveries, chargeback recoveries and administrative recoveries), parking revenue and revenue from other services that are distinct. The respective performance obligations are satisfied as services are rendered and revenue is recognized over time. See also Note 18 in the Trust’s consolidated financial statements for the year ended December 31, 2022 for details on amounts related to lease and non-lease components. Typically, revenue from operating costs recoveries and other services is collected from tenants on a monthly basis and parking revenue is collected at the day when the respective service has been provided. This results in immaterial contract balances as at each reporting date. b) Service and other revenues The Trust provides asset and property management services to co-owners, partners and third parties for which it earns market- based construction, development and other fees. These fees are recognized over time in accordance with IFRS 15 as the service or activity is performed. Where a contract has multiple deliverables, the Trust identifies the different performance obligations of the contract and recognizes the revenue allocated to each obligation as the respective obligation is met. The Trust recognizes non-lease component revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the Trust expects to be entitled in exchange for those goods or services. It applies to all contracts with customers, excluding leases, financial instruments and insurance contracts. Financial instruments – recognition and measurement The Trust’s financial instruments are accounted for under IFRS 9: Initial Recognition The Trust recognizes a financial asset or a financial liability when, and only when, it becomes a party to the contractual provisions of the instrument. Such financial assets or financial liabilities are initially recognized at their fair value, including directly attributable transaction costs in the case of a financial asset or financial liability not subsequently measured at fair value through profit or loss. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Subsequent measurement depends on the initial classification of the financial asset or financial liability. Classification The classification of financial assets depends on the entity’s business model for managing the financial assets and the contractual terms of the cash flows. Financial assets are classified and measured based on the following categories: • • • amortized cost; fair value through other comprehensive income (“FVTOCI”); and fair value through profit or loss (“FVTPL”). 80 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 84 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT The following table summarizes the Trust’s classification and measurement of financial assets and liabilities: Note(1) Classification under IFRS 9 MANAGEMENT’S DISCUSSION AND ANALYSIS Financial assets Mortgages, loans and notes receivable Amounts receivable and other Cash and cash equivalents Cash held as collateral Total return swap receivable Other financial assets Financial liabilities Accounts payable and other payables Secured debt Revolving operating facilities Unsecured debt Units classified as liabilities Earnout options Deferred unit plan (“DUP”) Long term incentive plan (“LTIP”) Equity incentive plan (“EIP”) Other financial liabilities 2.12 2.10 2.13 2.13 2.13 2.13 Amortized cost Amortized cost Amortized cost Amortized cost FVTPL FVTPL Amortized cost Amortized cost Amortized cost Amortized cost FVTPL FVTPL FVTPL FVTPL FVTPL FVTPL (1) The Note reference relates to the corresponding Note disclosure in the Trust’s consolidated financial statements for the year ended December 31, 2022. a) Financing costs Financing costs include commitment fees, underwriting costs and legal costs associated with the acquisition or issuance of financial assets or liabilities. Financing costs relating to secured debt, non-revolving credit facilities, and convertible and unsecured debentures are accounted for as part of the respective liability’s carrying value at inception and amortized to interest expense using the effective interest method. Financing costs incurred to establish revolving credit facilities are deferred as a separate asset on the consolidated balance sheet and amortized on a straight-line basis over the term of the facilities. In the event any debt is extinguished, any associated unamortized financing costs are expensed immediately. b) Derivative instruments Derivative financial instruments may be utilized by the Trust in the management of its interest rate and foreign currency exposure. Derivatives are carried at fair value with changes in fair value recognized in net income. The Trust’s policy is not to utilize derivative instruments for trading or speculative purposes. c) Fair value of financial and derivative instruments The fair value of financial instruments is the amount of consideration that would be agreed upon in an arm’s-length transaction between knowledgeable, willing parties who are under no compulsion to act, i.e., the fair value of consideration given or received. In certain circumstances, the fair value may be determined based on observable current market transactions in the same instrument, using market-based inputs. The fair values are described and disclosed in Note 15, “Fair value of financial instruments” in the Trust’s consolidated financial statements for the year ended December 31, 2022. d) Currency swap agreement The currency swap is a contractual agreement to exchange payments based on specified notional amounts in two currencies, Canadian dollars and U.S. dollars, for a specific period. The currency swap agreement requires the exchange of net contractual payments periodically without the exchange of the notional principal amounts on which the payments are based. Changes in market value are recorded in net income and comprehensive income. The currency swap payable reflects the fair value of the swap agreement, and is determined as the difference between the foreign exchange rate between Canadian dollars and U.S. dollars as per the swap agreement and the foreign exchange rate at the reporting date on the specified notional amount. The gain (loss) will be realized when the currency swap agreement matures or is unwound. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 81 85 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS e) Interest rate swap agreements The Trust may enter into interest rate swaps to economically hedge its interest rate risk. The fair value of interest rate swap agreements reflects the fair value of swap agreements at each reporting date, and is driven by the difference between the fixed interest rate and the applicable variable interest rate. The fair value of interest rate swap agreements is determined using the discounted cash flow valuation technique on the expected cash flows of the derivatives. The future fixed cash payments and the expected variable cash receipts are discounted to the reporting date, and then netted to determine the fair value of each interest rate swap agreement. The expected variable cash receipts are based on expectations of future interest rates, which are derived from yield curves based on observable market data. f) Total return swap (“TRS”) receivable The total return swap is a contractual agreement to exchange payments based on a specified notional amount and the underlying financial assets for a specific period. The total return to the Trust includes the total return generated by the underlying notional Trust Units, plus any appreciation, if there is any, in the market value of the notional Trust Units, less the amount equal to any decline, if there is any, in the market value of the underlying notional Trust Units. The total return swap agreement requires the exchange of net contractual payments periodically without the exchange of the notional principal amounts on which the payments are based. Changes in market value are recorded in net income and comprehensive income. The Trust has funded the total return swap agreement by a loan from the counterparty. The loan is measured at amortized cost. The total return swap receivable reflects the market value of the swap agreement, and is determined by reference to the value of the underlying notional Trust Units at each reporting date. The gain (loss) will be realized when the total return swap agreement matures or is unwound. g) Modifications or extinguishments of loans and debt Amendments to mortgages and loans receivable and debt are assessed as either modifications or extinguishments based on the terms of the revised agreements. When a modification is determined, the carrying amount of the loan or debt is adjusted using the original effective interest rate, with a corresponding adjustment recorded as a gain or loss. When an extinguishment is determined, the new loan or debt is recorded at its fair value and a corresponding gain/loss is recognized immediately for the difference between the carrying amount of the old loan or debt and the new loan or debt. h) Impairment of financial assets The Trust assesses, on a forward-looking basis, the expected credit losses (“ECL”) associated with its debt instruments carried at amortized cost. The impairment is dependent on whether there has been a significant increase in credit risk. For trade receivables, the Trust applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognized from initial recognition of the receivables. To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due. The contract assets (“Unbilled other tenant receivables”) relate to unbilled work in progress and have substantially the same risk characteristics as the trade receivables for the same types of contracts. The Trust has therefore concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the contract assets. However, the assumptions and estimates underlying the manner in which ECLs have been implemented historically may not be appropriate in the current economic environment, including but not limited to the inflationary environment, with rising interest rates. Accordingly, the Trust has not applied its existing ECL methodology mechanically. Instead, during the current economic environment, the Trust has been in discussions with tenants on a case-by-case basis to determine optimal rent payment solutions and has incorporated this available, reasonable and supportable information when estimating ECL on tenant receivables. All of the Trust’s loans receivable and mortgages receivable at amortized cost are considered to have low credit risk, and the loss allowance recognized during the period was therefore limited to 12 months expected losses. These financial assets are considered by management to be “low credit risk” when these financial assets have a low risk of default and the borrower has a strong capacity to meet its contractual cash flow obligations in the near term. i) Cash held as collateral The Trust, from time to time, pledges cash and cash equivalents as security for derivative instruments with financial institutions. This balance is classified as cash held as collateral, a non-current financial asset, and is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. 82 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 86 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS j) Interest income Interest income is recognized as interest accrues using the effective interest method. When a loan and receivable are impaired, the Trust reduces the carrying amount to its recoverable amount, which is the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognized using the original effective interest rate. Equity accounted investments a) Investment in associates Investment in associates includes entities over which the Trust has significant influence but not control or joint control, generally accompanying an ownership of between 20% and 50% of the voting rights. Investment in associates is accounted for using the equity method of accounting and recorded as equity accounted investments on the consolidated balance sheet. Under the equity method, the investment is initially recognized at cost, and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee, including the Trust’s pro rata share of changes in fair value of investment property held by the associate from the previous reporting period, after the date of acquisition. The Trust’s investment in associates includes any notional goodwill identified on acquisition. b) Investment in joint ventures A joint venture is a joint arrangement whereby the parties that have joint control only have rights to the net assets of the arrangement. Investment in joint ventures is accounted for using the equity method of accounting and recorded as equity accounted investments on the consolidated balance sheet. Under the equity method, the investment is initially recognized at cost, and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee, including the Trust’s pro rata share of changes in fair value of investment property held by the equity accounted investment from the previous reporting period, after the date of acquisition. The Trust’s investment in joint ventures includes any notional goodwill identified on acquisition. The Trust’s share of post-acquisition profit or loss is recognized in the consolidated statement of income and comprehensive income with a corresponding adjustment to the carrying amount of the equity accounted investment. When the Trust’s share of losses in an equity accounted investment equals or exceeds its interest in the equity accounted investment, including any other unsecured receivables, the Trust does not recognize further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the equity accounted investment. The Trust determines at each reporting date whether there is any objective evidence that the equity accounted investment is impaired. If this is the case, the Trust calculates the amount of impairment as the difference between the recoverable amount of the equity accounted investment and its carrying value and recognizes the amount in the consolidated statement of income and comprehensive income. Profits and losses resulting from upstream and downstream transactions between the Trust and its equity accounted investment are recognized in the Trust’s consolidated financial statements only to the extent of an unrelated investor's interests in the equity accounted investment. Accounting policies of equity accounted investments are updated when necessary to ensure consistency with the policies adopted by the Trust. Condominium sales revenue Some of the Trust’s equity accounted investments generated revenue from condominium sales. The Trust’s equity accounted investments adopted the accounting policy which requires that the revenue generated from contracts with customers on the sale of residential condominium units is recognized at a point in time when control of the asset (i.e., condominium unit) has transferred to the purchaser (i.e., generally, when the purchaser takes possession of the condominium unit) as the purchaser has the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. The amount of revenue recognized is based on the transaction price included in the purchasers' contracts. Any funds received prior to the purchasers taking possession of their respective assets are recognized as deferred revenue (contractual liability). Condominium cost of sales The Trust’s equity accounted investments allocate inventory costs associated with the development of condominiums to direct operating costs on a per unit basis using the net yield method. In addition, if post-closing costs are expected (i.e., remaining construction costs, warranties etc.), the unit’s allocation of the post-closing costs are included in cost of sales and a cost to complete liability is recorded. Foreign currency translation a) Functional currency The Trust’s properties and operations are all within Canada, which is also its primary economic environment. Accordingly, the functional currency of the Trust is determined to be the Canadian dollar. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 83 87 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS b) Foreign currency translation The Trust records foreign currency transactions initially at the rate of exchange at the date of the transaction. If the transaction spans over a period of time, the Trust records the foreign currency transaction at the average rate of exchange for the transaction period. At each reporting date, foreign currency monetary amounts are reported using the closing rate, which is the spot exchange rate at the end of the reporting period. Critical accounting estimates and assumptions The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The estimates and assumptions that are critical to the determination of the amounts reported in the consolidated financial statements relate to the following: a) Fair value of investment properties The fair value of investment properties is dependent on: i) projected future cash flows for income properties and properties under development, and ii) land, development and construction costs for properties under development, and discount rates applicable to those assets. The projected cash flows for each property are based on the location, type and quality of the property and supported by the terms of any existing leases, other contracts or external evidence such as current market rents for similar properties, and adjusted for estimated vacancy rates and estimated maintenance costs. Capitalization and discount rates are based on the location, size and condition of the properties and take into account market data at the valuation date. These assumptions may not ultimately be achieved. The critical estimates and assumptions underlying the valuation of investment properties are set out in Note 4 “Investment properties” in the Trust’s consolidated financial statements for the year ended December 31, 2022. b) Fair value of financial instruments i) Unit options issued to non-employees on acquisitions (the “Earnout options”) The Earnout options are considered to be contingent consideration with respect to the acquisitions they relate to, and are initially recognized at their fair value. The Earnout options are subsequently carried at fair value with changes in fair value recognized in the consolidated statements of income and comprehensive income. The fair value of Earnout options is determined using the Black-Scholes option-pricing model using certain observable inputs with respect to the volatility of the underlying Trust Unit price, the risk-free rate and using unobservable inputs with respect to the anticipated expected lives of the options, the number of options that will ultimately vest and the expected Trust Unit distribution rate. Generally, increases in the anticipated lives of the options, decreases in the number of options that will ultimately vest, and decreases in the expected Trust Unit distribution rate will combine to result in a lower fair value of Earnout options. ii) Deferred unit plan The deferred units are measured at fair value using the market price of the Trust Units on each reporting date with changes in fair value recognized in the consolidated statements of income and comprehensive income as additional compensation expense over their vesting period and as a gain or loss on financial instruments once vested. The additional deferred units are recorded in the consolidated statements of income and comprehensive income as compensation expense over their vesting period and as interest expense once vested. iii) Units classified as liabilities Units classified as liabilities are measured at each reporting period and approximate the fair value of Trust Units, with changes in value recorded directly in earnings through unrealized fair value adjustments. The distributions on such Units are classified as interest expense in the consolidated statement of income and comprehensive income. The Trust considers distributions on such Units classified as interest expense to be a financing activity in the consolidated statement of cash flows. iv) Long Term Incentive Plan The fair value of the LTIP is based on the Monte Carlo simulation pricing model, which incorporates: (i) the long-term performance of the Trust relative to the S&P/TSX Capped REIT Index for each performance period, (ii) the market value of Trust Units at each reporting date, and (iii) the total granted LTIP units under the plan including LTIP units that are reinvested. Any adjustments made to the accrued value of LTIP are recorded in earnings. v) Equity Incentive Plan The fair value of the EIP is based on the Monte Carlo simulation pricing model, which incorporates: (i) the performance of the Trust relative to the Unit price thresholds for the performance period, (ii) the 10-day VWAP of Trust Units at each 84 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 88 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS reporting date, and (iii) the total granted performance units under the EIP including performance units that are reinvested. Any adjustments made to the accrued value of EIP are recorded in earnings. Future Changes in Accounting Policies The Trust monitors the potential changes proposed by the IASB and analyzes the effect that changes in the standards may have on the Trust’s operations. Standards issued but not yet effective up to the date of issuance of the consolidated financial statements for the year ended December 31, 2022 are described below. This description is of the standards and interpretations issued that the Trust reasonably expects to be applicable at a future date. The Trust intends to adopt these standards when they become effective. Amendments to IAS 1, Presentation of Financial Statements – Classification of Liabilities as Current or Non-Current In January 2020, the IASB issued amendments to IAS 1 to clarify the requirements for classifying liabilities as current or non- current. The amendments clarify the classification of liabilities as current or non-current based on rights that are in existence at the end of the reporting period and unaffected by the likelihood that an entity will exercise its right to defer settlement of the liability for at least 12 months after the reporting period. The amendments also clarify the definition of “settlement” of a liability. In October 2022, revised amendments in respect of non-current liabilities with covenants were issued. Both amendments are effective on January 1, 2024 and should be applied retrospectively. Earlier application is permitted. Management is currently assessing the impact of the amendments on the Trust’s financial statements. Amendments to IAS 8, Definition of Accounting Estimates In February 2021, the IASB issued amendments to IAS 8, in which it introduces the definition of “accounting estimates”. The amendments clarify the distinction between changes in accounting estimates and changes in accounting policies and the correction of errors. The amendments also clarify that the effects on an accounting estimate of a change in an input or a change in a measurement technique are changes in accounting estimates unless they result from the correction of prior period errors. The amendments are effective January 1, 2023, with early adoption permitted. Management is currently assessing the impact of the amendments on the Trust’s financial statements. Introduction of IFRS 17, Insurance contracts In May 2017, the IASB issued the new IFRS 17 standard to replace IFRS 4. IFRS 17, Insurance contracts is a new standard that sets out principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of the standard. The objective of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts. This information gives a basis for users of financial statements to assess the effect that insurance contracts have on the entity’s financial position, financial performance and cash flows. The new standard is effective on January 1, 2023 and should be applied retrospectively. Earlier application is permitted. Management is currently assessing the impact of the new standard on the Trust’s financial statements. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 85 89 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Risks and Uncertainties The ability of the Trust to meet its performance targets is dependent on its success in mitigating the various forms of risks that it has identified. For a more comprehensive list of risks and uncertainties pertinent to the Trust, please see the additional factors disclosed in the Trust’s AIF under the headings “Risk Factors”. Real Property Ownership and Leasing/Tenant Risk All real property investments are subject to elements of risk. Such investments are affected by general economic conditions, local real estate markets, supply and demand for leased premises, competition from other available premises and various other factors. Real estate has a high fixed cost associated with ownership, and income lost due to declining rental rates or increased vacancies cannot easily be minimized through cost reduction. Through well-located, well-designed and professionally managed properties, management seeks to reduce this risk. Management believes prime locations will attract high-quality retailers with strong covenants and will enable the Trust to maintain economic rents and high occupancy. By maintaining properties at the highest standards through professional management practices, management seeks to increase tenant loyalty. The value of real property and any improvements thereto may also depend on the credit and financial stability of the tenants and on the vacancy rates of the Trust’s portfolio of income-producing properties. On the expiry of any lease, there can be no assurance that the lease will be renewed or the tenant replaced, and the terms of any subsequent lease may be less favourable to the Trust than the existing lease. In the event of default by a tenant, delays or limitations in enforcing rights as lessor, may be experienced and substantial costs in protecting the Trust’s investment may be incurred. Furthermore, at any time, a tenant of any of the Trust’s properties may seek the protection of bankruptcy, insolvency or similar laws that could result in the rejection and termination of such tenant’s lease and thereby cause a reduction in the cash flow available to the Trust. The ability to rent unleased space in the properties in which the Trust has an interest will be affected by many factors. Costs may be incurred in making improvements or repairs to property. The failure to rent vacant space on a timely basis or at all would likely have an adverse effect on the Trust’s financial condition. Certain significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges must be made throughout the period of ownership of real property regardless of whether the property is producing any income. If the Trust is unable to meet mortgage payments on any property, losses could be sustained as a result of the mortgagee’s exercise of its rights of foreclosure or sale. 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. If the Trust were to be required to liquidate its real property investments, the proceeds to the Trust might be significantly less than the aggregate carrying value of its properties. The Trust will be subject to the risks associated with debt financing on its properties and it may not be able to refinance its properties on terms that are as favourable as the terms of existing indebtedness. In order to minimize this risk, the Trust attempts to appropriately structure the timing of the renewal of significant tenant leases on the properties in relation to the time at which mortgage indebtedness on such properties becomes due for refinancing. In addition, the Trust attempts to stagger the maturities of its various levels of debt over an extended period of time. Significant deterioration of the retail shopping centre market in general, or the financial health of Walmart and other key tenants in particular, could have an adverse effect on the Trust’s business, financial condition or results of operations. Also, the emergence of e-commerce as a platform for retail growth has caused many retailers to change their approach to attracting and retaining customers. To the extent that some retailers are unsuccessful in attracting and retaining customers because of the impact of e-commerce on their respective businesses, the Trust may experience additional vacancy and its resulting adverse effects on financial condition and results of operations including occupancy rates, base rental income, tax and operating cost recoveries, leasing and other similar costs. With respect to residential rental properties, in addition to the risks highlighted above, the Trust is subject to the other risks inherent in the multi-tenant rental property industry, including controlling bad debt exposure, rent control regulations, increases in operating costs including the costs of utilities (residential leases are often “gross” leases under which the landlord is not able to pass on costs to its residents), the imposition of increased taxes or new taxes and capital investment requirements. Liquidity Risk The Trust’s ability to meet its financial obligations as they become due represents the Trust’s exposure to liquidity risk. It is management’s intention to either repay or refinance maturing liabilities with newly issued secured or unsecured debt, equity or, in certain circumstances not expected to occur frequently, the disposition of certain assets. Any net working capital deficiencies are funded with the Trust’s existing revolving operating facilities. Management expects to finance future acquisitions, including 86 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 90 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS committed Earnouts, Developments, Mezzanine Financing commitments and maturing debt from: i) existing cash balances, ii) a mix of mortgage debt secured by investment properties, operating facilities, issuance of equity and unsecured debentures, iii) repayments of mortgages receivable, and iv) the sale of non-core assets. However, the Trust’s ability to meet these future obligations may be impacted by the liquidity risk associated with receiving repayments of its mortgages, loans, and notes receivable, amounts receivable and other, deposits, and cash equivalents on time and in full and the realization of fair value on the disposition of the Trust’s non-core assets. Cash flow generated from operating activities is the primary source of liquidity to pay Unit distributions, sustaining capital expenditures and leasing costs. Liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities and the ability to lease out vacant units. In the next 12 months, $720.4 million of liabilities (including $459.3 million of secured and unsecured debt and $261.1 million of accounts and other payable amounts) will mature and will need to be settled by means of renewal or payment. The Trust aims to maintain flexibility and opportunities in funding by keeping committed credit lines available, obtaining additional mortgages as the value of investment properties increases and issuing equity or unsecured debentures. The key assumptions used in the Trust’s estimates of future cash flows when assessing liquidity risk are: the renewal or replacement of the maturing revolving operating facilities, secured debt and unsecured debentures, at reasonable terms and conditions in the normal course of business and no major bankruptcies of large tenants. Management believes that it has considered all reasonable facts and circumstances in forming appropriate assumptions. However, as always, there is a risk that significant changes in market conditions could alter the assumptions used. Capital Requirements and Access to Capital The Trust accesses the capital markets from time to time through the issuance of debt or equity securities. If the Trust were unable to raise additional funds or renew existing maturing debt on favourable terms, then acquisition or development activities could be curtailed, asset sales accelerated, property-specific financing, purchase and development agreements renegotiated and monthly cash distributions reduced or suspended. However, the Trust anticipates accessing the capital markets on reasonable terms due to its high occupancy levels and low lease maturities, combined with its strong national and regional tenant base and its prime retail locations. Environmental and Climate Change Risk As an owner of real property, the Trust is subject to various federal, provincial, territorial and municipal laws relating to environmental matters. Such laws provide that the Trust could be liable for the costs of removal of certain hazardous substances and remediation of certain hazardous locations. The failure to remove or remediate such substances or locations, if any, could adversely affect the Trust’s ability to sell such real estate or to borrow using such real estate as collateral and could potentially also result in claims against the Trust. The Trust is not aware of any material non-compliance with environmental laws at any of its properties. The Trust is also not aware of any pending or threatened investigations or actions by environmental regulatory authorities in connection with any of its properties or any pending or threatened claims relating to environmental conditions at its properties. The Trust has policies and procedures to review and monitor environmental exposure, including obtaining a Phase I environmental assessment, as appropriate, prior to the completion of an acquisition of land, a shopping centre or other real estate assets. Further investigation is conducted if the Phase I assessments indicate a problem. In addition, the standard lease requires compliance with environmental laws and regulations and restricts tenants from carrying on environmentally hazardous activities or having environmentally hazardous substances on site. The Trust has obtained environmental insurance on certain assets to further manage risk. The Trust is making the necessary capital and operating expenditures to comply with environmental laws and regulations. Although there can be no assurances, the Trust does not believe that costs relating to environmental matters will have a material adverse effect on the Trust’s business, financial condition or results of operations. However, environmental laws and regulations can change, and the Trust may become subject to more stringent environmental laws and regulations in the future. Compliance with more stringent environmental laws and regulations could have an adverse effect on the Trust’s business, financial condition or results of operations. Climate change continues to attract the focus of governments and the general public as an important threat, given the emission of greenhouse gases and other activities which continue to negatively impact the planet. The Trust faces the risk that its properties will be subject to government initiatives aimed at countering climate change, such as reduction of greenhouse gas emissions, which could impose constraints on its operational flexibility. Furthermore, the Trust’s properties may be exposed to the impact of events caused by climate change, such as natural disasters and increasingly frequent and severe weather conditions. Such events could interrupt the Trust’s operations and activities, damage its properties, diminish traffic and require the Trust to incur additional expenses including an increase in insurance costs to insure its properties against natural disasters and severe weather. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 87 91 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Potential Conflicts of Interest The Trust may be subject to various conflicts of interest because of the fact that the Trustees and executive management, and their associates, may be engaged in a wide range of real estate and other business activities. The Trust may become involved in transactions which conflict with the interests of the foregoing. The Trustees, executive management and their associates or affiliates may from time to time deal with persons, firms, institutions or corporations with which the Trust may be dealing, or which may be seeking investments similar to those desired by the Trust. The interests of these persons could conflict with those of the Trust. In addition, from time to time, these persons may be competing with the Trust for available investment opportunities. The Declaration of Trust contains “conflicts of interest” provisions requiring Trustees or officers of the Trust to disclose material interests in material contracts and transactions and refrain from voting. Cyber Security Cyber security has become an increasingly problematic issue for issuers and businesses in Canada and around the world, including for the Trust and the real estate industry. Cyber attacks against large organizations are increasing in sophistication and are often focused on financial fraud, compromising sensitive data for inappropriate use or disrupting business operations. Such an attack could compromise the Trust’s confidential information as well as that of the Trust’s employees, tenants and third parties with whom the Trust interacts and may result in negative consequences, including remediation costs, loss of revenue, additional regulatory scrutiny, litigation and reputational damage. As a result, the Trust continually monitors for malicious threats and adapts accordingly in an effort to ensure it maintains high privacy and security standards. The Trust invests in cyber-defence technologies to support its business model and to protect its systems, employees and tenants and seeks to employ industry best practices. The Trust’s investments continue to manage the risks it faces today and position the Trust for the evolving threat landscape. The Trust also follows certain protocols when it engages software and hardware vendors concerning data security and access controls. Debt Financing The ability of the Trust to make cash distributions or make other payments or advances is subject to applicable laws and contractual restrictions contained in the instruments governing its indebtedness. The degree to which the Trust is leveraged could have important consequences to the holders of its securities, including: that the Trust’s ability to obtain additional financing for working capital, capital expenditures or acquisitions in the future may be limited; that a significant portion of the Trust’s cash flow from operations may be dedicated to the payment of the principal of and interest on its indebtedness, thereby reducing funds available for future operations and distributions; that certain of the Trust’s borrowings may be at variable rates of interest, which exposes it to the risk of increased interest rates; and that the Trust may be impacted by economic downturns including the Trust’s ability to retain and attract tenants. Also, there can be no assurance that the Trust will continue to generate sufficient cash flow from operations to meet required interest and principal payments. Further, the Trust is subject to the risk that any of its existing indebtedness may not be able to be refinanced upon maturity or that the terms of such financing may not be as favourable as the terms of its existing indebtedness. These factors may adversely affect the Trust’s cash distributions. The Trust’s credit facilities provide lenders with first charge security interests on most of the income-producing properties in its portfolio. These credit facilities contain numerous terms and covenants that limit the discretion of management with respect to certain business matters. These covenants place restrictions on, among other things, the ability of the Trust to create liens or other encumbrances, to make certain payments, investments, loans and guarantees and to sell or otherwise dispose of assets and merge or consolidate with another entity. In addition, the credit facilities contain a number of financial covenants that require the Trust to meet certain financial ratios and financial condition tests. For example, certain of the Trust’s loans require specific loan to value and debt service coverage ratios which must be maintained by the Trust. A failure to comply with the obligations in the credit facilities could result in a default which, if not cured or waived, could result in acceleration of the relevant indebtedness. If the indebtedness under the credit facilities were to be accelerated, there can be no assurance that the assets of the Trust would be sufficient to repay that indebtedness in full. Interest and Financing Risk As a means of curbing inflation, the Bank of Canada increased interest rates in 2022. Higher interest rates or downgrade in the Trust’s credit rating could significantly affect the Trust’s ability to meet its financial obligations. Circumstances that may impair the Trust’s credit rating include an inability of the Trust to maintain its cash flow from operating activities, an inability to meet covenants for both secured and unsecured debentures, an inability to meet expectations of credit rating agencies, and/or a higher interest rate environment in the Canadian economy. In order to minimize this risk, the Trust’s policy is to negotiate fixed rate secured debt and unsecured debt with staggered maturities on the portfolio and, where appropriate, seek to match average lease maturity to average debt maturity. Derivative financial instruments may be utilized by the Trust in the management of its interest rate exposure. The Trust’s policy is not to utilize derivative financial instruments for trading or speculative purposes. In addition, the Declaration of Trust restricts total indebtedness permitted on the portfolio. Interest rate changes will also affect the Trust’s development portfolio. The Trust has entered into development agreements that obligate the Trust to acquire up to approximately 121,000 square feet of additional income properties at a cost determined by capitalizing the rental income at predetermined rates. Subject to the ability of the Trust to obtain financing on acceptable terms, 88 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 92 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS the Trust anticipates that it will finance these acquisitions by issuing additional debt and equity. Changes in interest rates will have an impact on the return from these acquisitions should the rate exceed the capitalization rate used and could result in a purchase not being accretive. This risk is mitigated as management has certain rights of approval over the developments and acquisitions. Operating facilities, secured debt and unsecured debt exist that are priced at a risk premium over short-term rates. Changes in short-term interest rates will have an impact on the cost of financing. In addition, there is a risk the lenders will not refinance on maturity. By restricting the amount of both variable interest rate debt and short-term debt, the Trust minimizes the impact of changes in short-term rates on financial performance. The Canadian capital markets are competitively priced. In addition, the secured debt market remains strong with lenders seeking quality products. Due to the quality and location of the Trust’s real estate, management expects to meet its financial obligations. Inflation Risk Canada’s inflation rate remains at a historically high level. Recent inflationary pressures experienced domestically and globally, external supply constraints, tight labour markets and strong demand for goods and resources, together with the imposition by governments of higher interest rates as a means of curbing inflationary increases, will put pressure on the Trust’s development, financing, operation and labour costs and could negatively impact levels of demand for real property. Accordingly, continued inflationary pressures and the resulting economic impacts may adversely affect the Trust’s financial condition and results of operations. If inflation at elevated levels persists and interest rates continue to climb, an economic contraction could be possible. Higher inflation and the prospect of moderated growth also negatively impacts the debt and equity markets in which the Trust seeks capital, and in turn might impact the Trust’s ability to obtain capital in the future on favourable terms, or at all. While the Trust’s portfolio and market position, as well as its strong and stable tenant base, provide the Trust with flexibility to navigate volatile economic conditions, there can be no assurances regarding the impact of a significant economic contraction on the business, operations, and financial performance of the Trust and its tenants. Joint Venture Risk The Trust is a co-owner in several properties including but not limited to SmartVMC, Transit City, a residential unit project in Laval, Quebec, a land parcel in Vaughan to build townhomes, and various other retail, self-storage, residential and other mixed- use properties. As part of its growth strategy, the Trust expects to increase its participation in additional joint ventures in the future, which may include additional joint ventures in condominiums, self-storage facilities, seniors’ housing and other initiatives. The Trust is subject to the risks associated with the conduct of joint ventures. Such risks include disagreements with its partners to develop and operate the properties efficiently, the inability of the partners to meet their obligations to the joint ventures or third parties as they become due and decisions made by partners which may not be in favour of the Trust’s best interests, but rather are in the best interests of the partnership. In addition, the Trust may be exposed to the risks of the actions taken by any of the partners that may result in reputational damage to the Trust or the joint ventures. These risks could have a material adverse effect on the joint ventures, which may have a material adverse effect on the Trust. The Trust attempts to mitigate these risks by continuing to maintain strong relationships with its partners. Development and Construction Risk Development and construction risk arises from the possibility that completed developed space will not be leased or that costs of development and construction will exceed original estimates, resulting in an uneconomic return from the leasing of such developments. The Trust mitigates this risk by limiting construction of any development until sufficient lease-up has occurred and by entering into fixed price contracts for a large proportion of both development and construction costs. The Trust is becoming increasingly involved in mixed-use development initiatives that include residential condominiums and townhomes, rental apartments, seniors’ housing and self-storage. Purchaser and tenant demand for these uses can be cyclical and is affected by changes in general market and economic conditions, such as consumer confidence, employment levels, availability of financing for home buyers, interest rates, demographic trends, and housing and similar commercial demand. Furthermore, the market value of undeveloped land, buildable lots and housing inventories held by the Trust can fluctuate significantly as a result of changing economic and real estate market conditions. An oversupply of alternative housing, such as new homes, resale homes (including homes held for sale by investors and speculators), foreclosed home and rental properties and apartments, accommodation of seniors’ housing and self-storage space may: i) reduce the Trust’s ability to sell new condominiums and townhomes, depress prices and reduce margins from the sale of condominiums and townhomes, and ii) have an adverse effect on the Trust’s ability to lease rental apartments, seniors’ housing and self-storage units and on the rents charged. The Trust’s construction commitments are subject to those risks usually attributable to construction projects, which include: i) construction or other unforeseen delays including delays in obtaining municipal approvals, ii) cost overruns, and iii) the failure of tenants to occupy and pay rent in accordance with existing lease arrangements, some of which are conditional. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 89 93 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Credit Risk Credit risk arises from cash and cash equivalents, as well as credit exposures with respect to tenant receivables and mortgages and loans receivable. Tenants may experience financial difficulty and become unable to fulfil their lease commitments. The Trust mitigates this risk of credit loss by reviewing tenants’ covenants, ensuring its tenant mix is diversified and limiting its exposure to any one tenant, except Walmart Canada because of its creditworthiness. Further risks arise in the event that borrowers may default on the repayment of amounts owing to the Trust. The Trust endeavours to ensure adequate security has been provided in support of mortgages and loans receivable. The failure of the Trust’s tenants or borrowers to pay the Trust amounts owing on a timely basis or at all would have an adverse effect on the Trust’s financial condition. Litigation and Regulatory Risks The Trust is subject to a wide variety of laws and regulations across all of its operating jurisdictions and faces risks associated with legal and regulatory changes and litigation. If the Trust fails to monitor and become aware of changes in applicable laws and regulations, or if the Trust fails to comply with these changes in an appropriate and timely manner, it could result in fines and penalties, litigation or other significant costs, as well as significant time and effort to remediate any violations. The Trust, in the normal course of operations, is subject to a variety of legal and other claims including claims relating to personal injury, property damage, property taxes, land rights and contractual and other commercial disputes. The final outcome with respect to outstanding, pending or future actions cannot be predicted with certainty, and the resolution of such actions may have an adverse effect on the Trust’s financial position or results of operations as well as reputational damage both from an operating and an investment perspective. Management evaluates all claims on their apparent merits and accrues management’s best estimate of the likely cost to satisfy such claims. Management believes the outcome of current legal and other claims filed against the Trust, after considering insurance coverage, will not have a significant impact on the Trust’s consolidated financial statements. In addition, the Trust’s estimates and judgments could also be affected by various risks and uncertainties which in turn could have a significant risk on the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements for the year ended December 31, 2022 and the reported amounts of revenues and expenses during the reporting period and may potentially result in a material adjustment in a subsequent period. Potential Volatility of Trust Unit Prices The price for the Trust Units could be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, the gain or loss of significant properties, changes in income estimates by analysts and market conditions in the industry, as well as general economic conditions or other risk factors set out herein. In addition, stock markets have experienced volatility that has affected the market prices for many issuers’ securities and that often has been unrelated to the operating performance of such issuers. These market fluctuations may adversely affect the market price of the Trust Units. A publicly traded REIT will not necessarily trade at values determined solely by reference to the underlying value of its real estate assets. Accordingly, the Trust Units may trade at a premium or a discount to the underlying value of the Trust’s real estate assets. One of the factors that may influence the market price of the Trust Units is market interest rates relative to the monthly cash distributions to the Unitholders. An increase in market interest rates or a decrease in monthly cash distributions by the Trust could adversely affect the market price of the Trust Units. In addition, the market price for the Trust Units may be affected by changes in general market conditions, fluctuations in the markets for equity securities and numerous other factors beyond the control of the Trust. Cash Distributions are Not Guaranteed and will Fluctuate with the Trust’s Performance A return on an investment in Units is not comparable to the return on an investment in a fixed-income security. The recovery of an investment in Units is at risk, and any anticipated return on an investment in Units is based on many performance assumptions. Although the Trust intends to make distributions of a significant percentage of its available cash to its Unitholders, these cash distributions are not assured and may be reduced or suspended. The ability of the Trust to make cash distributions and the actual amount distributed will be dependent upon, among other things, the financial performance of the properties in its property portfolio, its debt covenants and obligations, its working capital requirements and its future capital requirements. In addition, the market value of the Units may decline for a variety of reasons including if the Trust is unable to meet its cash distribution targets in the future, and that decline may be significant. It is important for a person making an investment in Units to consider the particular risk factors that may affect both the Trust and the real estate industry in which the Trust operates and which may, therefore, affect the stability of the cash distributions on the Units. 90 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 94 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Availability of Cash Flow Cash distributions to Unitholders may be reduced from time to time if such distributions would exceed the cash obligations of the Trust from time to time due to items such as principal repayments, tenant allowances, leasing commissions and capital expenditures and redemption of Units, if any. The Trust may be required to use part of its debt capacity or to reduce distributions in order to accommodate such items. The Trust anticipates temporarily funding such items, if necessary, through an operating line of credit in expectation of refinancing long-term debt on its maturity. Significant Unitholder Risk According to reports filed under applicable Canadian securities legislation, as at December 31, 2022, Mitchell Goldhar of Vaughan, Ontario beneficially owned or controlled a number of the outstanding Units which, together with the securities he beneficially owned or controlled that are exchangeable at his option for Trust Units for no additional consideration and the associated Special Voting Units, represented an approximate 20.8% voting interest in the Trust. Further, according to the above- mentioned reports, as at December 31, 2022, Mr. Goldhar beneficially owned or controlled additional rights to acquire Trust Units which, if exercised or converted, would result in him increasing his beneficial economic and voting interest in the Trust to as much as approximately 24.6%. In addition, pursuant to the Voting Top-Up Right Mr. Goldhar may be issued additional Special Voting Units to entitle him (directly or indirectly through Penguin) to cast 25% of the votes attached to voting Units at a meeting of the holders of voting Units. If Mr. Goldhar sells a substantial number of Trust Units in the public market, the market price of the Trust Units could fall. The perception among the public that these sales will occur could also produce such an effect. As a result of his voting interest in the Trust, Mr. Goldhar may be able to exert significant influence over matters that are to be determined by votes of the Unitholders of the Trust. The timing and receipt of any takeover or control premium by Unitholders could depend on the determination of Mr. Goldhar as to when to sell Trust Units. This could delay or prevent a change of control that might be attractive to and provide liquidity for Unitholders, and could limit the price that investors are willing to pay in the future for Trust Units. Tax-Related Risks There can be no assurance that Canadian federal income tax laws respecting the treatment of mutual fund trusts will not be changed in a manner that would adversely affect the Unitholders. If the Trust fails to qualify for the REIT Exception (as defined below), the Trust will be subject to the taxation regime under the SIFT Rules. The Trust qualifies for the REIT Exception as at December 31, 2022. In the event that the REIT Exception did not apply to the Trust, the corresponding application of the SIFT Rules to the Trust could impact the level of cash distributions which would otherwise be made by the Trust and the taxation of such distributions to Unitholders. The REIT Exception is based upon revenues of the REIT and the value of the REIT’s assets that may fluctuate during the year. The Trust intends to monitor its revenues and the value of its assets and take all necessary steps to continue to qualify for the REIT Exception. However, there can be no assurance that Canadian federal income tax laws with respect to the REIT Exception will not be changed, or that administrative and assessment practices of the Canada Revenue Agency will not develop in a manner that adversely affects the Trust or its Unitholders. Furthermore, the determination as to whether the Trust qualifies for the REIT Exception in a particular taxation year can only be made at the end of such taxation year. Accordingly, no assurance can be given that the Trust will continue to qualify for the REIT Exception. The extent to which distributions will be tax deferred in the future will depend in part on the extent to which the Trust is able to deduct capital cost allowance or other expenses relating to properties directly or indirectly held by the Trust. Public Health Crises Risks Public health crises, including the COVID-19 pandemic, or relating to any other broad-reaching disease, virus, flu, epidemic, pandemic or other similar disease or illness (each, a “Public Health Crisis”) have and could further adversely impact the Trust’s and its tenants’ businesses, including the ability of some tenants to legally operate thereby adversely impacting the ability of tenants to meet their payment obligations under leases. A Public Health Crisis could result in a general or acute decline in economic activity, increased unemployment, staff shortages, reduced tenant traffic, mobility restrictions and other quarantine measures, supply shortages, increased government regulations, and the quarantine or contamination of one or more of the Trust’s properties. A Public Health Crisis could impact the following material aspects of the Trust’s business, among others: i) the value of the Trust’s properties and developments; ii) the Trust’s ability to make distributions to Unitholders; iii) the availability or the terms of financing that the Trust currently has access to or may anticipate utilizing; iv) the Trust’s ability to make principal and interest payments on, or refinance any outstanding debt when due; v) the occupancy rates in the Trust’s properties; vi) the ability of the Trust to pursue its development plans or obtain construction financing on previously announced and anticipated timelines or within budgeted terms; vii) the ability of our tenants to enter into new leasing transactions or to satisfy rental payments under existing leases; viii) the impact to the Trust’s financial covenants; and (ix) changing consumer habits and foot traffic to the Trust’s properties and tenants’ stores. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 91 95 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS As global vaccination programs and other treatment options have advanced, governmental agencies, health agencies and private sector participants have eased restrictive measures that were previously imposed to varying degrees in an effort to contain the spread of COVID-19. Nevertheless, COVID-19 continues to impose risks and uncertainties on the Trust’s business, operations and financial performance. The inability of tenants to meet their payment obligations, deferred or otherwise, and any inability of the Trust to collect rents in a timely manner or at all could adversely affect the Trust’s business and financial condition. The Trust is monitoring the situation, but is unable to accurately predict the impact that the COVID-19 pandemic will have on its results of operations due to uncertainties including the ultimate geographic spread of the virus, the development of variants of concern, the severity of the disease, the duration or recurrence of the outbreak, and any further actions that may be taken by governmental agencies and private sector participants to contain the COVID-19 pandemic or to address its impacts. If the outbreak of COVID-19 and related developments lead to a more prolonged or significant impact on global, national or local markets or economic growth, the Trust’s cash flows, Unit price, financial condition or results of operations and ability to make distributions to Unitholders may be materially and adversely affected. Income Taxes and the REIT Exception In accordance with the Declaration of Trust, distributions to Unitholders are declared at the discretion of the Trustees. The Trust endeavours to distribute to Unitholders, in cash or in Units, in each taxation year its taxable income to such an extent that the Trust will not be liable to income tax under Part I of the Income Tax Act (Canada) (the “Tax Act”). For specified investment flow- through trusts (each a “SIFT”), the Tax Act imposes a special taxation regime (the “SIFT Rules”). A SIFT includes a trust resident in Canada with publicly traded units that holds one or more “non-portfolio properties”. “Non-portfolio properties” include certain investments in real properties situated in Canada and certain investments in corporations and trusts resident in Canada and in partnerships with specified connections in Canada. Under the SIFT Rules, a SIFT is subject to tax in respect of certain distributions that are attributable to the SIFT’s “non-portfolio earnings” (as defined in the Tax Act), at a rate substantially equivalent to the combined federal and provincial corporate tax rate on certain types of income. The SIFT Rules are not applicable to a SIFT that meets certain specified criteria relating to the nature of its revenues and investments in order to qualify as a real estate investment trust for purposes of the Tax Act (the “REIT Exception”). The Trust qualifies for the REIT Exception as at December 31, 2022. Environmental, Social and Governance (“ESG”) The Trust reviews and analyzes environmental, social and governance initiatives of all levels of government and industry associations and has piloted and adopted various energy efficiency and sustainability practices. In addition, the Board of Trustees established a sub-committee of its audit committee to focus on ESG issues. The Trust has published its 2022 ESG report, which can be found on the Trust’s website (www.smartcentres.com). The information on SmartCentres’ website does not form part of this MD&A. Disclosure Controls and Procedures and Internal Controls Over Financial Reporting Disclosure Controls and Procedures (“DCP”) The Trust’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have designed or caused to be designed under their direct supervision, the Trust’s DCP (as defined in National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”), adopted by the Canadian Securities Administrators) to provide reasonable assurance that: i) material information relating to the Trust, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the annual filings are being prepared, and ii) material information required to be disclosed in the annual filings is recorded, processed, summarized and reported on a timely basis. The Trust continues to evaluate the effectiveness of DCP, and changes are implemented to adjust to the needs of new processes and enhancements as required. There were no changes in the Trust’s internal controls over financial reporting in the year ended December 31, 2022 that materially affected, or are reasonably likely to materially affect, the Trust’s internal controls over financial reporting. Further, the Trust’s CEO and CFO have evaluated, or caused to be evaluated under their direct supervision, the effectiveness of the Trust’s DCP as at December 31, 2022, and concluded that it was effective. Internal Controls Over Financial Reporting (“ICFR”) The Trust’s CEO and CFO have also designed, or caused to be designed under their direct supervision, the Trust’s ICFR to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS. Using the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission 2013 (COSO 2013), the Trust’s CEO and CFO have evaluated, or caused to be evaluated under their direct supervision, the effectiveness of the Trust’s ICFR as at December 31, 2022, and concluded that it was effective. 92 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 96 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTMANAGEMENT’S DISCUSSION AND ANALYSIS Inherent Limitations Notwithstanding the foregoing, because of its inherent limitations, a control system can provide only reasonable assurance that the objectives of the control system are met and may not prevent or detect misstatements. Management’s estimates may be incorrect, or assumptions about future events may be incorrect, resulting in varying results. In addition, management has attempted to minimize the likelihood of fraud. However, any control system can be circumvented through collusion and illegal acts. Section X — Glossary of Terms Term Definition Anchors or Anchor tenants Anchors or Anchor tenants are defined as tenants within a retail or office property with gross leasable area greater than 30,000 square feet. CAM ECL Exchangeable Securities Defined as common area maintenance expenses. Refers to expected credit losses. Exchangeable Securities are securities issued by the limited partnership subsidiaries of the Trust that are convertible or exchangeable directly for Units without the payment of additional consideration, including Class B Smart Limited Partnership Units (“Class B Smart LP Units”) and Units classified as liabilities. Such Exchangeable Securities are economically equivalent to Units as they are entitled to distributions equal to those on the Units and are exchangeable for Units on a one-for-one basis. The issue of a Class B Smart LP Unit and Units classified as liabilities is accompanied by a Special Voting Unit that entitles the holder to vote at meetings of Unitholders. Net Asset Value (“NAV”) NAV represents the total assets less total liabilities of the Trust. Penguin Shadow Anchor Total Return Swap (“TRS”) Voting Top-Up Right Penguin refers to entities controlled by Mitchell Goldhar, a Trustee, Executive Chairman, Chief Executive Officer and significant Unitholder of the Trust. A shadow anchor is a store or business that satisfies the criteria for an anchor tenant, but may be located at an adjoining property or on a portion. A contractual agreement to exchange payments based on a specified notional amount and the underlying financial assets for a specific period. The Trust has a total return swap agreement with a Canadian financial institution to exchange returns based on a notional amount of up to 6.5 million Trust Units with a notional value of approximately $156.0 million for a 48-month period, which, subject to certain conditions, may be unwound prior to its maturity, either in whole or in part. Mitchell Goldhar (either directly or indirectly through Penguin) is entitled to have a minimum of 25.0% of the votes eligible to be cast at any meeting of Unitholders provided certain ownership thresholds are met. Pursuant to the Voting Top-Up Right, the Trust may issue additional Special Voting Units of the Trust to Mitchell Goldhar and/or Penguin to increase his voting rights to 25.0% in advance of a meeting of Unitholders. The total number of Special Voting Units is adjusted for each meeting of the Unitholders based on changes in Mitchell Goldhar’s, and Penguin’s, ownership interest. At the Trust’s annual meeting of Unitholders in December 2020, Unitholders approved an extension of the Voting Top-Up Right to December 31, 2025. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 93 97 MANAGEMENT’S DISCUSSION AND ANALYSISSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTManagement’s Responsibility for Financial Reporting The Annual Report, including consolidated financial statements, is the responsibility of the management of SmartCentres Real Estate Investment Trust and has been approved by the Board of Trustees. The financial statements have been prepared in accordance with International Financial Reporting Standards. The summary of significant accounting policies used are described in Note 2 to the consolidated financial statements. Financial information contained elsewhere in this report is consistent with information contained in the consolidated financial statements. Management maintains a system of internal controls over financial reporting that provides reasonable assurance that the assets of SmartCentres Real Estate Investment Trust are safeguarded and that facilitates the preparation of relevant, timely and reliable financial information that reflects, where necessary, management’s best estimates and judgments based on informed knowledge of the facts. The Board of Trustees is responsible for (i) ensuring that management fulfills its responsibility for financial reporting; and (ii) providing final approval of the consolidated financial statements. The Board of Trustees has appointed an Audit Committee comprising three independent Trustees to approve, monitor, evaluate, advise and make recommendations on matters affecting the external audit, the financial reporting and the accounting controls, policies and practices of SmartCentres Real Estate Investment Trust under its terms of reference. The Audit Committee meets at least four times per year with management and with the independent external auditors to satisfy itself that they are properly discharging their responsibilities. The consolidated financial statements and the Management Discussion and Analysis of SmartCentres Real Estate Investment Trust have been reviewed by the Audit Committee and approved by the Board of Trustees. PricewaterhouseCoopers LLP, the independent auditors, have audited the consolidated financial statements in accordance with International Financial Reporting Standards and have read Management’s Discussion and Analysis. Their auditors’ report is set forth herein. Mitchell Goldhar Executive Chairman & CEO Peter Slan Chief Financial Officer 98 SMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT Independent auditor’s report Independent auditor’s report To the Unitholders of SmartCentres Real Estate Investment Trust To the Unitholders of SmartCentres Real Estate Investment Trust Our opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, Our opinion the financial position of SmartCentres Real Estate Investment Trust and its subsidiaries (together, the In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Trust) as at December 31, 2022 and 2021, and its financial performance and its cash flows for the years SmartCentres Real Estate Investment Trust and its subsidiaries (together, the Trust) as at December 31, 2022 and 2021, and its then ended in accordance with International Financial Reporting Standards as issued by the International financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards Accounting Standards Board (IFRS). as issued by the International Accounting Standards Board (IFRS). What we have audited The Trust’s consolidated financial statements comprise: What we have audited The Trust’s consolidated financial statements comprise: • the consolidated balance sheets as at December 31, 2022 and 2021; the consolidated balance sheets as at December 31, 2022 and 2021; • the consolidated statements of income and comprehensive income for the years then ended;  • the consolidated statements of cash flows for the years then ended;  the consolidated statements of income and comprehensive income for the years then ended; • the consolidated statements of equity for the years then ended; and the consolidated statements of cash flows for the years then ended;  • the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information. the consolidated statements of equity for the years then ended; and   the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information. Basis for opinion Basis for opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. Independence We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. We are independent of the Trust in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements. Key audit matters Independence We are independent of the Trust in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements. Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2022. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matters PricewaterhouseCoopers LLP Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2022. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 200 Apple Mill Road, Vaughan, Ontario, Canada L4K 0J8 T: +1 905 326 6800, F: +1 905 326 5339 “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. PricewaterhouseCoopers LLP 200 Apple Mill Road, Vaughan, Ontario, Canada L4K 0J8 T: +1 905 326 6800, F: +1 905 326 5339 “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 1 99 SMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT100 SMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTKey audit matter How our audit addressed the key audit matter Valuation of investment properties Refer to note 2 – Summary of significant accounting policies and note 4 – Investment properties to the consolidated financial statements. The Trust measures its investment properties at fair value and, as at December 31, 2022, total investment properties were valued at $10,250 million and include income properties and properties under development (PUD). Fair values of investment properties are determined using valuations prepared by management, with reference to available external data. PUD is valued using land development and construction costs recorded at market value or the discounted cash flow valuation method and income properties are valued using the discounted cash flow valuation method. Management applied significant judgment in determining the fair values of investment properties using the two methods described above (the valuation methods). The significant assumptions in the land development and construction costs recorded at market value include the market value per acre for land. The significant assumptions used in the discounted cash flow valuation method include estimated future cash flows over an average period of 10 years, discount rates and terminal capitalization rates. The determination of estimated future cash flows incorporates significant assumptions including expectations of changes in rental rates, occupancy rates, lease renewal rates and downtime on existing lease expiries. We considered this a key audit matter due to the significant judgments by management when determining the fair values of the income properties and PUD and the high degree of Our approach to addressing the matter included the following procedures, among others: For a sample of investment properties, tested how management determined the fair value, which included the following: – Tested the underlying data used in the valuations. – Evaluated the reasonableness of the estimated future cash flows over an average period of 10 years used in the discounted cash flow valuation method by comparing assumptions, such as expected changes in occupancy rates, to external market and industry data and comparing components of the year one cash flows to the underlying accounting records. – Professionals with specialized skill and knowledge in the field of real estate valuations assisted us in evaluating the appropriateness of the valuation methods and in evaluating the reasonableness of the discount rates, terminal capitalization rates, changes in rental rates, lease renewal rates and downtime on existing lease expiries. – Assessed the market value of land per acre used by management by comparing it to external market and industry data. Key audit matterHow our audit addressed the key audit matterValuation of investment propertiesRefer to note 2 – Summary of significant accounting policies and note 4 – Investment properties to the consolidated financial statements.The Trust measures its investment properties at fair value and, as at December 31, 2022, total investment properties were valued at $10,250 million and include income properties and properties under development (PUD). Fair values of investment properties are determined using valuations prepared by management, with reference to available external data. PUD is valued using land development and construction costs recorded at market value or the discounted cash flow valuation method and income properties are valued using the discounted cash flow valuation method. Management applied significant judgment in determining the fair values of investment properties using the two methods described above (the valuation methods). The significant assumptions in the land development and construction costs recorded at market value include the market value per acre for land.The significant assumptions used in the discounted cash flow valuation method include estimated future cash flows over an average period of 10 years, discount rates and terminal capitalization rates. The determination of estimated future cash flows incorporates significant assumptions including expectations of changes in rental rates, occupancy rates, lease renewal rates and downtime on existing lease expiries.We considered this a key audit matter due to the significant judgments by management when determining the fair values of the income properties and PUD and the high degree of complexity in assessing audit evidence related to the significant assumptions used by management. In addition, the audit effort involved the use of professionals with specialized skill and knowledge in the field of real estate valuations.Our approach to addressing the matter included the following procedures, among others:• For a sample of investment properties, tested how management determined the fair value, which included the following:– Tested the underlying data used in the valuations.– Evaluated the reasonableness of the estimated future cash flows over an average period of 10 years used in the discounted cash flow valuation method by comparing assumptions, such as expected changes in occupancy rates, to external market and industry data and comparing components of the year one cash flows to the underlying accounting records.– Professionals with specialized skill and knowledge in the field of real estate valuations assisted us in evaluating the appropriateness of the valuation methods and in evaluating the reasonableness of the discount rates, terminal capitalization rates, changes in rental rates, lease renewal rates and downtime on existing lease expiries. • Assessed the market value of land per acre used by management by comparing it to external market and industry data.2 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORTOther information Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis, which we obtained prior to the date of this auditor’s report and the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, which is expected to be made available to us after that date. Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. Key audit matter How our audit addressed the key audit matter In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. complexity in assessing audit evidence related to the significant assumptions used by management. In addition, the audit effort involved the use of professionals with specialized skill and knowledge in the field of real estate valuations. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Other information Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis, which we obtained prior to the date of this auditor’s report and the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, which is expected to be made available to us after that date. Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, 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. Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In preparing the consolidated financial statements, management is responsible for assessing the Trust’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting In connection with our audit of the consolidated financial statements, our responsibility is to read the other unless management either intends to liquidate the Trust or to cease operations, or has no realistic alternative but to do so. information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. Those charged with governance are responsible for overseeing the Trust’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from required to report that fact. We have nothing to report in this regard. When we read the information, other material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally than the consolidated financial statements and our auditor’s report thereon, included in the annual report, accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or if we conclude that there is a material misstatement therein, we are required to communicate the matter to error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the those charged with governance. economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Responsibilities of management and those charged with governance for the consolidated financial statements • • • • than forgery, from error, as for one resulting Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and Management is responsible for the preparation and fair presentation of the consolidated financial appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is statements in accordance with IFRS, and for such internal control as management determines is intentional omissions, fraud may higher misrepresentations, or the override of internal control. necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Obtain an understanding of internal control relevant to the audit 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 Trust’s internal In preparing the consolidated financial statements, management is responsible for assessing the Trust’s control. ability to continue as a going concern, disclosing, as applicable, matters related to going concern and Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related using the going concern basis of accounting unless management either intends to liquidate the Trust or to disclosures made by management. cease operations, or has no realistic alternative but to do so. involve collusion, Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant Those charged with governance are responsible for overseeing the Trust’s financial reporting process. doubt on the Trust’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Trust to cease to continue as a going concern. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 3 101 SMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT• • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Trust to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit 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 Trust’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.  Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Trust’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Trust to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Trust to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 4 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 102 SMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTWe communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Daniel D'Archivio. DRAFT From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Chartered Professional Accountants, Licensed Public Accountants Vaughan, Ontario February 8, 2023 The engagement partner on the audit resulting in this independent auditor’s report is Daniel D’Archivio. /s/ PricewaterhouseCoopers LLP Chartered Professional Accountants, Licensed Public Accountants Vaughan, Ontario February 8, 2023 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 5 103 SMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT2022 2022 10,208,071 10,208,071 680,999 680,999 238,099 238,099 171,807 171,807 83,230 83,230 43,807 43,807 11,426,013 11,426,013 42,321 42,321 40,373 40,373 86,593 86,593 57,124 57,124 14,474 14,474 35,255 35,255 276,140 276,140 11,702,153 11,702,153 4,523,987 4,523,987 277,400 277,400 17,265 17,265 4,818,652 4,818,652 459,278 459,278 261,122 261,122 720,400 720,400 5,539,052 5,539,052 5,126,197 5,126,197 1,036,904 1,036,904 6,163,101 6,163,101 11,702,153 11,702,153 2021 2021 9,847,078 9,847,078 654,442 654,442 345,089 345,089 97,148 97,148 80,940 80,940 45,139 45,139 11,069,836 11,069,836 — — 27,399 27,399 71,947 71,947 49,542 49,542 12,289 12,289 62,235 62,235 223,412 223,412 11,293,248 11,293,248 4,176,121 4,176,121 326,085 326,085 18,243 18,243 4,520,449 4,520,449 678,406 678,406 253,078 253,078 931,484 931,484 5,451,933 5,451,933 4,877,961 4,877,961 963,354 963,354 5,841,315 5,841,315 11,293,248 11,293,248 SMARTCENTRES REAL ESTATE INVESTMENT TRUST SMARTCENTRES REAL ESTATE INVESTMENT TRUST CONSOLIDATED BALANCE SHEETS CONSOLIDATED BALANCE SHEETS (in thousands of Canadian dollars) (in thousands of Canadian dollars) As at December 31, As at December 31, Assets Assets Non-current assets Non-current assets Note Note Investment properties Investment properties Equity accounted investments Equity accounted investments Mortgages, loans and notes receivable Mortgages, loans and notes receivable Other financial assets Other financial assets Other assets Other assets Intangible assets Intangible assets 4 4 5 5 6 6 8 8 7 7 9 9 Current assets Current assets Assets held for sale Assets held for sale Residential development inventory Residential development inventory Current portion of mortgages, loans and notes receivable Current portion of mortgages, loans and notes receivable Amounts receivable and other Amounts receivable and other Prepaid expenses, deposits and deferred financing costs Prepaid expenses, deposits and deferred financing costs Cash and cash equivalents Cash and cash equivalents Total assets Total assets Liabilities Liabilities Non-current liabilities Non-current liabilities Debt Debt Other financial liabilities Other financial liabilities Other payables Other payables Current liabilities Current liabilities Current portion of debt Current portion of debt Accounts payable and current portion of other payables Accounts payable and current portion of other payables Total liabilities Total liabilities Equity Equity Trust Unit equity Trust Unit equity Non-controlling interests Non-controlling interests 4 4 10 10 6 6 11 11 11 11 21 21 12 12 13 13 14 14 12 12 14 14 Total liabilities and equity Total liabilities and equity Commitments and contingencies (Note 28) Commitments and contingencies (Note 28) The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. Approved by the Board of Trustees. Approved by the Board of Trustees. Michael Young Michael Young Trustee Trustee Garry Foster Garry Foster Trustee Trustee 104 6 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 6 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT SMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT SMARTCENTRES REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (in thousands of Canadian dollars) For the years ended December 31, Net rental income and other Rentals from investment properties and other Property operating costs and other Net rental income and other Other income and expenses General and administrative expense, net Earnings from equity accounted investments Fair value adjustment on revaluation of investment properties Gain on sale of investment properties Interest expense Interest income Fair value adjustment on financial instruments Acquisition-related costs Net income and comprehensive income Net income and comprehensive income attributable to: Trust Units Non-controlling interests Note 2022 2021 18 19 20 5 26 804,598 (301,994) 502,604 780,796 (294,956) 485,840 (33,269) 4,199 201,834 315 (31,922) 211,420 491,528 27 12(d) (148,702) (144,540) 26 18,036 91,246 (298) 635,965 516,049 119,916 635,965 12,341 (34,227) (2,791) 987,676 827,976 159,700 987,676 The accompanying notes are an integral part of the consolidated financial statements. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 7 105 SMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT SMARTCENTRES REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of Canadian dollars) For the years ended December 31, Cash provided by (used in) Operating activities Net income and comprehensive income Items not affecting cash and other items Cash interest paid Interest received Distributions from equity accounted investments Expenditures on direct leasing costs and tenant incentives Expenditures on tenant incentives for properties under development Changes in other non-cash operating items Cash flows provided by operating activities Financing activities Repayment of unsecured debentures Proceeds from unsecured debt Proceeds from revolving operating facilities Repayments of secured debt Repayments of revolving operating facility Repayments of other unsecured debt Distributions paid on Trust Units Distributions paid on non-controlling interests and Units classified as liabilities Payment of lease liability Cash flows used in financing activities Investing activities Acquisitions and Earnouts of investment properties Additions to investment properties Additions to equity accounted investments Additions to equipment Increase in cash held as collateral Decrease in cash held as collateral Advances of mortgages and loans receivable Repayments of mortgages and loans receivable Net proceeds from sale of investment properties Cash flows used in investing activities Decrease in cash and cash equivalents during the year Cash and cash equivalents – beginning of year Cash and cash equivalents – end of year Supplemental cash flow information (see Note 21) The accompanying notes are an integral part of the consolidated financial statements. Note 2022 2021 21 12(d) 5 21 12(b) 3 7 8(b) 635,965 (154,639) (139,693) 44,119 4,784 (9,860) (1,897) (8,017) 370,762 — 700,000 392,000 (281,983) (610,000) (154,913) (267,563) (52,007) (1,883) (276,349) (128,389) (131,057) (22,774) (1,589) (94,821) 145,100 (50,485) 120,800 41,822 (121,393) (26,980) 62,235 35,255 987,676 (519,801) (150,554) 17,648 4,072 (5,927) (730) 39,240 371,624 (623,120) 68,532 300,000 (88,749) — (23,015) (267,552) (55,032) (1,873) (690,809) (328,765) (78,627) (25,871) (349) (50,279) — (68,371) 57,685 81,403 (413,174) (732,359) 794,594 62,235 8 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 106 SMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT SMARTCENTRES REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENTS OF EQUITY For the years ended December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars) Attributable to Unitholders Attributable to LP Units Classified as Non-Controlling Interests Note Trust Units Retained Earnings (Note 16) Unit Equity LP Units Retained (Note 16) Earnings LP Unit Equity Other Non- Controlling Interest (Note 22) Total Equity Equity – January 1, 2021 3,090,188 1,227,169 4,317,357 640,206 205,927 846,133 3,485 5,166,975 Issuance of Units Unit issuance costs 16 16 198 (18) — — 198 (18) 1,738 — 1,738 — — — — — 1,936 (18) Net income and comprehensive income — 827,976 827,976 — 159,320 159,320 380 987,676 Distributions 17 — (267,552) (267,552) — (47,282) (47,282) (420) (315,254) Equity – December 31, 2021 3,090,368 1,787,593 4,877,961 641,944 317,965 959,909 3,445 5,841,315 Equity – January 1, 2022 3,090,368 1,787,593 4,877,961 641,944 317,965 959,909 3,445 5,841,315 Issuance of Units Unit issuance costs Net income and comprehensive income Distributions 16 16 17 — (250) — — — 1,279 — 1,279 (250) — — — — — 1,279 (250) — 516,049 516,049 — 119,519 119,519 397 635,965 — (267,563) (267,563) — (47,363) (47,363) (282) (315,208) Equity – December 31, 2022 3,090,118 2,036,079 5,126,197 643,223 390,121 1,033,344 3,560 6,163,101 The accompanying notes are an integral part of the consolidated financial statements. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 9 107 SMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SMARTCENTRES REAL ESTATE INVESTMENT TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2022 and December 31, 2021 (in thousands of Canadian dollars, except Unit, square foot and per Unit amounts) 1. Organization SmartCentres Real Estate Investment Trust and its subsidiaries (collectively, “the Trust”), is an unincorporated open-ended mutual fund trust governed by the laws of the Province of Alberta created under a declaration of trust, dated December 4, 2001, subsequently amended and last restated on December 9, 2020 (“the Declaration of Trust”). The Trust develops, leases, constructs, owns and manages shopping centres, office buildings, high-rise and low-rise condominiums and rental residences, seniors’ housing, townhome units, self-storage rental facilities, and industrial facilities in Canada, both directly and through its subsidiaries, Smart Limited Partnership, Smart Limited Partnership II, Smart Limited Partnership III, Smart Limited Partnership IV, Smart Oshawa South Limited Partnership, Smart Oshawa Taunton Limited Partnership, Smart Boxgrove Limited Partnership, ONR Limited Partnership, ONR Limited Partnership I, and SmartVMC West Limited Partnership. The exchangeable securities of these subsidiaries, which are presented as non-controlling interests or as a liability, as appropriate, are economically equivalent to voting trust units (“Trust Units”) as a result of voting, exchange and distribution rights as more fully described in Note 16(a). The address of the Trust’s registered office is 3200 Highway 7, Vaughan, Ontario, L4K 5Z5. The Units of the Trust are listed on the Toronto Stock Exchange (“TSX”) under the ticker symbol “SRU.UN”. These consolidated financial statements have been approved for issue by the Board of Trustees on February 8, 2023. The Board of Trustees has the power to amend the consolidated financial statements after issue. As at December 31, 2022, the Penguin Group of Companies (“Penguin”), owned by Mitchell Goldhar, owned approximately 20.8% (December 31, 2021 – 20.8%) of the issued and outstanding Units of the Trust and Limited Partnerships (see also Note 22, “Related party transactions”). 2. Summary of significant accounting policies 2.1 Basis of presentation The Trust’s consolidated financial statements are prepared on a going concern basis and have been presented in Canadian dollars rounded to the nearest thousand. The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of investment property and certain financial and derivative instruments (discussed in Note 2.4 and Note 2.11, respectively). The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, unless otherwise indicated. Statement of compliance The consolidated financial statements of the Trust have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). 2.2 Principles of consolidation Subsidiaries are all entities over which the Trust has control. The Trust controls an entity when the Trust is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Trust. They are deconsolidated from the date that control ceases. Inter-entity transactions, balances, unrealized losses and unrealized gains on transactions between the Trust and its subsidiaries are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Trust. Non-controlling interests represent equity interests in subsidiaries not attributable to the Trust. The share of net assets of subsidiaries attributable to non-controlling interests is presented as a component of equity. Net income and comprehensive income are attributed to Trust Units and non-controlling interests. Interests in joint arrangements Investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. A joint operation is a joint arrangement whereby the parties that have joint control have rights to the assets and obligations for the liabilities relating to the arrangement. The Trust is a co-owner in several properties that are subject to joint control and has determined that certain current joint arrangements are joint operations as the Trust, through its subsidiaries, is the direct beneficial owner of the Trust’s interests in the properties. For these properties, the Trust recognizes its proportionate share of the assets, liabilities, revenue and expenses of these co-ownerships in the respective lines in the consolidated financial statements (see Note 24, “Co-owned property interests”). 10 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 108 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT2.3 Equity accounted investments a) Investment in associates NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Investment in associates includes entities over which the Trust has significant influence but not control or joint control, generally accompanying an ownership of between 20% and 50% of the voting rights. Investment in associates is accounted for using the equity method of accounting and recorded as equity accounted investments on the consolidated balance sheet. Under the equity method, the investment is initially recognized at cost, and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee, including the Trust’s pro rata share of changes in fair value of investment property held by the associate from the previous reporting period, after the date of acquisition. The Trust’s investment in associates includes any notional goodwill identified on acquisition. b) Investment in joint ventures A joint venture is a joint arrangement whereby the parties that have joint control only have rights to the net assets of the arrangement. Investment in joint ventures is accounted for using the equity method of accounting and recorded as equity accounted investments on the consolidated balance sheet. Under the equity method, the investment is initially recognized at cost, and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee, including the Trust’s pro rata share of changes in fair value of investment property held by the equity accounted investment from the previous reporting period, after the date of acquisition. The Trust’s investment in joint ventures includes any notional goodwill identified on acquisition. The Trust’s share of post-acquisition profit or loss is recognized in the consolidated statement of income and comprehensive income with a corresponding adjustment to the carrying amount of the equity accounted investment. When the Trust’s share of losses in an equity accounted investment equals or exceeds its interest in the equity accounted investment, including any other unsecured receivables, the Trust does not recognize further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the equity accounted investment. The Trust determines at each reporting date whether there is any objective evidence that the equity accounted investment is impaired. If this is the case, the Trust calculates the amount of impairment as the difference between the recoverable amount of the equity accounted investment and its carrying value and recognizes the amount in the consolidated statement of income and comprehensive income. Profits and losses resulting from upstream and downstream transactions between the Trust and its equity accounted investment are recognized in the Trust’s consolidated financial statements only to the extent of an unrelated investor’s interests in the equity accounted investment. Accounting policies of equity accounted investments are updated when necessary to ensure consistency with the policies adopted by the Trust. Condominium sales revenue Some of the Trust’s equity accounted investments generated revenue from condominium sales. The Trust’s equity accounted investments adopted the accounting policy which requires that the revenue generated from contracts with customers on the sale of residential condominium units is recognized at a point in time when control of the asset (i.e., condominium unit) has transferred to the purchaser (i.e., generally, when the purchaser takes possession of the condominium unit) as the purchaser has the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. The amount of revenue recognized is based on the transaction price included in the purchasers’ contracts. Any funds received prior to the purchasers taking possession of their respective assets are recognized as deferred revenue (contractual liability). Condominium cost of sales The Trust’s equity accounted investments allocate inventory costs associated with the development of condominiums to direct operating costs on a per unit basis using the net yield method. In addition, if post-closing costs are expected (i.e., remaining construction costs, warranties etc.), the unit’s allocation of the post-closing costs are included in cost of sales and a cost to complete liability is recorded. 2.4 Investment properties Investment properties include income properties and properties under development (land or building, or part of a building, or both) that are held by the Trust, or leased by the Trust as a lessee, to earn rentals or for capital appreciation or both. Acquired investment properties are measured initially at cost, including related transaction costs in connection with asset acquisitions. Certain properties are developed by the Trust internally, and other properties are developed and leased to third parties under development management agreements with Penguin and other vendors (“Earnouts”). Earnouts occur when the vendors retain responsibility for managing certain developments on land acquired by the Trust for additional proceeds paid on completion calculated based on a predetermined, or formula-based, capitalization rate, SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 11 109 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS net of land and development costs incurred by the Trust (see Note 4(d)(ii)). The completion of an Earnout is reflected as an additional purchase in Note 3, “Acquisitions and Earnouts”. Costs capitalized to properties under development include direct development and construction costs, Earnout Fees (“Earnout Fees”), borrowing costs, property taxes and other carrying costs, as well as capitalized staff compensation and other costs directly attributable to property under development. Borrowing costs that are incurred for the purpose of, and are directly attributable to, acquiring or constructing a qualifying investment property are capitalized as part of its cost. The amount of borrowing costs capitalized is determined first by reference to borrowings specific to the project, where relevant, and otherwise by applying a weighted average cost of borrowings to eligible expenditures after adjusting for borrowings associated with other specific developments. Borrowing costs are capitalized while acquisition or construction is actively underway and cease once the asset is ready for use as intended by management, or suspended if the development of the asset is suspended, as identified by management. After the initial recognition, investment properties are recorded at fair value, determined based on comparable transactions, if any. If comparable transactions are not available, the Trust uses alternative valuation methods such as: i) the discounted cash flow valuation method, and ii) land, development and construction costs recorded at market value. Valuations, where obtained externally, are performed during the year with quarterly updates on capitalization rates by professional valuers who hold recognized and relevant professional qualifications and have recent experience in the location and category of the investment property being valued. Related fair value gains and losses are recorded in the consolidated statements of income and comprehensive income in the period in which they arise. Investment property held by the Trust under a lease is classified as investment property when the definition of an investment property is met and the Trust accounts for the lease as a right-of-use asset. The Trust accounts for all leasehold property interests that meet the definition of investment property held by the Trust as right-of-use assets. Subsequent expenditure is capitalized to the investment property’s carrying amount only when it is probable that future economic benefits associated with the expenditure will flow to the Trust and the cost of the item can be measured reliably. All other repairs and maintenance costs are expensed when incurred. When part of an investment property is replaced, the carrying amount of the replaced part is derecognized. Initial direct leasing costs incurred by the Trust in negotiating and arranging tenant leases are added to the carrying amount of investment properties. An investment property is classified as held for sale when it is expected that its carrying amount will be recovered principally through a sale transaction rather than through continuing use. For an investment property to be classified as held for sale: i) it must be available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such property, and ii) the sale must be highly probable, management must be committed to a plan to sell the assets, and the sale is expected generally within one year of classification. The Trust continues to measure investment properties, including those classified as held for sale, at fair value. Assets held for sale are presented separately on the consolidated balance sheets. 2.5 Residential development inventory Residential development inventory, which is developed for sale in the ordinary course of business within the normal operating cycle, is stated at the lower of cost and estimated net realizable value. Residential development inventory is reviewed for impairment at each reporting date. An impairment loss is recognized as an expense when the carrying value of the property exceeds its net realizable value. Net realizable value is based on projections of future cash flows, which take into account the development plans for each project and management’s best estimate of the most probable set of anticipated economic conditions. The cost of residential development inventory includes borrowing costs directly attributable to projects under active development. The amount of borrowing costs capitalized is determined first by reference to borrowings specific to the project, where relevant, and otherwise by applying a weighted average interest rate for the Trust’s other borrowings to eligible expenditures. Borrowing costs are not capitalized on residential development inventory where no development activity is taking place. Residential development inventory is presented separately on the consolidated balance sheets as current assets, as the Trust intends to sell these assets in the ordinary course of business within the normal operating cycle. The revenue generated from contracts with customers on the sale of townhomes and residential condominium units is recognized at a point in time when control of the asset (i.e., townhome or condominium unit) has transferred to the purchaser (i.e., generally, when the purchaser takes possession of the townhome or condominium unit) as the 12 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 110 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2.6 2.7 2.8 purchaser has the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. The amount of revenue recognized is based on the transaction price included in the purchasers’ contracts. Any funds received prior to the purchasers taking possession of their respective assets are recognized as deferred revenue (contractual liability). Business combinations The Trust applies business combination accounting whereby identifiable assets acquired and liabilities assumed are measured at their acquisition date fair values. Any excess of the purchase price over the fair value of identifiable net assets acquired is considered goodwill. If the purchase price is less than the fair value of the net assets acquired the difference is recognized directly in the consolidated statement of income and comprehensive income as a gain. The Trust expenses any transaction costs associated with a business combination in the period incurred. When an acquisition does not meet the criteria for a business, it is accounted for as an asset acquisition. Any transaction costs associated with an asset acquisition are allocated to the assets acquired and liabilities assumed. No goodwill is recognized for asset acquisitions. Intangible assets The Trust’s intangible assets comprise key joint venture relationships, trademarks and goodwill. The joint venture relationships and trademarks have finite useful lives, and as such are amortized over a period of 30 years and reviewed for impairment when an indication of impairment exists. Goodwill is not amortized but tested for impairment at least annually, or more frequently if there are indicators of impairment. Equipment Equipment is stated at cost less accumulated amortization and accumulated impairment losses and is included in other assets. Cost includes expenditures that are directly attributable to the acquisition of the asset. The Trust records amortization expense on a straight-line basis over the assets’ estimated useful lives included in the table as follows: Office furniture and fixtures Computer hardware Computer software Up to 7 years Up to 5 years Up to 7 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at least at each financial year- end. If events and circumstances indicate an asset may be impaired, the asset’s carrying amount is written down immediately to its recoverable amount if its carrying amount is greater than its estimated recoverable amount defined as the higher of an asset’s fair value less costs to sell and its value in use. 2.9 Provisions Provisions are recognized when: i) the Trust 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 reliably estimated. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation that reflect current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense. 2.10 Classification of Units as liabilities and equity a) Trust Units The Trust Units meet the definition of a financial liability under IFRS as the redemption feature of the Trust Units creates an unavoidable contractual obligation to pay cash. The Trust Units are considered to be “puttable instruments” because of the redemption feature. IFRS provides a very limited exemption to allow puttable instruments to be presented as equity provided certain criteria are met. To be presented as equity, a puttable instrument must meet all of the following conditions: i) it must entitle the holder to a pro rata share of the entity’s net assets in the event of the entity’s dissolution; ii) it must be in the class of instruments that is subordinate to all other instruments; iii) all instruments in the class in ii) must have identical features; iv) other than the redemption feature, there can be no other contractual obligations that meet the definition of a liability; and v) the expected cash flows for the instrument must be based substantially on the profit or loss of the entity or change in fair value of the instrument. This is called the “Puttable Instrument Exemption”. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 13 111 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Trust Units meet the Puttable Instrument Exemption criteria and accordingly are presented as equity in the consolidated financial statements. The distributions on Trust Units are deducted from retained earnings. b) Limited Partnership Units The Class B General Partnership Units and Class D Limited Partnership Units of Smart Limited Partnership (referred to herein as “Smart LP Units”), Class B Limited Partnership Units of Smart Limited Partnership II (referred to herein as “Smart LP II Units”), Class B General Partnership Units of Smart Limited Partnership III (referred to herein as “Smart LP III Units”), Class B General Partnership Units of Smart Limited Partnership IV (referred to herein as “Smart LP IV Units”), Class B General Partnership Units and Class D Limited Partnership Units of Smart Oshawa South Limited Partnership (referred to herein as “Smart Oshawa South LP Units”), Class B General Partnership Units and Class D Limited Partnership Units of Smart Oshawa Taunton Limited Partnership (referred to herein as “Smart Oshawa Taunton LP Units”), Class B Limited Partnership Units of ONR Limited Partnership (referred to herein as “ONR LP Units”), Class B Limited Partnership Units of ONR Limited Partnership I (referred to herein as “ONR LP I Units”), Class B Limited Partnership Units of Smart Boxgrove Limited Partnership (referred to herein as “Smart Boxgrove LP Units”), and Class D Limited Partnership Units of SmartVMC West Limited Partnership (referred to herein as “SmartVMC West LP Units”) are exchangeable into Trust Units at the partners’ option. All limited partnership units that are presented as equity are referred to herein as “LP Units” (individually, each of these limited partnerships are referred to herein as an LP). The original characteristics of the LP Units indicated that they were exchangeable into a liability (the Trust Units are a liability by definition), and accordingly were also considered to be a liability, measured at amortized cost each reporting period with changes in carrying amount recorded directly in the consolidated statements of income and comprehensive income, and on that basis, the distributions on such Units were classified as interest expense in the consolidated statements of income and comprehensive income. However, amendments were made effective December 31, 2012 to the Exchange, Option and Support Agreements (“EOSA”) for each respective LP that require the Trust to convert to a closed-end trust prior to honouring a redemption request by the partners. Converting to a closed-end trust will classify the Trust Units as equity as the Trust Units will no longer have the redemption feature. As a result, the LP Units meet the Puttable Instrument Exemption criteria and as such are presented in equity as non-controlling interests in the Trust’s consolidated financial statements. The Class D Smart LP Units, Class F Smart LP Units, Class D Smart Oshawa South LP Units, Class D Smart Oshawa Taunton LP Units, Class B ONR LP Units, Class B ONR LP I Units, and Class D SmartVMC West LP Units (collectively referred to herein as “Units classified as liabilities”), are presented as a liability, designated at fair value in accordance with IFRS 9, “Financial Instruments” (“IFRS 9”), and approximate the fair value of Trust Units, with changes in fair value recorded directly in earnings. The distributions on such Units are classified as interest expense in the consolidated statement of income and comprehensive income. The Trust considers distributions on such Units classified as interest expense to be a financing activity in the consolidated statement of cash flows. 2.11 Financial instruments – recognition and measurement The Trust’s financial instruments are accounted for under IFRS 9: Initial Recognition The Trust recognizes a financial asset or a financial liability when, and only when, it becomes a party to the contractual provisions of the instrument. Such financial assets or financial liabilities are initially recognized at their fair value, including directly attributable transaction costs in the case of a financial asset or financial liability not subsequently measured at fair value through profit or loss. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Subsequent measurement depends on the initial classification of the financial asset or financial liability. Classification The classification of financial assets depends on the entity’s business model for managing the financial assets and the contractual terms of the cash flows. Financial assets are classified and measured based on the following categories: • • • amortized cost; fair value through other comprehensive income (“FVTOCI”); and fair value through profit or loss (“FVTPL”). 14 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 112 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTThe following table summarizes the Trust’s classification and measurement of financial assets and liabilities: Note Classification under IFRS 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Financial assets Mortgages, loans and notes receivable Amounts receivable and other Cash and cash equivalents Cash held as collateral Total return swap receivable Other financial assets Financial liabilities Accounts payable and other payables Secured debt Revolving operating facilities Unsecured debt Units classified as liabilities Earnout options Deferred unit plan (“DUP”) Long term incentive plan (“LTIP”) Equity incentive plan (“EIP”) Other financial liabilities a) Financing costs 2.12 2.10 2.13 2.13 2.13 2.13 Amortized cost Amortized cost Amortized cost Amortized cost FVTPL FVTPL Amortized cost Amortized cost Amortized cost Amortized cost FVTPL FVTPL FVTPL FVTPL FVTPL FVTPL Financing costs include commitment fees, underwriting costs and legal costs associated with the acquisition or issuance of financial assets or liabilities. Financing costs relating to secured debt, non-revolving credit facilities, and convertible and unsecured debentures are accounted for as part of the respective liability’s carrying value at inception and amortized to interest expense using the effective interest method. Financing costs incurred to establish revolving credit facilities are deferred as a separate asset on the consolidated balance sheet and amortized on a straight-line basis over the term of the facilities. In the event any debt is extinguished, any associated unamortized financing costs are expensed immediately. b) Derivative instruments Derivative financial instruments may be utilized by the Trust in the management of its interest rate and foreign currency exposure. Derivatives are carried at fair value with changes in fair value recognized in net income. The Trust’s policy is not to utilize derivative instruments for trading or speculative purposes. c) Fair value of financial and derivative instruments The fair value of financial instruments is the amount of consideration that would be agreed upon in an arm’s-length transaction between knowledgeable, willing parties who are under no compulsion to act; i.e., the fair value of consideration given or received. In certain circumstances, the fair value may be determined based on observable current market transactions in the same instrument, using market-based inputs. The fair values are described and disclosed in Note 15, “Fair value of financial instruments”. d) Currency swap agreement The currency swap is a contractual agreement to exchange payments based on specified notional amounts in two currencies, Canadian dollars and U.S. dollars, for a specific period. The currency swap agreement requires the exchange of net contractual payments periodically without the exchange of the notional principal amounts on which the payments are based. Changes in market value are recorded in net income and comprehensive income. The currency swap payable reflects the fair value of the swap agreement, and is determined as the difference between the foreign exchange rate between Canadian dollars and U.S. dollars as per the swap agreement and the foreign exchange rate at the reporting date on the specified notional amount. The gain (loss) will be realized when the currency swap agreement matures or is unwound. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 15 113 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS e) Interest rate swap agreements The Trust may enter into interest rate swaps to economically hedge its interest rate risk. The fair value of interest rate swap agreements reflects the fair value of swap agreements at each reporting date, and is driven by the difference between the fixed interest rate and the applicable variable interest rate. The fair value of interest rate swap agreements is determined using the discounted cash flow valuation technique on the expected cash flows of the derivatives. The future fixed cash payments and the expected variable cash receipts are discounted to the reporting date, and then netted to determine the fair value of each interest rate swap agreement. The expected variable cash receipts are based on expectations of future interest rates, which are derived from yield curves based on observable market data. f) Total return swap (“TRS”) receivable The total return swap is a contractual agreement to exchange payments based on a specified notional amount and the underlying financial assets for a specific period. The total return to the Trust includes the total return generated by the underlying notional Trust Units, plus any appreciation, if there is any, in the market value of the notional Trust Units, less the amount equal to any decline, if there is any, in the market value of the underlying notional Trust Units. The total return swap agreement requires the exchange of net contractual payments periodically without the exchange of the notional principal amounts on which the payments are based. Changes in market value are recorded in net income and comprehensive income. The Trust has funded the total return swap agreement by a loan from the counterparty. The loan is measured at amortized cost. The total return swap receivable reflects the market value of the swap agreement, and is determined by reference to the value of the underlying notional Trust Units at each reporting date. The gain (loss) will be realized when the total return swap agreement matures or is unwound. g) Modifications or extinguishments of loans and debt Amendments extinguishments based on the terms of the revised agreements. to mortgages and loans receivable and debt are assessed as either modifications or When a modification is determined, the carrying amount of the loan or debt is adjusted using the original effective interest rate, with a corresponding adjustment recorded as a gain or loss. When an extinguishment is determined, the new loan or debt is recorded at its fair value and a corresponding gain/loss is recognized immediately for the difference between the carrying amount of the old loan or debt and the new loan or debt. h) Impairment of financial assets The Trust assesses, on a forward-looking basis, the expected credit losses (“ECL”) associated with its debt instruments carried at amortized cost. The impairment is dependent on whether there has been a significant increase in credit risk. For trade receivables, the Trust applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognized from initial recognition of the receivables. To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due. The contract assets (“Unbilled other tenant receivables”) relate to unbilled work in progress and have substantially the same risk characteristics as the trade receivables for the same types of contracts. The Trust has therefore concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the contract assets. However, the assumptions and estimates underlying the manner in which ECLs have been implemented historically may not be appropriate in the current economic environment, including but not limited to the inflationary environment, with rising interest rates. Accordingly, the Trust has not applied its existing ECL methodology mechanically. Instead, during the current economic environment, the Trust has been in discussions with tenants on a case-by-case basis to determine optimal rent payment solutions and has incorporated this available, reasonable and supportable information when estimating ECL on tenant receivables. 16 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 114 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT2.12 2.13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS All of the Trust’s loans receivable and mortgages receivable at amortized cost are considered to have low credit risk, and the loss allowance recognized during the period was therefore limited to 12 months expected losses. These financial assets are considered by management to be “low credit risk” when these financial assets have a low risk of default and the borrower has a strong capacity to meet its contractual cash flow obligations in the near term. i) Cash held as collateral The Trust, from time to time, pledges cash and cash equivalents as security for derivative instruments with financial institutions. This balance is classified as cash held as collateral, a non-current financial asset, and is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. j) Interest income Interest income is recognized as interest accrues using the effective interest method. When a loan and receivable are impaired, the Trust reduces the carrying amount to its recoverable amount, which is the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans and receivables is recognized using the original effective interest rate. Cash and cash equivalents Cash and cash equivalents comprise cash and short-term investments with original maturities of three months or less. Trust and Limited Partnership Unit based arrangements a) Unit options issued to non-employees on acquisitions (the “Earnout options”) In connection with certain acquisitions and the associated development agreements, the Trust may grant options to acquire Units of the Trust or Limited Partnerships to Penguin or other vendors. These options are exercisable only at the time of completion and rental of additional space on acquired properties at strike prices determined on the date of grant. Earnout options that have not vested expire at the end of the term of the corresponding development management agreement. The Earnout options are considered to be a financial liability because there is a contractual obligation for the Trust to deliver Trust or Limited Partnership Units upon exercise of the Earnout options. The Earnout options are considered to be contingent consideration with respect to the acquisitions they relate to, and are initially recognized at their fair value. The Earnout options are subsequently carried at fair value with changes in fair value recognized in the fair value adjustment on financial instruments in the consolidated statements of income and comprehensive income. The fair value of Earnout options is determined using the Black-Scholes option-pricing model using certain observable inputs with respect to the volatility of the underlying Trust Unit price, the risk-free rate and using unobservable inputs with respect to the anticipated expected lives of the options, the number of options that will ultimately vest and the expected Trust Unit distribution rate. Generally, increases in the anticipated lives of the options, decreases in the number of options that will ultimately vest, and decreases in the expected Trust Unit distribution rate will combine to result in a lower fair value of Earnout options (see also 2.23(b)(i)). b) Deferred unit plan Deferred units granted to Trustees with respect to their Trustee fees, as well as the matching deferred units, vest immediately and are considered to be with respect to past services and are recognized as compensation expense upon grant. Deferred units granted to eligible associates with respect to their bonuses vest immediately, and the matching deferred units vest 50% on the third anniversary and 25% on each of the fourth and fifth anniversaries. Deferred units granted relating to amounts matched by the Trust are considered to be with respect to future services and are recognized as compensation expense based upon the fair value of Trust Units over the vesting period of each deferred unit. The deferred units earn additional deferred units for the distributions that would otherwise have been paid on the deferred units as if they instead had been issued as Trust Units on the date of grant. The deferred units are considered to be a financial liability because there is a contractual obligation for the Trust to deliver Trust Units or settle in cash upon conversion or redemption of the deferred units. The deferred units are measured at fair value using the market price of the Trust Units on each reporting date, with changes in fair value recognized in the consolidated statements of income and comprehensive income as additional compensation expense over their vesting period and as a gain or loss on financial instruments once vested. The additional deferred units are recorded in the consolidated statements of income and comprehensive SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 17 115 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS income as compensation expense over their vesting period and as interest expense once vested (see also 2.23(b)(ii)). c) Long Term Incentive Plan The Trust has a Long Term Incentive Plan that awards officers of the Trust with performance units that are linked to the long-term performance of Trust Units relative to the respective market index. Performance units vest over a performance period of three years and are settled for cash based on the market value of Trust Units at the end of the performance period. At each reporting date, the performance units are measured based on the performance of Trust Units relative to the respective market index, the market value of Trust Units and the total performance units granted including additional units for distributions (see also 2.23(b)(iv)). d) Equity Incentive Plan The Trust has an Equity Incentive Plan that awards officers and key employees of the Trust with performance units when the daily volume weighted average price (“VWAP”) of all Trust Units traded on the TSX for 20 consecutive trading days meets or exceeds certain Unit price thresholds set by the Board. Performance units vest over a performance period of three years and are settled for cash or exchanged for Trust Units based on the 10- day VWAP of Trust Units at the redemption date. At each reporting date, the performance units are measured based on the performance of Trust Units relative to the Unit price threshold targets, the market value of Trust Units and the total performance units granted including additional units for distributions (see also 2.23(b)(v)). 2.14 Rentals from investment properties and other The Trust’s rental from investment properties and other comes from different sources and is accounted for in accordance with IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) and IFRS 16, “Leases” (“IFRS 16”). a) Rentals from investment properties The Trust’s lease agreements may contain both lease and non-lease elements. IFRS 16 requires lessors to allocate consideration in the contracts between lease and non-lease components based on their relative stand- alone prices. Rentals from investment properties accounted for using IFRS 16 (lease components) include rents from tenants under leases, recoveries of property tax and operating costs that do not relate to additional services provided to lessees, percentage participation rents, lease cancellation fees, parking income and some incidental lease-related income. Rents from tenants may include free rent periods and rental increases over the term of the lease and are recognized in revenue on a straight-line basis over the term of the lease. The difference between revenue income recognized and the cash received is included in other assets as straight-line rents receivable. Lease incentives provided to tenants are deferred and amortized against revenue rental income over the term of the lease. Percentage participation rents are recognized after the minimum sales level has been achieved with each lease. Lease cancellation fees are recognized as revenue income once an agreement is completed with the tenant to terminate the lease and the collectibility is probable. Rentals from investment properties also include certain amounts accounted for under IFRS 15 (non-lease components) where the Trust provides lessees or others with a distinct service. Non-lease components include revenue in a form of recoveries of operating costs where services are provided to tenants (common area maintenance recoveries, chargeback recoveries and administrative recoveries), parking revenue and revenue from other services that are distinct. The respective performance obligations are satisfied as services are rendered and revenue is recognized over time. See also Note 18 for details on amounts related to lease and non- lease components. Typically, revenue from operating costs recoveries and other services is collected from tenants on a monthly basis and parking revenue is collected at the day when the respective service has been provided. This results in immaterial contract balances as at each reporting date. b) Service and other revenues The Trust provides asset and property management services to co-owners, partners and third parties for which it earns market-based construction, development and other fees. These fees are recognized over time in accordance with IFRS 15 as the service or activity is performed. Where a contract has multiple deliverables, the Trust identifies the different performance obligations of the contract and recognizes the revenue allocated to each obligation as the respective obligation is met. 18 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 116 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT2.15 2.16 2.17 2.18 2.19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Trust recognizes non-lease component revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the Trust expects to be entitled in exchange for those goods or services. It applies to all contracts with customers, excluding leases, financial instruments and insurance contracts. Tenant receivables Tenant receivables are recognized initially at fair value and subsequently are measured at amortized cost using the effective interest method, less impairment provision. The carrying amount of tenant receivables is reduced through the use of expected credit losses, and a loss is recorded in the consolidated statements of income and comprehensive income within “Property operating costs”. The Trust records the expected credit loss to comply with IFRS 9’s simplified approach for tenant receivables where its loss allowance is measured at initial recognition and throughout the life of the receivable at an amount equal to lifetime expected credit loss. Current and deferred income tax The Trust is taxed as a mutual fund trust for Canadian income tax purposes. In accordance with the Declaration of Trust, distributions to Unitholders are declared at the discretion of the Trustees. The Trust endeavours to declare distributions in each taxation year in such an amount as is necessary to ensure that the Trust will not be subject to tax on its net income and net capital gains under Part I of the Income Tax Act (Canada) (“Tax Act”). The Trust qualifies for the REIT Exception under the specified investment flow-through (“SIFT”) trust rules for accounting purposes. The Trust considers the tax deductibility of the Trust’s distributions to Unitholders to represent, in substance, an exemption from current tax so long as the Trust continues to expect to distribute all of its taxable income and taxable capital gains to its Unitholders. Accordingly, the Trust will not recognize any current tax or deferred income tax assets or liabilities on temporary differences in the Trust’s financial statements. Distributions Distributions are recognized as a deduction from retained earnings for the Trust Units and the Limited Partnership Units classified as equity, and as interest expense for the Units classified as liabilities and vested deferred units, in the Trust’s consolidated financial statements in the period in which the distributions are approved. Operating segments Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. The Trust has determined that its chief operating decision-maker is the Executive Chairman and Chief Executive Officer. Leases Upon lease commencement where the Trust is the lessee, the Trust records a right-of-use asset at the amount equal to the lease liability. The lease liability is initially measured at the present value of lease payments payable over the lease term, discounted at the Trust’s incremental borrowing rate. The lease liability is subsequently measured at amortized cost using the effective interest method. However, as and when rent changes as a result of lease payments being linked to a rate or index, leased assets and liabilities have to be remeasured. A lease modification is accounted for as a separate lease if: • • the modification increases the scope of the lease by adding the right to use one or more underlying assets; and the consideration for the lease increases by an amount commensurate with the stand-alone price for the increase in scope. With respect to tenant improvements in connection with the sublease, under IFRS 16, tenant improvements provided by the Trust are not included in the cost of the right-of-use asset. However, when the leased property meets the definition of investment property under IAS 40 (see Note 2.4), the Trust presents tenant improvements that enhance the value of the leased property as an adjustment together with right-of-use assets or incentives resulting in an adjustment to revenue within investment. 2.20 Foreign currency translation a) Functional currency The Trust’s properties and operations are all within Canada, which is also its primary economic environment. Accordingly, the functional currency of the Trust is determined to be the Canadian dollar. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 19 117 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS b) Foreign currency translation The Trust records foreign currency transactions initially at the rate of exchange at the date of the transaction. If the transaction spans over a period of time, the Trust records the foreign currency transaction at the average rate of exchange for the transaction period. At each reporting date, foreign currency monetary amounts are reported using the closing rate, which is the spot exchange rate at the end of the reporting period. 2.21 Interest Rate Benchmark Reform On January 1, 2021, the Trust adopted amendments to IFRS 9, IAS 39, IFRS 7 and IFRS 16 Interest Rate Benchmark Reform – Phase 2 as issued in August 2020. For financial instruments measured using amortized cost, changes to the basis for determining the contractual cash flows required by interest rate benchmark reform were reflected by adjusting their effective interest rate. Accordingly, no immediate gain or loss was recognized. The Trust’s exposure to the interest rate benchmark reform as at December 31, 2022 include all variable-rate financial instruments, and are presented in the table below: As at December 31, 2022 Financial instruments measured at amortized cost Balance yet to transition to an alternative benchmark interest rate Financial assets Mortgages receivable Loans receivable Financial liabilities Secured debt Unsecured debt Revolving operating facilities 39,456 140,123 179,579 31,536 1,143,232 81,283 1,256,051 2.22 Critical accounting judgments The following are the critical judgments that have been made in applying the Trust’s accounting policies and that have the most significant effect on the amounts recorded or disclosed in the consolidated financial statements: a) Investment properties The Trust’s accounting policies relating to investment properties are described in Note 2.4. In applying these policies, judgment is applied in determining whether certain costs are additions to the carrying amount of an investment property and, for properties under development, identifying the point at which substantial completion of the property occurs and identifying the directly attributable borrowing costs to be included in the carrying value of the development property. The Trust applies judgment in determining whether development projects are active and viable, otherwise previously capitalized costs are written off. The Trust also applies judgment in determining whether the properties it acquires are considered to be asset acquisitions or business combinations. The Trust considers all the properties it has acquired to date to be asset acquisitions. Earnout options, as described in Note 2.13(a), are exercisable upon completion and rental of additional space on acquired properties. Judgment is applied in determining whether Earnout options are considered to be contingent consideration relating to the acquisition of the acquired properties or additional cost of services during the construction period. The Trust considers the Earnout options it has issued to date to represent contingent considerations relating to the acquisitions. The valuation of the investment properties is the main area of judgment exercised by the Trust. Investment properties are stated at fair value. Gains and losses arising from changes in the fair values are recognized in fair value adjustment on revaluation of investment properties in the consolidated statements of income and comprehensive income in the period in which they arise. Management internally values the entire portfolio of investment properties, taking into account available external data. In addition, the Trust endeavours to obtain external valuations of approximately 15%–20% (by value) of the portfolio annually carried out by professionally qualified valuers in accordance with the Appraisal and Valuation Standards of the Royal Institute of Chartered Surveyors. Properties are rotated annually to ensure that approximately 50% (by value) of the portfolio is appraised externally over a three-year period. Judgment is applied in determining the extent and frequency of independent appraisals. 20 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 118 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS b) Investment in associates The Trust’s policy for its investment in associates is described in Note 2.3. For those investment in associates disclosed in Note 5, “Equity accounted investments”, management has assessed the level of influence that the Trust has over those investment in associates and determined that it has significant influence based on its decision-making authority with regards to the operating, financing and investing activities as specified in the contractual terms of the arrangement. Consequently, those investments have been classified as investment in associates. c) Joint arrangements The Trust’s policy for its joint arrangements is described in Note 2.2. In applying this policy, the Trust makes judgments with respect to whether the Trust has joint control and whether the arrangements are joint operations or joint ventures. d) Intangible assets The Trust’s policy for intangible assets is described in Note 2.7. In applying this policy, the Trust makes judgments with respect to the amortization period relating to the joint venture relationships and trademarks that have finite useful lives, while also reviewing for impairment when an indication of impairment exists. In addition, on an annual basis or more frequently if there are any indications of impairment, the Trust evaluates whether goodwill may be impaired by determining whether the recoverable amount is less than the carrying amount for the smallest identified cash-generating unit. e) Classifications of Units as liabilities and equity The Trust’s accounting policies relating to the classification of Units as liabilities and equity are described in Note 2.10. The critical judgments inherent in these policies relate to applying the criteria set out in IAS 32, “Financial Instruments Presentation”, relating to the Puttable Instrument Exemption. f) Income taxes The Trust is taxed as a mutual fund trust for Canadian income tax purposes and qualifies for the REIT Exemption under the SIFT rules for tax purposes. The Trust endeavours to declare distributions in each taxation year in such an amount as is necessary to ensure that the Trust will not be subject to tax on its net income and net capital gains under Part I of the Income Tax Act (Canada) (“Tax Act”). The Trust qualifies for the REIT Exemption under the specified investment flow-through (SIFT) trust rules for accounting purposes. The Trust considers the tax deductibility of the Trust’s distributions to Unitholders to represent, in substance, an exemption from current tax so long as the Trust continues to expect to distribute all of its taxable income and taxable capital gains to its Unitholders. Accordingly, the Trust will not recognize any current tax or deferred income tax assets or liabilities on temporary differences in the Trust’s financial statements. 2.23 Critical accounting estimates and assumptions The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. The estimates and assumptions that are critical to the determination of the amounts reported in the consolidated financial statements relate to the following: a) Fair value of investment properties The fair value of investment properties is dependent on: i) projected future cash flows for income properties and properties under development, and ii) land, development and construction costs for properties under development, and discount rates applicable to those assets. The projected cash flows for each property are based on the location, type and quality of the property and supported by the terms of any existing leases, other contracts or external evidence such as current market rents for similar properties, and adjusted for estimated vacancy rates and estimated maintenance costs. Capitalization and discount rates are based on the location, size and condition of the properties and take into account market data at the valuation date. These assumptions may not ultimately be achieved. The critical estimates and assumptions underlying the valuation of investment properties are set out in Note 4 “Investment properties”. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 21 119 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS b) Fair value of financial instruments i) Unit options issued to non-employees on acquisitions (the “Earnout options”) The Earnout options are considered to be contingent consideration with respect to the acquisitions they relate to, and are initially recognized at their fair value. The Earnout options are subsequently carried at fair value with changes in fair value recognized in the consolidated statements of income and comprehensive income. The fair value of Earnout options is determined using the Black-Scholes option-pricing model using certain observable inputs with respect to the volatility of the underlying Trust Unit price, the risk-free rate and using unobservable inputs with respect to the anticipated expected lives of the options, the number of options that will ultimately vest and the expected Trust Unit distribution rate. Generally, increases in the anticipated lives of the options, decreases in the number of options that will ultimately vest, and decreases in the expected Trust Unit distribution rate will combine to result in a lower fair value of Earnout options. ii) Deferred unit plan The deferred units are measured at fair value using the market price of the Trust Units on each reporting date with changes in fair value recognized in the consolidated statements of income and comprehensive income as additional compensation expense over their vesting period and as a gain or loss on financial instruments once vested. The additional deferred units are recorded in the consolidated statements of income and comprehensive income as compensation expense over their vesting period and as interest expense once vested. iii) Units classified as liabilities Units classified as liabilities are measured at each reporting period and approximate the fair value of Trust Units, with changes in value recorded directly in earnings through unrealized fair value adjustments. The distributions on such Units are classified as interest expense in the consolidated statement of income and comprehensive income. The Trust considers distributions on such Units classified as interest expense to be a financing activity in the consolidated statement of cash flows. iv) Long Term Incentive Plan The fair value of the LTIP is based on the Monte Carlo simulation pricing model, which incorporates: (i) the long-term performance of the Trust relative to the S&P/TSX Capped REIT Index for each performance period, (ii) the market value of Trust Units at each reporting date, and (iii) the total granted LTIP units under the plan including LTIP units that are reinvested. Any adjustments made to the accrued value of the LTIP are recorded in earnings. v) Equity Incentive Plan The fair value of the EIP is based on the Monte Carlo simulation pricing model, which incorporates: (i) the performance of the Trust relative to the Unit price thresholds for the performance period, (ii) the 10-day VWAP of Trust Units at each reporting date, and (iii) the total granted performance units under the EIP including performance units that are reinvested. Any adjustments made to the accrued value of the EIP are recorded in earnings. 2.24 Reclassification of comparative figures The comparative figures relating to “Deferred financing costs”, in the amount of $1,269, have been grouped to “Prepaid expenses and deposits” (see also Note 11, “Amounts receivable and other, prepaid expenses, deposits and deferred financing costs”) to conform with the current period presentation. The comparative figures relating to “Earnings from other”, in the amount of $38, have been grouped to “Rentals from investment properties and other” (see also Note 18, “Rentals from investment properties and other”) to conform with the current period presentation. 22 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 120 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT2.25 Future changes in accounting policies The Trust monitors the potential changes proposed by the IASB and analyzes the effect that changes in the standards may have on the Trust’s operations. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Standards issued but not yet effective up to the date of issuance of the consolidated financial statements for the year ended December 31, 2022 are described below. This description is of the standards and interpretations issued that the Trust reasonably expects to be applicable at a future date. The Trust intends to adopt these standards when they become effective. Amendments to IAS 1, Presentation of Financial Statements – Classification of Liabilities as Current or Non-Current In January 2020, the IASB issued amendments to IAS 1 to clarify the requirements for classifying liabilities as current or non-current. The amendments clarify the classification of liabilities as current or non-current based on rights that are in existence at the end of the reporting period and unaffected by the likelihood that an entity will exercise its right to defer settlement of the liability for at least 12 months after the reporting period. The amendments also clarify the definition of “settlement” of a liability. In October 2022, revised amendments in respect of non-current liabilities with covenants were issued. Both amendments are effective on January 1, 2024 and should be applied retrospectively. Earlier application is permitted. Management is currently assessing the impact of the amendments on the Trust’s financial statements. Amendments to IAS 8, Definition of Accounting Estimates In February 2021, the IASB issued amendments to IAS 8, in which it introduces the definition of “accounting estimates”. The amendments clarify the distinction between changes in accounting estimates and changes in accounting policies and the correction of errors. The amendments also clarify that the effects on an accounting estimate of a change in an input or a change in a measurement technique are changes in accounting estimates unless they result from the correction of prior period errors. The amendments are effective January 1, 2023, with early adoption permitted. Management is currently assessing the impact of the amendments on the Trust’s financial statements. Introduction of IFRS 17, Insurance contracts In May 2017, the IASB issued the new IFRS 17 standard to replace IFRS 4. IFRS 17, Insurance contracts is a new standard that sets out principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of the standard. The objective of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts. This information gives a basis for users of financial statements to assess the effect that insurance contracts have on the entity’s financial position, financial performance and cash flows. The new standard is effective on January 1, 2023 and should be applied retrospectively. Earlier application is permitted. Management is currently assessing the impact of the new standard on the Trust’s financial statements. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 23 121 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Acquisitions and Earnouts Acquisitions and Earnouts completed during the year ended December 31, 2022 a. In January 2022, the Trust acquired, from its unrelated partner, a 50% interest in each of three co-owned properties located in Ottawa (Laurentian), Ontario, Edmonton Capilano, Alberta, and Lachenaie, Quebec, for a total purchase price of $100,000 and adjusted for costs of acquisition and other working capital amounts, which was paid in cash and funded from the Trust’s existing operating facilities. Upon completion of the acquisition, the Trust became the 100% owner of these properties. b. c. d. In January 2022, the Trust acquired a 25% interest in parcels of land from its unrelated partner located in Mirabel, Quebec, for a purchase price of $2,609, paid in cash and adjusted for costs of acquisition. Upon completion of the acquisition, the Trust’s interest in these parcels of land increased to 50%. In June 2022, the Trust acquired a parcel of land in Pickering, Ontario, for investment property development for gross proceeds of $16,635, paid in cash and adjusted for costs of acquisition and other working capital amounts. During the year ended December 31, 2022, pursuant to development management agreements referred to in Note 4, “Investment properties” (see also Note 22, “Related party transactions”), the Trust completed the purchase of Earnout transactions on 7,114 square feet of retail space and three land parcels. The purchase price was $1,661 for retail space and $7,549 for land parcels, of which $315 was satisfied through the issuance of 11,198 Class B Series 5 Smart LP III Units, $964 was satisfied through the issuance of 18,655 Class B Series 1 Smart LP IV Units and 12,419 Class B Series 6 Smart LP III Units (see also Note 13(b) and Note 16, “Unit equity”), and the balance was paid in cash, adjusted for other working capital amounts. The following table summarizes the consideration for Acquisitions and Earnouts completed for the year ended December 31, 2022: Cash LP Units issued Adjustments for other working capital amounts Note Acquisitions Earnouts 4(d)(ii) 120,201 — 2,013 122,214 8,188 1,279 (257) 9,210 Total 128,389 1,279 1,756 131,424 24 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 122 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Acquisitions and Earnouts completed during the year ended December 31, 2021 a. In February 2021, the Trust acquired a parcel of land totalling 7.6 acres in Aurora, Ontario for a purchase price of $12,237, paid in cash and adjusted for costs of acquisition and other working capital amounts. b. c. d. e. In April and June 2021, the Trust acquired two parcels of residential land in Hamilton, Ontario, for a total purchase price of $1,085, paid in cash and adjusted for costs of acquisition and other working capital amounts. In December 2021, the Trust acquired a 50.0% interest in a parcel of land for retail development in Toronto (Leaside), Ontario, for a total purchase price of $12,750, paid in cash and adjusted for costs of acquisition and other working capital amounts. The remaining 50.0% interest is held by Penguin. In December 2021, the Trust acquired a 66.67% interest in a parcel of land adjacent to the Vaughan Metropolitan Centre in Vaughan, Ontario, from unrelated parties for a purchase price of $494,312. The purchase price of this parcel of land (“SmartVMC West”) was satisfied by: i) $300,000 of cash, ii) $181,236 through the issuance of 3,623,188 Class D Series 1 LP Units and 2,173,913 Class D Series 2 LP Units of SmartVMC West Limited Partnership, and iii) $13,076 through the assumption of mortgages. The Trust’s ownership interest in SmartVMC West represents 66.67%, while the remaining 33.33% interest is held by Penguin. During the year ended December 31, 2021, pursuant to development management agreements referred to in Note 4, “Investment properties” (see also Note 22, “Related party transactions”), the Trust completed the purchase of: i) An Earnout transaction on a parcel of land totalling 13.2 acres located in Niagara Falls, Ontario. The purchase price was $1,415, of which $466 was satisfied through the issuance of 19,954 Class B Series 6 Smart LP III Units (see also Note 13(b)) and the balance was paid in cash, adjusted for other working capital amounts. This parcel of land was subsequently disposed of (see also, Note 4, “Investment properties”). ii) Earnout transactions totalling 24,619 square feet of development space with a purchase price of $8,925, of which $1,042 was satisfied through the issuance of 12,569 Class B Smart LP III Units and 26,317 Class B Smart LP IV Units (see also Note 13(b)) and the balance paid in cash, adjusted for other working capital amounts (see also, Note 4(d)(ii)). iii) An Earnout transaction on 23,012 square feet of retail space in Stouffville, Ontario. The purchase price was $5,934, of which $229 was satisfied through the issuance of 7,763 Class B Series 2 Smart LP Units (see also Note 13(b)) and the balance was paid in cash, adjusted for development costs funded by the Trust and other amounts. The following table summarizes the consideration for Acquisitions and Earnouts completed for the year ended December 31, 2022: Cash LP Units issued Mortgages assumed Adjustments for other working capital amounts Acquisitions - SmartVMC West 300,000 181,236 Acquisitions - other 26,611 — Note 4(d)(ii) 13,076 (76) — 9 326,611 181,236 13,076 (67) Total Acquisitions Earnouts Total Acquisitions and Earnouts 328,765 182,974 13,076 12,315 537,130 2,154 1,738 — 12,382 16,274 494,236 26,620 520,856 See also Note 5, “Equity accounted investments”, for additional details on acquisitions reflected in equity accounted investments. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 25 123 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Investment properties The following table summarizes the activities in investment properties: Balance – beginning of year Additions (deductions): Acquisitions, Earnouts and related adjustments of investment properties Earnout Fees on properties subject to development management agreements Transfer to income properties from properties under development Transfer from income properties to properties under development Transfer from properties under development to equity accounted investments Capital expenditures Deferred leasing costs Development expenditures Capitalized interest Dispositions Year Ended December 31, 2022 Year Ended December 31, 2021 Note Income Properties Properties Under Development Income Properties Total Properties Under Development Total 8,395,077 1,452,001 9,847,078 8,267,430 582,960 8,850,390 101,993 28,679 130,672 22,015 499,700 521,715 4(d)(ii) 1,401 — 1,401 2,397 — 2,397 39,707 (39,707) — 40,555 (40,555) (7,887) 7,887 — (2,400) 2,400 — — — (25,000) (25,000) — (6,850) (6,850) 19,912 1,589 — — 19,912 17,472 1,589 3,057 — 17,472 — 3,057 — — 79,373 35,036 79,373 35,036 — — 53,186 53,186 14,333 14,333 (777) (40,726) (41,503) (62,865) (37,285) (100,150) Fair value adjustment on revaluation of investment properties Balance – end of year Investment properties 26 (54,122) 255,956 201,834 107,416 384,112 491,528 8,496,893 1,753,499 10,250,392 8,395,077 1,452,001 9,847,078 8,496,893 1,711,178 10,208,071 8,395,077 1,452,001 9,847,078 Investment properties classified as held for sale 4(e) — 42,321 42,321 — — — 8,496,893 1,753,499 10,250,392 8,395,077 1,452,001 9,847,078 The historical costs of both income properties and properties under development as at December 31, 2022 totalled $6,765,293 and $1,338,313, respectively (December 31, 2021 – $6,603,696 and $1,273,350, respectively). Secured debt with a carrying value of $969,054 (December 31, 2021 – $1,294,546) is secured by investment properties with a fair value of $2,807,896 (December 31, 2021 – $3,206,478). Presented separately from investment properties is $78,820 (December 31, 2021 – $76,042) of net straight-line rents receivable and tenant incentives (these amounts are included in Note 7, “Other assets”) arising from the recognition of rental revenues on a straight-line basis and amortization of tenant incentives over the respective lease terms. The fair value of investment properties has been reduced by these amounts. a) Valuation methods underlying management’s estimation of fair value i) Income properties The Trust applies the discounted cash flow valuation method to estimate the value of income properties, which include: freehold properties, properties with leasehold interests with purchase options, and properties with leasehold interests without purchase options. The Trust applies this valuation method as it believes that the discounted cash flow valuation method represents the Trust’s estimate of fair values of income properties based on expectations of changes in rental rates, occupancy rates, lease renewal rates, leasing costs, expected credit losses and downtime on lease expiries, among others. Using the discounted cash flow valuation method, the fair value of income properties is estimated based on assumptions of the asset’s benefits and liabilities over its life, over an average period of 10 years in addition to its terminal value. The 10 years of annual net cash flows and the terminal cash flows are projected for each property, and then a discount rate is applied to each of these cash flows to establish the present value of future cash flows for each property. Annual net cash flows are estimated as rental revenue, less operating expenses, a vacancy allowance and other adjustments. The terminal value is estimated based on the application of a terminal capitalization rate to each property’s stabilized net operating income (“NOI”). The sum of the present value of future cash flows, including its discounted terminal value, represents the estimated fair value of each property. 26 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 124 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The significant areas of estimation uncertainty in determining the fair value of income properties include the projected cash flows and the discount rate for each property. The projected cash flows for each property are based on expected inflows and outflows, and are based on the location, type and quality of the property and supported by the terms of any existing leases, other contracts or external evidence such as current market rents for similar properties, and adjusted for estimated vacancy rates based on current and expected future market conditions after expiry of any current leases and expected maintenance costs. The discount rate for each property is based on the location, size and quality of the property, taking into account market data at the valuation date. ii) Properties under development Properties under development are valued using two primary methods: i) discounted cash flow method, factoring in future cash inflows and outflows such as construction costs to complete development, leasing costs and other fees, and Earnout Fees, if any; or ii) land, development and construction costs are recorded at market value, factoring in development risks such as planning, zoning, timing and market conditions. Using the discounted cash flow valuation method, the fair value of properties under development is estimated based on assumptions of the asset’s benefits and liabilities over its life, over an average period of 10 years in addition to its terminal value. The 10 years of annual net cash flows and the terminal cash flows are projected for each property, and then a discount rate is applied to each of these cash flows to establish the present value of future cash flows for each property. Annual net cash flows are estimated as rental revenue, less operating expenses, construction costs, a vacancy allowance and other adjustments. The terminal value is estimated based on the application of a terminal capitalization rate to each property’s stabilized NOI. The sum of the present value of future cash flows, including its discounted terminal value, represents the estimated fair value of each property. The following table summarizes significant assumptions in Level 3 valuations along with corresponding fair values for investment properties: Valuation Method Income properties Discounted cash flow Properties under development Land, development and construction costs recorded at market value Discounted cash flow Total Valuation Method Income properties December 31, 2022 Terminal Capitalization Rate Discount Rate Carrying Value Weighted Average (%) Range (%) Weighted Average (%) Range (%) 8,496,893 5.92 4.18 – 7.53 6.43 4.58 – 8.03 N/A 6.06 N/A 5.53 – 7.40 N/A 6.66 N/A 6.03 – 7.90 1,627,880 125,619 1,753,499 10,250,392 December 31, 2021 Terminal Capitalization Rate Discount Rate Carrying Value Weighted Average (%) Range (%) Weighted Average (%) Range (%) Discounted cash flow 8,395,077 5.83 4.18 – 7.43 6.34 4.58 – 7.93 Properties under development Land, development and construction costs recorded at market value Discounted cash flow 1,324,263 127,738 1,452,001 9,847,078 N/A 5.92 N/A 4.89 – 7.30 N/A 6.53 N/A 5.64 – 7.80 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 27 125 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The estimates of fair value are most sensitive to changes in the discount rates and forecasted future cash flows for each property. The sensitivity analysis in the table below indicates the approximate impact on the fair values of the Trust’s investment property portfolio resulting from changes in discount rates and in assuming no changes in other assumptions. Income properties Rate Sensitivity (%) Increase (decrease) in fair value of income properties due to: (1.00) (0.50) (0.25) +0.25 +0.50 +1.00 Changes in discount rates 1,821,700 823,500 392,800 (359,600) (690,700) (1,278,500) Forecasted Future Cash Flows Sensitivity (%) (10.00) (5.00) (2.50) +2.50 +5.00 +10.00 Increase (decrease) in fair value of income properties due to: Changes in forecasted future cash flows (849,300) (424,200) (211,800) 212,700 423,900 849,200 Properties under development Rate Sensitivity (%) (1.00) (0.50) (0.25) +0.25 +0.50 +1.00 Increase (decrease) in fair value of properties under development due to: Changes in discount rates 28,600 13,000 6,200 (5,900) (11,000) (20,600) Forecasted Future Cash Flows Sensitivity (%) (10.00) (5.00) (2.50) +2.50 +5.00 +10.00 Increase (decrease) in fair value of properties under development due to: Changes in forecasted future cash flows (12,500) (6,200) (3,200) 3,000 6,100 12,100 b) Dispositions Disposition of investment properties during the year ended December 31, 2022 In January 2022, the Trust sold its 40% interest in a parcel of land totalling 1.39 acres located in Markham, Ontario, for gross proceeds of $800 to a joint venture, Boxgrove Self Storage Limited Partnership, for development of a self-storage facility (see also, Note 5(b)). In March 2022, the Trust sold a parcel of land totalling 4.62 acres located in Laval East, Quebec, for gross proceeds of $5,600, which was satisfied by cash. In April 2022, the Trust sold a parcel of land totalling 6.48 acres located in Stouffville, Ontario, for gross proceeds of $18,365, which was satisfied by cash. In September 2022, the Trust sold a parcel of land totalling 6.86 acres located in London, Ontario, for gross proceeds of $15,180, which was satisfied by cash. In December 2022, the Trust contributed its interest in a parcel of land totalling 2.31 acres located in Vaughan, Ontario, for a value of $25,000 to a joint venture, Vaughan NW RR PropCo LP, for development of a retirement residence (see also, Note 5(b)). Disposition of investment properties during the year ended December 31, 2021 In January 2021, the Trust sold a parcel of land totalling 13.2 acres located in Niagara Falls, Ontario, for gross proceeds of $4,725, of which $1,415 was paid in cash and the balance was granted as an interest-bearing loan to the purchaser. See also Note 3, “Acquisitions and Earnouts” and Note 6, “Mortgages, loans and notes receivable”. In February 2021, the Trust contributed its interest in a parcel of land totalling 1.5 acres located in Brampton, Ontario, for a value of $3,250 to a joint venture, Kingspoint Self Storage LP, for development of a self-storage facility (see also, Note 5(b)). In March 2021, the Trust sold a parcel of land totalling 2.4 acres located in Mascouche, Quebec, for gross proceeds of $3,068, which was satisfied by cash. In March 2021, the Trust contributed its interest in a parcel of land totalling 2.7 acres located in Mascouche, Quebec for a value of $3,600 to a joint venture, Mascouche North Apartments Limited Partnership, for development of a rental apartment complex (see also, Note 5(b)). In September 2021, the Trust sold a parcel of land totalling 1.4 acres located in Stouffville, Ontario, for gross proceeds of $2,715, which was satisfied by cash. In October 2021, the Trust, together with its 50% partner Penguin, sold a parcel of land totalling 78.4 acres (39.2 acres at the Trust’s share) located in Innisfil, Ontario, for gross proceeds of $21,572 (at the Trust’s share), which was satisfied by a 28 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 126 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS vendor take-back mortgage bearing interest at 4% per annum, with a term of two years, in the amount of $15,097 (at the Trust’s share, see also Note 6(b), footnote 11), with the balance paid in cash adjusted for other working capital amounts. In December 2021, the Trust sold a property, consisting of an investment property and a property under development, located in Maple Ridge, British Columbia, for gross proceeds of $67,500, which was satisfied by cash, adjusted for transaction costs and other working capital amounts. c) Leasehold property interests At December 31, 2022, 16 (December 31, 2021 – 16) investment properties with a fair value of $964,916 (December 31, 2021 – $977,376) are leasehold property interests accounted for as leases. i) Leasehold property interests without bargain purchase options The Trust previously prepaid its entire lease obligations for the 14 leasehold interests with Penguin (see also Note 22, “Related party transactions”) in the amount of $889,931 (December 31, 2021 – $889,931), including prepaid land rent of $229,846 (December 31, 2021 – $229,846). ii) Leasehold property interests with bargain purchase options One leasehold interest commenced in 2003 under the terms of a 35-year lease with Penguin (see also Note 22, “Related party transactions”). The lease requires a $10,000 payment at the end of the lease term in 2038 to exercise a purchase option, which is considered to be a bargain purchase option. The Trust prepaid its entire lease obligation for this property of $57,997 (December 31, 2021 – $57,997). As the Trust expects to exercise the purchase option in 2038, the purchase option price has been included in accounts payable in the amount of $2,350 (December 31, 2021 – $2,145), net of imputed interest at 9.18% of $7,650 (December 31, 2021 – $7,855) (see also Note 14, “Accounts and other payables”). A second leasehold interest was acquired on February 11, 2015 and includes a land lease that expires on September 1, 2054. The land lease requires monthly payments ranging from $450 to $600 annually until September 1, 2054, and a $6,000 payment between September 1, 2023 and September 1, 2025 to exercise a purchase option that is considered to be a bargain purchase option. As the Trust expects to exercise the purchase option on September 1, 2023, the purchase option price and the monthly payments up to September 1, 2023 have been included in accounts payable in the amount of $6,061 (December 31, 2021 – $6,138), net of imputed interest at 6.25% of $314 (December 31, 2021 – $649) (see also Note 14, “Accounts and other payables”). d) Properties under development The following table presents properties under development: As at December 31, 2022 December 31, 2021 Properties under development not subject to development management agreements i) Properties under development subject to development management agreements ii) Less: properties under development classified as held for sale 1,698,652 54,847 1,753,499 42,321 1,711,178 1,391,301 60,700 1,452,001 — 1,452,001 For the year ended December 31, 2022, the Trust capitalized a total of $35,036 (year ended December 31, 2021 – $14,333) of borrowing costs related to properties under development. i) Properties under development not subject to development management agreements During the year ended December 31, 2022, the Trust completed the development and leasing of certain properties under development not subject to development management agreements, for which the value of land and development costs incurred has been reclassified from properties under development to income properties. For the year ended December 31, 2022, the Trust incurred land and development costs of $39,893 (year ended December 31, 2021 – $26,328). ii) Properties under development subject to development management agreements (Earnout agreements) These properties under development (including certain leasehold property interests) are subject to various development management agreements with Penguin and Walmart. In certain events, the developer/vendor may sell a portion of undeveloped land to accommodate the construction plan that provides the best use of the property, reimbursing the Trust its costs related to such portion, and provides a profit based on a pre-negotiated formula. Pursuant to the development management agreements, the developers/ vendors assume responsibility for managing the development of the land on behalf of the Trust and are granted the SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 29 127 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS right for a period of up to 10 years to earn an Earnout Fee (subject to options and extensions in certain circumstances). On completion and rental of additional space on these properties, the Trust is obligated to pay the Earnout Fee and any additional development costs not previously incurred by the Trust, at a total price calculated by a formula using the net operating rents and predetermined negotiated capitalization rates, on the date rent becomes payable on the additional space (“Gross Cost”). The Earnout Fee is calculated as the Gross Cost less the associated land and development costs incurred by the Trust. For certain of these properties under development, Penguin and others have been granted Earnout options that give them the right, at their option, to invest up to 40% of the Earnout Fee for one of the agreements and up to 30% to 40% of the Gross Cost for the remaining agreements in Trust Units, Class B, D and F Smart LP Units, Class B and D Smart LP III Units, Class B Smart LP IV Units, Class B and D Smart Oshawa South LP Units, Class B and D Smart Oshawa Taunton LP Units, Class B Smart Boxgrove LP Units and Class B ONR LP I Units at predetermined option strike prices subject to a maximum number of Units. On December 9, 2020, the Trust entered into an Omnibus Agreement with Mitchell Goldhar that provided a right to extend the terms of certain Earnout agreements for an additional two years. As a result, the Earnout agreements for Earnout options that were originally set to expire between 2020 to 2025 may be extended to 2022 to 2027. See also Note 13, “Other financial liabilities”. The following table summarizes the Earnout options that were elected to exercise which resulted in proceeds (see also Note 13(b)): Unit Type Smart Limited Partnership Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership IV Class and Series Class B Series 2 Class B Series 4 Class B Series 5 Class B Series 6 Class B Series 1 Year Ended December 31 2022 — — 315 392 572 2021 229 34 — 780 695 1,279 1,738 The following table summarizes the development costs incurred (exclusive of the cost of land previously acquired) and Earnout Fees paid to vendors relating to the completed retail spaces (see also Note 3, “Acquisitions and Earnouts”) that have been reclassified to income properties: Development costs incurred Earnout Fees paid Year Ended December 31 2022 8,582 1,401 9,983 2021 12,902 2,397 15,299 e) Investment properties classified as held for sale As at December 31, 2022, land parcels classified as held for sale had a carrying value of $42,321. Subsequent to December 31, 2022, the Trust disposed of the land parcels classified as held for sale (see also Note 29, “Subsequent events”). 30 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 128 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Equity accounted investments The following table summarizes key components relating to the Trust’s equity accounted investments: Investment – beginning of year 489,230 165,212 654,442 354,992 108,212 463,204 Year Ended December 31, 2022 Year Ended December 31, 2021 Investment in Associates Investment in Joint Ventures Investment in Associates Investment in Joint Ventures Total Total Operating Activities: Earnings (losses) Distributions – VMC Residences condominium unit closings(1) Distributions – operating activities Financing Activities: 4,932 (733) 4,199 183,431 27,989 211,420 (24,322) (4,550) — (24,322) (52,824) — (52,824) (234) (4,784) (3,358) (714) (4,072) Fair value adjustment on loan 3,690 — 3,690 3,995 — 3,995 Investing Activities: Cash contribution Property contribution Development distributions Investment – end of year 23,154 — (33,362) 32,982 25,000 56,136 25,000 6,355 29,589 35,944 — 6,850 6,850 — (33,362) (3,361) (6,714) (10,075) 458,772 222,227 680,999 489,230 165,212 654,442 (1) a) During the year ended December 31, 2022, the distribution in the amount of $24,322 was satisfied by a non-cash settlement of the Residence III LP loan payable (for the year ended December 31, 2021 – the distribution in the amount of $52,824 was satisfied by a non-cash settlement of the Residence III LP loan payable) (see Note 12(b)(iv)). Investment in associates The following table summarizes the Trust’s ownership interest in investment in associates as reflected in the Trust’s consolidated financial statements: Business Focus Partner(s) Principal Intended Activity December 31, 2022 December 31, 2021 Ownership Interest (%), As at Mixed-use real estate development Penguin-Calloway Vaughan Partnership (“PCVP”) Penguin(1) Residential condominium developments VMC Residences Limited Partnership (“Residences LP”) Residences III LP East Block Residences LP Penguin(1), CentreCourt Penguin(1), CentreCourt Penguin(1), CentreCourt Residences (One) LP Penguin(1) Residences (Two) LP Penguin(1) (1) See also Note 22, “Related party transactions”. Own, develop and operate investment properties in the SmartVMC (Eastern 52.0 acres) Own, develop and sell two residential condominium towers and 22 townhomes (Transit City 1 and 2) at SmartVMC Own, develop and sell a residential condominium tower (Transit City 3) at SmartVMC Own, develop and sell two residential condominium towers (Transit City 4 and 5) at SmartVMC Own, develop and sell residential condominium towers (ArtWalk) Own, develop and sell residential condominium towers (Park Place) 50.0 50.0 25.0 25.0 25.0 50.0 66.7 25.0 25.0 25.0 50.0 — In December 2019, the Trust acquired, as part of a 50:50 joint arrangement with Penguin, through PCVP, a 50% interest in a parcel of land (“700 Applewood”) with approximately 15.5 acres in Vaughan, Ontario, proximate to SmartVMC to relocate Walmart from SmartVMC and for other future development, for a purchase price of $109,218 paid in cash, adjusted for other working capital amounts. In connection with this acquisition, an interest-free loan with a principal amount of $81,448 and a maturity of December 2029 was extended to Penguin to finance its interest in PCVP’s acquisition of 700 Applewood. In March 2020, the Trust assumed this loan receivable from Penguin (see also Note 6(b), footnote 3), along with an offsetting non-interest-bearing note payable of an equal amount (see Note 12(b)(iv), footnote 2). Note that the limited partnerships involved in residential condominium developments, as noted in the above table: Residences LP, Residences III LP, East Block Residences LP, Residences (One) LP, and Residences (Two) LP are herein collectively referred to as “VMC Residences”. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 31 129 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS i) Summary of balance sheets The following table summarizes the balance sheets for investment in associates: As at Non-current assets Current assets(1) Total assets Non-current liabilities(2) Current liabilities Total liabilities December 31, 2022 PCVP VMC Residences Total PCVP December 31, 2021 VMC Residences Total 1,333,107 — 1,333,107 1,322,717 — 1,322,717 47,854 471,995 519,849 19,284 373,691 392,975 1,380,961 471,995 1,852,956 1,342,001 373,691 1,715,692 416,283 — 416,283 327,443 81,203 408,646 113,075 385,011 498,086 111,782 157,729 269,511 529,358 385,011 914,369 439,225 238,932 678,157 Net assets 851,603 86,984 938,587 902,776 134,759 1,037,535 Trust’s share of net assets before adjustments 425,802 31,565 457,367 451,387 34,135 485,522 Fair value adjustment on loan Trust’s share of net assets 1,003 402 1,405 1,216 2,492 3,708 426,805 31,967 458,772 452,603 36,627 489,230 (1) (2) Balance as at December 31, 2022 includes investment properties classified as held for sale of $32,100, of which the Trust’s share is $16,050 (December 31, 2021 – $nil). Balance as at December 31, 2022 includes loan payable to the Trust of $48,532 (December 31, 2021 – $47,214), see also Note 6(b). The investment in associates listed above have entered into various development construction contracts with existing commitments totalling $76,607, of which the Trust’s share is $29,151 (December 31, 2021 – $216,635, of which the Trust’s share is $76,087). ii) Summary of earnings The following table summarizes the earnings for investment in associates for: Revenue Rental revenue(1) Residential sales revenue Operating expense Rental operating costs Residential cost of sales Year Ended December 31, 2022 Year Ended December 31, 2021 PCVP VMC Residences Total PCVP VMC Residences Total 33,122 — — 17,415 33,122 17,415 28,919 — 28,919 — 297,299 297,299 (14,749) — (14,749) (12,421) — (12,421) — (13,719) (13,719) — (224,576) (224,576) Revenue net of operating expense 18,373 3,696 22,069 16,498 72,723 89,221 Fair value adjustment on revaluation of investment properties Interest (expense) income Loss on sale of investment properties Earnings Trust’s share of earnings before supplemental cost and additional profit sharing Additional Trust’s share of earnings(2) Supplemental cost Trust’s share of earnings 2,060 (7,563) (482) 12,388 6,194 — (2,231) 3,963 — 160 — 2,060 321,146 — 321,146 (7,403) (6,619) (482) — 254 — (6,365) — 3,856 16,244 331,025 72,977 404,002 969 7,163 165,513 18,243 183,756 — — — — 2,522 2,522 (2,231) (2,618) — (2,618) 969 4,932 162,895 20,765 183,660 (1) Includes office rental revenue from the Trust in the amount of $2,720 for the year ended December 31, 2022 (year ended December 31, 2021 – $2,625). (2) Additional profit allocated to the Trust for Transit City condominium closings pursuant to the development agreement and limited partnership agreement. In accordance with the VMC Supplemental Development Fee Agreement, the Trust invoiced PCVP a net amount of $4,462 related to associated development fees for the year ended December 31, 2022 (year ended December 31, 2021 – $5,237). iii) Summary of development credit facilities The development financing relating to PCVP and VMC Residences comprise pre-development, construction and letters of credit facilities. With respect to the development credit facilities relating to PCVP, the obligations are joint and several 32 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 130 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS to each of the PCVP limited partners; however, by virtue of an indemnity agreement between the PCVP limited partners, the obligations are effectively several. From time to time, the original facility amounts are reduced through repayments and through amended agreements with the financial institutions from which the facilities were obtained. PCVP and VMC Residences had the following credit facilities available: As at December 31, 2022 December 31, 2021 (in thousands of dollars) Maturity in Annual Interest Rate (%)(1) Facility Amount Facility Amount PCVP Development credit facility Construction credit facility Letters of credit facility(2) VMC Residences Development credit facility Development credit facility February 2023 June 2027 May 2023 BA + 1.35 BA + 1.20 N/A April 2022 September 2023 BA + 1.75 BA + 1.60 Development facilities – end of year Amount drawn on development credit facilities Letters of credit – outstanding Remaining unused development credit facilities 15,876 400,000 60,000 475,876 — 279,264 279,264 755,140 (515,287) (63,083) 176,770 15,876 386,766 60,000 462,642 11,656 279,264 290,920 753,562 (317,105) (42,832) 393,625 Trust’s share of remaining unused development credit facilities 67,634 146,742 (1) Annual interest rate is a function of Canadian Banker’s Acceptance rate (“BA”) plus a premium. (2) Letter of credit fee rate is 0.75%. b) Investment in joint ventures The following table summarizes the Trust’s ownership interest in each joint venture investment grouped by their principal intended activities as reflected in the Trust’s consolidated financial statements: As at Business Focus Retail investment properties Joint Venture: 1500 Dundas East LP Self-storage facilities December 31, 2022 December 31, 2021 Joint Venture Partner Number of Projects Ownership Interest (%) Number of Projects Ownership Interest (%) Fieldgate 1 13 30 50 1 10 30 50 Joint Ventures: Leaside SAM LP, Oshawa South Self Storage LP, Bramport SAM LP, Vaughan NW SAM LP, Dupont Self Storage LP, Aurora Self Storage LP, Scarborough East Self Storage LP, Kingspoint Self Storage LP, Jane Self Storage LP, Gilbert Self Storage LP, Boxgrove Self Storage LP, Whitby Self Storage LP and Regent Self Storage LP Seniors’ apartments Joint Venture: Vaughan NW SA PropCo LP Retirement residences SmartStop Revera Joint Ventures: Vaughan NW RR (PropCo and OpCo LPs), Baymac RR PropCo LP, Oakville Garden Drive RR PropCo LP and Markham Main Street RR PropCo LP Joint Ventures: Ottawa SW (PropCo and OpCo LPs)(1) Revera Groupe Sélection Residential apartments Joint Venture: Laval C Apartments LP Joint Venture: Balliol/Pailton LP Joint Venture: Mascouche North Apartments LP Total Jadco Greenwin Cogir — — 1 50 4 1 1 1 1 22 50 –(1) 50 75 80 5 1 1 1 1 21 50 50 50 75 80 (1) According to the limited partnership agreement entered into by the Trust and Groupe Sélection in April 2020, the ownership of this joint venture was 50:50. As at December 31, 2022, the Trust contributed $24,412 to this partnership, of which $5,319 was characterized as special contributions. These special contributions have resulted in a corresponding increase to the Trust’s equity entitlements in respect of the partnership. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 33 131 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Acquisitions completed during the year ended December 31, 2022 In January 2022, pursuant to a 50:50 joint venture formed with SmartStop known as Boxgrove Self Storage Limited Partnership, each joint venture party contributed $1,000 into the joint venture to fund the purchase of a parcel of land located in Markham, Ontario, totalling 1.39 acres, in which the Trust had a 40% interest, with the intention to develop and operate a self-storage facility. In May 2022, the Trust formed a 50:50 joint venture with SmartStop known as Regent Self Storage Limited Partnership, and pursuant to the joint venture agreement, each joint venture party contributed $3,490 into the joint venture to fund the purchase of a parcel of land located in Burnaby, British Columbia, totalling 0.89 acres with the intention to develop and operate a self-storage facility. In December 2022, pursuant to the 50:50 joint venture previously formed with Revera known as Vaughan NW RR PropCo Limited Partnership, the Trust contributed its interest in a parcel of land totalling 2.31 acres to the joint venture for a value of $25,000, while Revera contributed cash, with the intention to develop and operate a retirement residence which is located in Vaughan, Ontario. See also Note 4, “Investment properties”. i) Summary of balance sheets The following table summarizes the balance sheets for investment in joint ventures: As at Non-current assets Current assets Total assets Non-current liabilities Current liabilities Total liabilities Net assets Trust’s share of net assets December 31, 2022 December 31, 2021 729,104 13,864 742,968 285,955 36,683 322,638 420,330 222,227 545,946 2,009 547,955 163,840 66,662 230,502 317,453 165,212 The joint ventures listed above have entered into various development construction contracts with existing commitments totalling $124,349, of which the Trust’s share is $61,010 (December 31, 2021 – $77,053, of which the Trust’s share is $47,497). ii) Summary of earnings (losses) The following table summarizes the earnings (losses) for investment in joint ventures for: Revenue Operating expense Revenue net of operating expense Fair value adjustments on revaluation of investment properties Interest expense Earnings Trust’s share of earnings before supplemental cost Supplemental cost Trust’s share of earnings (losses) Year Ended December 31 2022 26,127 (11,514) 14,613 (2,420) (7,825) 4,368 2,927 (3,660) (733) 2021 16,383 (7,696) 8,687 60,635 (5,135) 64,187 27,760 — 27,760 In accordance with the Supplemental Development and Construction Fee Agreements, the Trust invoiced certain investments in joint ventures for a net amount of $7,321 related to associated supplemental development fees for the year ended December 31, 2022 (year ended December 31, 2021 – $nil). 34 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 132 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS iii) Summary of credit facilities Development financing includes a credit facility relating to Laval C Apartments comprising a pre-development and construction facility, and a construction facility relating to additional self-storage facilities. From time to time, the facilities amounts may be reduced through repayments and through amended agreements with the financial institutions from which the facilities were obtained. The development facilities are presented as follows: As at December 31, 2022 and December 31, 2021, the Trust’s joint ventures had the following credit facilities: As at December 31, 2022 December 31, 2021 (in thousands of dollars) Laval C Apartments LP Construction facility – Tower A Construction facility – Tower B(2) SmartStop Construction facility Markham Main Street Development facility Mascouche North Apartments LP Construction facility Maturity in Annual Interest Rate (%)(1) February 2022 November 2024 BA + 1.60 BA + 1.60 Facility Amount — 48,822 Facility Amount 35,417 — May 2024 BA + 2.20 136,900 118,100 December 2023 BA + 1.75 11,000 11,000 Amount drawn on development credit facilities Letters of credit – outstanding Remaining unused development credit facilities August 2025 BA + 1.50 55,000 251,722 (181,610) (1,648) 68,464 — 164,517 (130,630) (887) 33,000 Trust’s share of remaining unused development credit facilities 40,234 16,500 (1) Annual interest rate is a function of BA rates plus a premium. (2) Management is renegotiating the facility. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 35 133 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Mortgages, loans and notes receivable The following table summarizes mortgages, loans and notes receivable: As at Mortgages receivable (a) Loans receivable (b) Notes receivable (c) Current Non-current Note 22 22 December 31, 2022 December 31, 2021 39,456 282,312 2,924 324,692 86,593 238,099 324,692 139,589 274,523 2,924 417,036 71,947 345,089 417,036 a) Mortgages receivable of $39,456 (December 31, 2021 – $139,589) are provided pursuant to agreements with Penguin (see also Note 22, “Related party transactions”). These amounts are provided to fund costs associated with both the original acquisition and development of seven properties (December 31, 2021 – seven properties). The Trust is committed to lend up to $190,720 (December 31, 2021 – $300,796) to assist with the further development of these properties. The following table provides further details on the mortgages receivable (by maturity date) provided to Penguin: Property Caledon (Mayfield), ON(5) Salmon Arm, BC(3)(5) Aurora (South), ON(5) Innisfil, ON(3)(5) Vaughan (7 & 427), ON(5) Toronto (StudioCentre), ON(3)(4) Pitt Meadows, BC(4) Committed Maturity Date Annualized Variable Interest Rate at Year-End (%) The Trust’s Purchase Option of Property (%) Extended Maturity Date(1) (2) December 31, 2022 December 31, 2021 15,498 13,398 15,155 16,011 April 2024 August 2028 August 2028 August 2028 October 2023 N/A N/A N/A 15,781 December 2023 August 2028 39,224 August 2028 N/A 75,653 November 2023 August 2028 190,720 7.00 6.50 6.75 7.00 6.75 6.90 6.90 6.90 50 — 50 — 50 25 50 — — — — — 10,750 15,860 17,940 16,642 19,588 15,862 26,915 23,594 31,894 39,456 139,589 (1) (2) (3) (4) (5) The maturity dates for these mortgages are automatically extended to August 31, 2028 unless written notice is delivered from the borrower. During the extended maturity period, the mortgages receivable accrue interest at a variable rate based on the Canadian Banker's Acceptance rate plus 4.00% to 5.00%. The Trust has a purchase option from the borrower in these properties upon a certain level of development and leasing being achieved. As at December 31, 2022, it is management’s expectation that the Trust will exercise these purchase options. The Trust owns a 50% interest in these properties, with the other 50% interest owned by Penguin. These loans are secured against Penguin’s interest in the property. The weighted average interest rate on this mortgage is subject to an upper limit of 6.90%. Penguin fully repaid the outstanding balance of the mortgages in October 2022. Mortgages receivable amendments Interest on these mortgages accrues monthly as follows: from December 9, 2020 to the maturity date of each mortgage, at a variable rate based on the Canadian Banker’s Acceptance rate plus 2.75% to 4.20%; and from the maturity date of each mortgage to the extended maturity date (August 31, 2028), at a variable rate based on the Canadian Banker’s Acceptance rate plus 4.00% to 5.00%. Prior to December 9, 2020, interest on these mortgages accrued as follows: i) at a variable rate based on the Canadian Banker’s Acceptance rate plus 1.75% to 4.20% or at the Trust’s cost of capital (as defined in the applicable mortgage agreement) plus 0.25%; or ii) at fixed rates of 6.35% to 7.50%, which was added to the outstanding principal up to a predetermined maximum accrual, after which it was payable in cash on a monthly or quarterly basis. Additional interest of $97,665 (December 31, 2021 – $103,808) on the existing credit facilities may be accrued on certain of the mortgages receivable before cash interest must be paid. The mortgage security includes a first or second charge on properties, assignments of rents and leases and general security agreements. In addition, the outstanding balance is guaranteed by Penguin. The loans are subject to individual loan guarantee agreements that provide additional guarantees for all interest and principal advanced on outstanding amounts. The amounts that are guaranteed decrease on achievement of certain specified value-enhancing events. Management considers all mortgages receivable to be fully collectible. 36 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 134 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT b) The following table presents loans receivable (by maturity date): NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Committed Maturity Date Interest Rate (%) Note December 31, 2022 December 31, 2021 Issued to Penguin(1) Penguin(2) Penguin(3) Penguin(4) Total loans issued to Penguin PCVP(5) Self-storage facilities(6) 12,493 26,227 N/A 18,450 N/A 120,700 January 2023 January 2023 Variable 2.76 % 22 22 December 2029 Interest-free 12(b)(iv), 22 August 2030 Variable 22 January 2023 2.76 % 22 May 2024 Variable Total loans issued to equity accounted investments Other(7) Greenwin(8) Greenwin(9) Other(10) N/A January 2023 11,694 September 2024 1,280 N/A January 2025 October 2023 5.00 % Variable Variable 4.00 % Total loans issued to unrelated parties 7,389 13,266 62,986 16,638 100,279 48,532 116,096 164,628 2,308 — — 15,097 17,405 282,312 9,707 14,027 77,828 15,404 116,966 47,214 91,938 139,152 3,308 — — 15,097 18,405 274,523 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) This loan receivable was provided pursuant to a development management agreement with Penguin with a total loan facility of $12,493. Repayment of the pro rata share of the outstanding loan amount is due upon the completion of each Earnout event. The loan bears interest at 10 basis points plus the lower of: i) the Canadian prime rate plus 45 basis points, and ii) the Canadian Dealer Offered Rate plus 145 basis points. In March 2019, the Trust entered into a loan agreement with Penguin for a non-revolving principal advance facility of $13,227 and a non-revolving construction facility of $13,000, which combine for a total loan facility of $26,227, bearing interest accruing at a fixed rate of 2.76% and a variable rate based on Canadian Banker's Acceptance rate plus 150 basis points, respectively. The loan security includes a first or second charge on the property, assignments of rents and leases and general security agreements, and is guaranteed by Penguin. This loan receivable relates to the acquisition of a parcel of land in Vaughan, Ontario, through PCVP in December 2019 (“700 Applewood purchase”). In March 2020, the Trust assumed this loan receivable from Penguin in regards to PCVP. The loan has a principal amount outstanding of $81,448, is non-interest-bearing, and is repayable at the end of 10 years. As at December 31, 2022, the loan balance of $62,986 is net of a cumulative fair value adjustment totalling $18,462. See also Note 12(b)(iv) reflecting the corresponding non-interest-bearing loan payable amount. This loan receivable was provided in December 2021 in connection with the acquisition of a 50% interest in development lands in Toronto (Leaside), Ontario. The loan bears interest at: i) the Canadian Banker’s Acceptance rate plus 220 basis points, up to 60% of the facility limit, and ii) the Canadian Banker’s Acceptance rate plus 370 basis points, for the remainder. In April 2019, the Trust entered into a loan agreement with PCVP (in which the Trust has a 50% interest) for a total loan facility of $90,600, bearing interest accruing at 2.76% per annum. The loan security includes a first or second charge on properties, assignments of rents and leases and general security agreements, and is guaranteed by Penguin up to its 50% share of the loan. The Trust reflects the activity from the PCVP as an equity accounted investment (see also Note 5, “Equity accounted investments”) and 100% of the loan provided to the PCVP is recorded in the consolidated financial statements for the year ended December 31, 2022. In July 2020, the Trust entered into a master credit loan agreement with its partner SmartStop to provide funding for the development of certain self-storage facilities. The master credit loan agreement matures in July 2023 and bears interest at a variable rate based on the Canadian Banker’s Acceptance rate plus 245 basis points. In April 2021, this master credit loan agreement was amended which resulted in an increase to total committed amounts from $65,500 to $80,800, and the maturity was extended to May 2024. Also in April 2021, the Trust entered into a second master credit loan agreement with SmartStop to provide funding for the development of additional self-storage facilities. This second master credit loan agreement matures in May 2024 with a committed amount of $34,300. See further details in Note 5(b). In January 2021, the Trust entered into a loan agreement pursuant to the closing of the Niagara Falls parcel sale to a third party. The Trust agreed to take back a first charge as security for the loan, which bears interest at 5.0% per annum, calculated semi-annually. Subsequently, the loan was fully repaid in January 2023. In September 2019, the Trust entered into a loan agreement with Greenwin in connection with the acquisition of a 50% interest in development lands in Barrie, Ontario. As at December 31, 2022, the total remaining credit facility was $11,694. The loan security includes a first charge on the development lands and is guaranteed by Greenwin. This loan matures in September 2024, and bears interest at the greater of: i) 7.0% per annum, and ii) the Trust’s weighted average cost of capital plus 1.25% per annum. In August 2020, Greenwin repaid this loan in advance of the maturity date. In January 2020, the Trust entered into a loan agreement with Greenwin, whereby the Trust assisted Greenwin to fund the acquisition of its 25% interest in development lands in Toronto, Ontario. As at December 31, 2022, the total remaining non-revolving term acquisition credit facility was $1,280. The loan agreement also includes a non-revolving put exercise credit facility in an amount equal to the put purchase price plus any associated closing costs at the time of exercise. The loan security includes a first charge on the development lands and is guaranteed by Greenwin. This loan matures in January 2025, and bears interest at the greater of: i) 7.0% per annum, and ii) the Trust’s weighted average cost of capital plus 1.25% per annum. In August 2020, Greenwin repaid this loan in advance of the maturity date. In October 2021, the Trust entered into a loan agreement pursuant to the sale of the Innisfil property to a third party. The Trust agreed to take back a first charge as security for the loan. The loan matures in October 2023 and bears interest at 4.00% per annum, calculated annually. Penguin has assigned its 50% interest in the vendor take-back loan to the Trust as security for the mortgage receivable. Management considers all outstanding loans to be fully collectible. c) Notes receivable of $2,924 (December 31, 2021 – $2,924) have been granted to Penguin (see also Note 22, “Related party transactions”). As at December 31, 2022, these secured demand notes bear interest at the rate of 9.00% per annum (December 31, 2021 – 9.00%). The estimated fair values of mortgages, loans and notes receivable are based on their respective current market rates, bearing similar terms and risks. This information is disclosed in Note 15, “Fair value of financial instruments”. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 37 135 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Other assets The following table summarizes the activity in other assets: Straight-line rents receivable Tenant incentives Equipment Right-of-use assets December 31, 2021 Additions Write-offs Amortization and other adjustments December 31, 2022 43,564 32,478 76,042 1,285 3,613 80,940 8,311 9,368 17,679 1,589 312 (262) (36) (298) — — 19,580 (298) (7,552) (7,051) (14,603) (539) (1,850) (16,992) 44,061 34,759 78,820 2,335 2,075 83,230 8. Other financial assets The following table summarizes the components of other financial assets: As at Total return swap receivable (a) Interest rate swap agreements Cash held as collateral (b) Note December 31, 2022 December 31, 2021 13 137,526 34,281 — 171,807 46,869 — 50,279 97,148 a) Total return swap receivable The following table summarizes the activity in the total return swap receivable: Balance – beginning of year Additions Distributions received Fair value adjustments Balance – end of year b) Cash held as collateral Year Ended December 31 2022 46,869 101,041 (5,466) (4,918) 137,526 2021 — 42,342 (1,115) 5,642 46,869 Cash and cash equivalents were pledged with a Canadian financial institution as collateral to secure the payment and performance of all secured obligations under the total return swap agreement, see also Note 8(a). In December 2022, the cash held as collateral of $145,100 was released. See also Note 12(b). 9. Intangible assets The following table summarizes the components of intangible assets: As at Intangible assets with finite lives: Key joint venture relationships Trademarks Total intangible assets with finite lives Goodwill December 31, 2022 Cost Accumulated Amortization 36,944 2,995 39,939 13,979 53,918 9,353 758 10,111 — 10,111 Net 27,591 2,237 29,828 13,979 43,807 December 31, 2021 Cost Accumulated Amortization 36,944 2,995 39,939 13,979 53,918 8,121 658 8,779 — 8,779 Net 28,823 2,337 31,160 13,979 45,139 The total amortization expense recognized for the year ended December 31, 2022 amounted to $1,332 (year ended December 31, 2021 – $1,331). 38 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 136 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT 10. Residential development inventory Residential development inventory consists of development lands, co-owned with Fieldgate, located at Vaughan NW, Ontario, for the purpose of developing and selling residential townhome units. The following table summarizes the activity in residential development inventory: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As at Balance – beginning of year Development costs Capitalized interest Balance – end of year December 31, 2022 December 31, 2021 27,399 11,931 1,043 40,373 25,795 646 958 27,399 11. Amounts receivable and other, prepaid expenses, deposits and deferred financing costs The following table presents the components of amounts receivable and other, prepaid expenses, deposits and financing costs: As at Amounts receivable and other Tenant receivables Unbilled other tenant receivables Receivables from related party – excluding equity accounted investments Receivables from related party – equity accounted investments Other non-tenant receivables Other(1) Allowance for ECL Amounts receivable and other, net of allowance for ECL Prepaid expenses, deposits and deferred financing costs(2) (1) The amount includes a related party amount of $6,835 (December 31, 2021 – $7,987). (2) Includes prepaid realty tax of $1,468 (December 31, 2021 – $1,350). December 31, 2022 December 31, 2021 26,735 11,100 11,899 616 1,954 13,591 65,895 (8,771) 57,124 14,474 71,598 36,305 11,847 6,966 581 1,414 11,383 68,496 (18,954) 49,542 12,289 61,831 Allowance for expected credit loss The Trust records the ECL to comply with IFRS 9’s simplified approach for amounts receivable where its allowance for ECL is measured at initial recognition and throughout the life of the amounts receivable at a total equal to lifetime ECL. The following table summarizes the reconciliation of changes in the allowance for ECL on amounts receivable: Balance – beginning of year Net allowance recognized as expense (reversal) Tenant receivables written off Balance – end of year Year Ended December 31 2022 18,954 (3,073) (7,110) 8,771 2021 19,742 2,841 (3,629) 18,954 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 39 137 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. Debt The following table presents debt balances: As at Secured debt (a) Unsecured debt (b) Revolving operating facilities (c) Current Non-current a) Secured debt December 31, 2022 December 31, 2021 969,054 3,932,928 81,283 4,983,265 459,278 4,523,987 4,983,265 1,294,546 3,262,356 297,625 4,854,527 678,406 4,176,121 4,854,527 Secured debt bears interest at a weighted average interest rate of 3.91% as at December 31, 2022 (December 31, 2021 – 3.49%). Total secured debt of $969,054 (December 31, 2021 – $1,294,546) includes $948,921 (December 31, 2021 – $1,182,078) at fixed interest rates, and $20,133 (December 31, 2021 – $70,277) at variable interest rates of the Canadian Banker’s Acceptance rate plus 170 basis points. Secured debt matures at various dates between 2023 and 2031 and is secured by first or second registered mortgages over specific income properties and properties under development and first general assignments of leases, insurance and registered chattel mortgages. The following table presents principal repayment requirements for secured debt: 2023 2024 2025 2026 2027 Thereafter Instalment Payments 38,599 32,336 21,736 11,240 5,473 16,176 125,560 Lump Sum Payments at Maturity 201,295 (1) 118,696 389,605 86,881 — 48,200 844,677 Unamortized acquisition date fair value adjustments Unamortized financing costs (1) Includes construction loans in the amount of $20,133, which bear interest at Canadian Banker’s Acceptance rate plus 170 basis points. b) Unsecured debt The following table summarizes the components of unsecured debt: Total 239,894 151,032 411,341 98,121 5,473 64,376 970,237 554 (1,737) 969,054 As at Unsecured debentures i) Credit facilities ii) TRS debt iii) Other unsecured debt iv) December 31, 2022 December 31, 2021 2,652,327 996,238 143,232 141,131 3,932,928 2,650,571 416,223 — 195,562 3,262,356 i) Unsecured debentures As at December 31, 2022, unsecured debentures totalled $2,652,327 (December 31, 2021 – $2,650,571). Unsecured debentures mature at various dates between 2023 and 2030, with interest rates ranging from 1.74% to 3.99%, and a weighted average interest rate of 3.17% as at December 31, 2022 (December 31, 2021 – 3.17%). 40 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 138 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the components of unsecured debentures: Series Series I Series N Series O Series P Maturity Date May 30, 2023 February 6, 2025 August 28, 2024 August 28, 2026 Series S December 21, 2027 Series U December 20, 2029 Series V June 11, 2027 Series W December 11, 2030 Series X December 16, 2025 Series Y December 18, 2028 Annual Interest Rate (%) Interest Payment Dates December 31, 2022 December 31, 2021 3.985 3.556 2.987 3.444 3.834 3.526 3.192 3.648 1.740 2.307 3.167 (1) May 30 and November 30 February 6 and August 6 February 28 and August 28 February 28 and August 28 June 21 and December 21 June 20 and December 20 June 11 and December 11 June 11 and December 11 June 16 and December 16 June 18 and December 18 Unamortized financing costs 200,000 160,000 100,000 250,000 250,000 450,000 300,000 300,000 350,000 300,000 2,660,000 (7,673) 2,652,327 200,000 160,000 100,000 250,000 250,000 450,000 300,000 300,000 350,000 300,000 2,660,000 (9,429) 2,650,571 (1) Represents the weighted average annual interest rate and excludes deferred financing costs. Unsecured debenture activities for the year ended December 31, 2022 There was no significant activity relating to unsecured debentures during the year ended December 31, 2022. Unsecured debenture activities for the year ended December 31, 2021 Redemptions and Maturity In January 2021, the Trust completed the redemption of its 3.730% Series M senior unsecured debentures and 2.876% Series Q senior unsecured debentures, in aggregate principal amounts of $150,000 and $150,000, respectively, with yield maintenance costs and accrued interest payable. The yield maintenance costs of $11,084 relating to the redemptions were recorded in the Trust’s consolidated financial statements for the year ended December 31, 2020. In June 2021, the Trust’s 2.757% Series T senior unsecured debentures (the “Senior T Debentures”) matured. Aggregate principal amount of Senior T Debentures outstanding was $323,120 and was fully repaid on maturity. Credit rating of unsecured debentures Dominion Bond Rating Services (“DBRS”) provides credit ratings of debt securities for commercial issuers that indicate the risk associated with a borrower’s capabilities to fulfil its obligations. An investment-grade rating must exceed “BB”, with the highest rating being “AAA”. In December 2022, DBRS confirmed the Trust’s BBB(high) rating and maintained the negative trend. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 41 139 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS ii) Credit facilities The following table summarizes the activity for unsecured credit facilities: (Issued In) Non-revolving: August 2018(1) March 2019(1) May 2019(1) January 2022 December 2022(1) December 2022 Initial Maturity Date Annual Interest Rate (%) Facility Amount December 31, 2022 December 31, 2021 January 31, 2025 July 31, 2026 June 24, 2024 2.980 3.520 3.146 January 19, 2027 BA + 1.20 December 1, 2025 4.370 December 1, 2025 BA + 1.20 80,000 150,000 170,000 300,000 100,000 100,000 80,000 150,000 170,000 300,000 100,000 100,000 December 2022 December 20, 2025 BA + 1.20 or CAD Prime 100,000 100,000 Revolving: May 2020 May 11, 2024 BA + 1.20 100,000 Less: Unamortized financing costs Unamortized debt modification adjustments — 1,000,000 (1,802) (1,960) 996,238 80,000 150,000 170,000 — — — — 17,000 417,000 (777) — 416,223 (1) The Trust entered into interest rate swap agreements to convert the variable interest rate of the Canadian Banker’s Acceptance rate plus 1.20% into a weighted average fixed interest rate of 2.62% per annum. The weighted average term to maturity of the interest rate swaps is 2.39 years. Hedge accounting has not been applied to the interest rate swap agreements. iii) TRS Debt The Trust borrowed TRS debt concurrent with entering the TRS agreement in February 2021. As at December 31, 2022, TRS unsecured debt of $143,232 (December 31, 2021 – TRS secured debt of $42,191) carries variable rate interest at a rate of CDOR plus 106 basis points. The interest on this TRS debt includes floating amounts that are payable at each May, August, November and February commencing in May 2021 to the date the TRS agreement matures or is unwound. In December 2022, the cash collateralized against the TRS debt was released and as a result the TRS debt was reclassified from secured debt to unsecured debt as at December 31, 2022. See also Note 8, “Other financial assets”, for further details. iv) Other unsecured debt Other unsecured debt net of fair value adjustments totalling $141,131 (December 31, 2021 – $195,562) at the Trust’s share pertains to loans received from equity accounted investments in connection with contribution agreements relating to joint ventures. The loans are non-interest-bearing with repayment terms based on the distributions that are to be paid pursuant to the limited partnership agreements. The balances of the loans are expected to be paid at the end of their respective terms. The following table summarizes components of the Trust’s other unsecured debt: As at PCVP (5.00% discount rate)(1) PCVP (5.75% discount rate)(2) Vaughan NW RR PropCo LP VMC Residences(3) December 31, 2022 December 31, 2021 64,992 62,986 12,500 653 141,131 80,259 77,828 12,500 24,975 195,562 (1) (2) (3) In connection with the 700 Applewood purchase in December 2019, the loan has a principal amount outstanding of $81,448 (December 31, 2021 – $100,404), is non- interest-bearing, and is repayable at the end of 10 years. As at December 31, 2022, the loan balance of $64,992 is net of the unamortized fair value adjustment totalling $16,456 (December 31, 2021 – the loan balance of $80,259 is net of a fair value adjustment totalling $20,145). In connection with the 700 Applewood purchase in March 2020, the Trust assumed a loan payable to PCVP from Penguin. The loan has a principal amount outstanding of $81,448 (December 31, 2021 – $100,404), is non-interest-bearing, and is repayable at the end of 10 years. As at December 31, 2022, the loan balance of $62,986 is net of the unamortized fair value adjustment totalling $18,462 (December 31, 2021 – the loan balance of $77,828 is net of a fair value adjustment totalling $22,576). See also Note 6(b) reflecting offsetting loan receivable amount. In connection with the Transit City condominium closings, $nil was received and $24,322 was settled during the year ended December 31, 2022 (year ended December 31, 2021 – $24,322 was received and $52,824 was settled). See Note 5, “Equity accounted investments.” 42 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 140 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS c) Revolving operating facilities As at December 31, 2022, the Trust had: i) a $500,000 unsecured revolving operating facility bearing interest at a variable interest rate based on either bank prime rate plus 20 basis points or the Canadian Banker’s Acceptance rate plus 120 basis points, which matures on August 20, 2026 (in addition, the Trust has an accordion feature of $250,000 whereby the Trust has an option to increase its facility amount with the lenders to sustain future operations as required); and ii) a $150,000 revolving senior unsecured term facility under which the Trust has the ability to draw funds based on bank prime rates and Canadian Banker’s Acceptance rate for Canadian dollar-denominated borrowings, and LIBOR rates or U.S. prime rates for U.S. dollar-denominated borrowings. Concurrently with the U.S. dollar draws, the Trust enters into cross currency swaps to exchange its U.S. dollar borrowings into Canadian dollar borrowings. The following table summarizes components of the Trust’s revolving operating facilities: Revolving facility maturing August 2026 Revolving facility maturing February 2024(1) Annual Interest Rate (%) Facility Amount Amount Drawn Outstanding Letters of Credit Remaining Undrawn Facilities December 31, 2022 December 31, 2021 BA + 1.20 500,000 7,000 15,374 477,626 341,715 US$ LIBOR + 1.20 150,000 74,283 — 81,283 75,717 553,343 — 341,715 (1) The Trust has drawn in US$54,873 which was translated to $74,283 as at December 31, 2022 (December 31, 2021 – drawn in US$116,786 which was translated to $147,625). d) Interest expense The following table summarizes interest expense: Interest at stated rates Amortization of acquisition date fair value adjustments on assumed debt Adjustment on debt modification Amortization of deferred financing costs Distributions on Units classified as liabilities and vested deferred units Capitalized to properties under development Capitalized to residential development inventory Year Ended December 31 2022 2021 166,181 150,187 (460) (1,960) 3,606 17,414 (527) — 3,828 6,343 184,781 159,831 (35,036) (14,333) (1,043) (958) 148,702 144,540 The following table presents a reconciliation between the interest expense and the cash interest paid: Interest expense Amortization of acquisition date fair value adjustments on assumed debt Adjustment on debt modification Amortization of deferred financing costs Distributions on Units classified as liabilities and vested deferred units, net of amounts capitalized to properties under development Change in accrued interest payable Cash interest paid Year Ended December 31 2022 2021 148,702 144,540 460 1,960 (3,606) (7,139) (684) 527 — (3,828) (6,343) 15,658 139,693 150,554 For the year ended December 31, 2022, including cash interest paid of $139,693 (year ended December 31, 2021 – $150,554) and interest capitalized to both properties under development and residential development inventory of $36,079 (year ended December 31, 2021 – $15,291), total interest paid was $175,772 (year ended December 31, 2021 – $165,845). SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 43 141 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS e) Liquidity The Trust’s liquidity position is monitored by management on a regular basis. The table below provides the contractual maturities of the Trust’s material financial obligations including debentures, mortgage receivable advances and development commitments: Secured debt Unsecured debt Revolving operating facilities Interest obligations(1) Accounts payable Other payable Long term incentive plan Total 2023 2024 2025 2026 2027 Thereafter 970,237 239,894 151,031 411,341 98,121 5,473 64,377 3,979,281 213,153 370,000 933,232 400,000 850,000 1,212,896 81,283 7,000 74,283 — — — — 202,010 4,471 113,742 95,743 76,884 (32,724) (56,106) 259,352 259,352 — 27,011 8,147 8,730 580 580 — — 134 — — — — — — — — 10,000 — 5,519,754 732,597 717,786 1,440,450 575,005 822,749 1,231,167 Mortgage receivable advances (repayments)(2) Development obligations (commitments) 151,264 1,015 1,130 (15,880) 1,034 378 163,587 20,669 20,669 — — — — — Total 5,691,687 754,281 718,916 1,424,570 576,039 823,127 1,394,754 (1) Interest obligations represent expected interest payments on secured debt, unsecured debt, and revolving operating facilities under the assumption that the balances are repaid at maturity, and do not represent a separate contractual obligation. (2) Mortgages receivable of $39,456 at December 31, 2022, and further forecasted commitments of $151,264, mature over a period extending to 2028 if the Trust does not exercise its option to acquire the investment properties. Refer to Note 6, “Mortgages, loans and notes receivable”, for timing of principal repayments. 13. Other financial liabilities The following table summarizes the components of other financial liabilities: As at Units classified as liabilities (a) Deferred unit plan (c) LTIP (d) EIP (e) Currency swap agreement(1) Interest rate swap agreements Note December 31, 2022 December 31, 2021 211,497 48,402 580 16,204 717 — 277,400 254,223 50,660 697 10,377 2,374 7,754 326,085 8 (1) The currency swap agreement has been recorded in the revolving operating facilities balance as reflected in Note 12(c) “Revolving operating facilities”. a) Units classified as liabilities Total number of Units classified as liabilities The following table presents the number of Units classified as liabilities that are issued and outstanding: Class F Series 3 Smart LP Units Class D Series 1 Smart Oshawa South LP Units Class D Series 1 Smart LP Units Class B ONR LP Units Class B Series 1 ONR LP I Units Class B Series 2 ONR LP I Units Class D Series 1 SmartVMC West LP Units Class D Series 2 SmartVMC West LP Units Total Balance – January 1, 2021 311,022 8,708 260,417 1,248,140 132,881 139,302 — — 2,100,470 Issuance of LP Units — — — — — — 3,623,188 2,173,913 5,797,101 Balance – December 31, 2021 311,022 8,708 260,417 1,248,140 132,881 139,302 3,623,188 2,173,913 7,897,571 Balance – January 1, 2022 311,022 Balance – December 31, 2022 311,022 8,708 260,417 1,248,140 132,881 139,302 3,623,188 2,173,913 7,897,571 8,708 260,417 1,248,140 132,881 139,302 3,623,188 2,173,913 7,897,571 44 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 142 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Carrying value of Units classified as liabilities The following table represents the carrying value of Units classified as liabilities. The fair value measurement of the Units classified as liabilities is described in Note 15, “Fair value of financial instruments”. Class D Series 1 Smart LP Units Class F Series 3 Smart LP Units Class D Series 1 Smart Oshawa South LP Units Class B ONR LP Units Class B Series 1 ONR LP I Units Class B Series 2 ONR LP I Units Class D Series 1 SmartVMC West LP Units Class D Series 2 SmartVMC West LP Units Total Balance – January 1, 2021 Change in carrying value Issuance of LP Units 7,178 2,833 — 201 6,011 28,808 3,067 3,214 — — 48,479 79 — 2,372 11,371 1,211 1,269 3,358 2,015 24,508 — — — — 113,273 67,963 181,236 Balance – December 31, 2021 10,011 280 8,383 40,179 4,278 4,483 116,631 69,978 254,223 Balance – January 1, 2022 10,011 280 8,383 40,179 4,278 4,483 116,631 69,978 254,223 Change in carrying value (1,683) (47) (1,409) (6,752) (719) (754) (19,601) (11,761) (42,726) Balance – December 31, 2022 8,328 233 6,974 33,427 3,559 3,729 97,030 58,217 211,497 b) Earnout options As part of the consideration paid for certain investment property acquisitions, the Trust has granted options in connection with the development management agreements (see also Note 4(d)). On completion and rental of additional space on specific properties, the Earnout options vest and the holder may elect to exercise the options and receive Trust Units, Class B Smart LP Units, Class D Smart LP Units, Class F Smart LP Units, Class B Smart LP III Units, Class B Smart LP IV Units, Class B Smart Oshawa South LP Units, Class D Smart Oshawa South LP Units, Class B Smart Oshawa Taunton LP Units, Class D Smart Oshawa Taunton LP Units, Class B Smart Boxgrove LP Units and Class B ONR LP I Units, as applicable. Earnout options that have not vested expire at the end of the term of the corresponding development management agreement. In certain circumstances, the Trust may be required to issue additional Earnout options to Penguin. The option strike prices were based on the market price of Trust Units on the date the substantive terms were agreed on and announced. In the case of Class B Smart LP III Units, Class B Smart LP IV Units, Class B Smart Oshawa South LP Units, Class D Smart Oshawa South LP Units, Class B Smart Oshawa Taunton LP Units, Class D Smart Oshawa Taunton LP Units, Class B Smart Boxgrove LP Units, and Class B ONR LP I Units, the strike price is the market price of the Trust Units at the date of exchange. On December 9, 2020, the Trust entered into an Omnibus Settlement Agreement with Mitchell Goldhar that provided a right to extend the terms of certain Earnout agreements for an additional two years. As a result, the Earnout agreements for Earnout options in the table below that were originally set to expire between 2020 to 2025 may be extended to 2022 to 2027. The following tables summarize the changes in Units outstanding and proceeds received: Options to acquire Strike Price Options Outstanding at January 1, 2022 Options Cancelled Options Exercised Options Outstanding at December 31, 2022 Amounts from Options Exercised Trust Units 20.01 to 33.55 1,457,285 ($) (#) (#) — (#) — (#) 1,457,285 Class B Smart LP Units, Class D Smart LP Units and Class F Smart LP Units(1) Class B Smart LP III Units(2) Class B Smart LP IV Units(3) Class B Smart Oshawa South LP Units and Class D Smart Oshawa South LP Units(4) Class B Smart Oshawa Taunton LP Units and Class D Smart Oshawa Taunton LP Units(5) 20.10 to 33.00 Market price Market price 5,847,776 1,846,472 — — — (154,392) 397,543 — (21,785) 5,847,776 1,692,080 375,758 Market price 26,585 — — 26,585 Market price 265,422 Class B and Class G Smart Boxgrove LP Units(6) Class B ONR LP I Units(7) Market price Market price 267,179 429,599 — — — — — — 265,422 267,179 429,599 Total Earnout options 10,537,861 — (176,177) 10,361,684 1,279 (1) (2) (3) Each option is represented by a corresponding Class C Smart LP Unit or Class E Smart LP Unit. For the options issued in June 2008, each option is convertible into Class F Series 3 Smart LP Units. At the holder’s option, the Class F Series 3 Smart LP Units may be redeemed for cash at $20.10 per Unit or, on the completion and rental of additional space on certain development properties, the Class F Series 3 Smart LP Units may be exchanged for Class B Smart LP Units. Each option is represented by a corresponding Class C Smart LP III Unit. Each option is represented by a corresponding Class C Smart LP IV Unit. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 45 143 ($) — — 707 572 — — — — NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT ($) — 229 814 695 — — — — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (4) (5) (6) (7) Each option is represented by a corresponding Class C Smart Oshawa South LP Unit or Class E Smart Oshawa South LP Unit. Each option is represented by a corresponding Class C Smart Oshawa Taunton LP Unit or Class E Smart Oshawa Taunton LP Unit. Each option is represented by a corresponding Class C Smart Boxgrove LP Unit. Each option is represented by a corresponding Class C ONR LP I Unit. Options to acquire Strike Price ($) Options Outstanding at January 1, 2021 (#) Trust Units 20.01 to 33.55 1,457,285 Options Cancelled Options Exercised Options Outstanding at December 31, 2021 Amounts from Options Exercised (#) — (#) — (#) 1,457,285 Class B Smart LP Units, Class D Smart LP Units and Class F Smart LP Units(1) Class B Smart LP III Units(2) Class B Smart LP IV Units(3) Class B Smart Oshawa South LP Units and Class D Smart Oshawa South LP Units(4) Class B Smart Oshawa Taunton LP Units and Class D Smart Oshawa Taunton LP Units(5) 20.10 to 33.00 Market price Market price 5,855,539 1,879,759 — (7,763) — (33,287) 422,059 — (24,516) 5,847,776 1,846,472 397,543 Market price 26,585 — — 26,585 Class B and Class G Smart Boxgrove LP Units(6) Class B ONR LP I Units(7) Market price Market price Market price 265,422 — — 267,179 482,086 (52,487) — — — 265,422 267,179 429,599 Total Earnout options 10,655,914 (52,487) (65,566) 10,537,861 1,738 (1) (2) (3) (4) (5) (6) (7) Each option is represented by a corresponding Class C Smart LP Unit or Class E Smart LP Unit. For the options issued in June 2008, each option is convertible into Class F Series 3 Smart LP Units. At the holder’s option, the Class F Series 3 Smart LP Units may be redeemed for cash at $20.10 per Unit or, on the completion and rental of additional space on certain development properties, the Class F Series 3 Smart LP Units may be exchanged for Class B Smart LP Units. Each option is represented by a corresponding Class C Smart LP III Unit. Each option is represented by a corresponding Class C Smart LP IV Unit. Each option is represented by a corresponding Class C Smart Oshawa South LP Unit or Class E Smart Oshawa South LP Unit. Each option is represented by a corresponding Class C Smart Oshawa Taunton LP Unit or Class E Smart Oshawa Taunton LP Unit. Each option is represented by a corresponding Class C Smart Boxgrove LP Unit. Each option is represented by a corresponding Class C ONR LP I Unit. c) Deferred unit plan The following table summarizes the number of outstanding deferred units: Balance – January 1, 2021 Granted Trustees Eligible associates Reinvested units from distributions Vested Exchanged for Trust Units Redeemed for cash Forfeited Balance – December 31, 2021 Balance – January 1, 2022 Granted Trustees Eligible associates Reinvested units from distributions Vested Redeemed for cash Forfeited Balance – December 31, 2022 Outstanding 1,305,275 71,205 231,360 106,865 — (6,665) (34,671) (5,948) 1,667,421 1,667,421 44,970 181,388 121,028 — (110,867) (15,431) 1,888,509 Vested 1,068,243 71,205 115,680 87,545 95,804 (6,665) (34,671) — 1,397,141 1,397,141 44,970 92,043 100,996 83,704 (110,867) — 1,607,987 Unvested 237,032 — 115,680 19,320 (95,804) — — (5,948) 270,280 270,280 — 89,345 20,032 (83,704) — (15,431) 280,522 46 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 144 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT The following table summarizes the change in the carrying value of the deferred unit plan: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Carrying value – beginning of year Deferred units granted for trustee fees Deferred units granted for bonuses Reinvested distributions on vested deferred units Compensation expense – reinvested distributions and amortization Exchanged for Trust Units Redeemed for cash Fair value adjustment – vested and unvested deferred units Carrying value – end of year d) LTIP The following table summarizes the activities in the LTIP: Balance – beginning of year Amortization Fair value adjustment LTIP vested and paid out Balance – end of year e) Equity Incentive Plan Year Ended December 31 2022 50,660 712 2,900 2,846 3,576 — (3,372) (8,920) 48,402 2021 28,051 886 2,702 2,424 3,990 (198) (1,019) 13,824 50,660 Year Ended December 31 2022 697 280 (397) — 580 2021 1,540 968 (808) (1,003) 697 During the years ended December 31, 2022 and 2021, the Trust granted performance units in connection with the EIP, subject to the achievement of Unit price thresholds. The performance period for the EIP is from the grant date to December 31 of the sixth anniversary. Distributions on performance units will accumulate on the performance units that have been granted. Performance units, including distributions on performance units, vest for the lesser of three years after they are earned or on the end of the applicable Performance Period. Upon vesting, performance units will be exchanged for Trust Units or paid out in cash at the option of the holders. The following summarizes the outstanding number of performance units associated with the EIP: Balance – beginning of year(1) Granted(2) Reinvested units from distributions Terminated Balance – end of year Year Ended December 31 2022 1,339,699 65,000 87,514 (121,673) 2021 — 1,371,000 66,696 (97,997) 1,370,540 1,339,699 (1) (2) The beginning balance of 2022 includes performance units that were granted to Mitchell Goldhar and eligible associates during the year ended December 31, 2021, as well as performance units that were reinvested from distributions, and certain performance units that were terminated. Under the EIP granted to Mitchell Goldhar in 2021 totalling 900,000 Units, the $26.00 Unit price threshold was achieved on April 5, 2021, and the $28.00 Unit price threshold was achieved on May 18, 2021, and under the EIP granted to Mitchell Goldhar and other eligible associates in 2021, the $30.00 Unit price threshold was achieved on September 22, 2021, and the $32.00 Unit price threshold was achieved on April 5, 2022. The performance units for these Unit price thresholds will vest on April 4, 2024, May 17, 2024, September 21, 2024 and April 4, 2025, respectively. The following table summarizes the change in the carrying value of the EIP: Balance – beginning of year Amortization costs Fair value adjustment Balance – end of year Year Ended December 31 2022 10,377 7,912 (2,085) 16,204 2021 — 7,127 3,250 10,377 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 47 145 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. Accounts and other payables The following table presents accounts payable and the current portion of other payables that are classified as current liabilities: As at Accounts payable Accounts payable and accrued liabilities with Penguin 22 Tenant prepaid rent, deposits, and other payables Residential sales deposits Accrued interest payable Distributions payable Realty taxes payable Current portion of other payables Note December 31, 2022 December 31, 2021 83,088 3,504 108,364 11,690 14,094 26,569 2,946 10,867 261,122 75,148 3,370 118,457 375 13,410 26,600 3,193 12,525 253,078 The following table presents other payables that are classified as non-current liabilities: As at Future land development obligations with Penguin Lease liability – investment properties(1) Lease liability – other Total other payables Less: Current portion of other payables Total non-current portion of other payables (1) Leasehold properties with bargain purchase options are accounted for as leases. Note December 31, 2022 December 31, 2021 4(c)(ii) 17,646 8,411 2,075 28,132 (10,867) 17,265 18,931 8,283 3,554 30,768 (12,525) 18,243 Future land development obligations The future land development obligations represent payments required to be made to Penguin (see also Note 22, “Related party transactions”) for certain undeveloped lands acquired from 2006 to 2015, either on completion and rental of additional space on the undeveloped lands or, if no additional space is completed on the undeveloped lands, at the expiry of the development management agreement periods ending in 2022 to 2025, which may be extended up to 2027. The accrued future land development obligations are measured at their amortized values using imputed interest rates ranging from 4.50% to 5.50%. For the year ended December 31, 2022, imputed interest of $423 (year ended December 31, 2021 – $630) was capitalized to properties under development. 48 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 146 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. Fair value of financial instruments The fair value of financial instruments is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s-length transaction based on the current market for assets and liabilities with the same risks, principal and remaining maturity. The following table summarizes the fair value of the Trust’s financial instruments: As at December 31, 2022 December 31, 2021 FVTPL Amortized cost Total FVTPL Amortized cost Total Financial assets Mortgages, loans and notes receivable Amounts receivable and other Cash and cash equivalents Cash held as collateral Total return swap receivable Interest rate swap agreements Financial liabilities Accounts and other payables Secured debt Unsecured debt Revolving operating facilities Units classified as liabilities Deferred unit plan LTIP EIP Currency swap agreements Interest rate swap agreements — — — — 137,526 34,281 322,697 322,697 57,124 35,255 — — — 57,124 35,255 — 137,526 34,281 — — — — 261,122 938,431 261,122 938,431 3,616,047 3,616,047 81,283 81,283 — — — — 46,869 — — — — — 211,497 48,402 580 16,204 717 — — — — — — — 211,497 254,223 48,402 50,660 580 697 16,204 10,377 717 — 2,374 7,754 414,215 414,215 49,542 62,235 50,279 — — 49,542 62,235 50,279 46,869 — 253,078 253,078 1,344,257 1,344,257 3,284,160 3,284,160 297,625 — — — — — — 297,625 254,223 50,660 697 10,377 2,374 7,754 Fair value hierarchy The Trust values financial assets and financial liabilities carried at fair value using quoted closing market prices, where available. Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical financial assets or financial liabilities. When quoted market prices are not available, the Trust maximizes the use of observable inputs within valuation models. When all significant inputs are observable, the valuation is classified as Level 2. Valuations that require the significant use of unobservable inputs are considered Level 3. Valuations at this level are more subjective and, therefore, more closely managed. Such assessment has not indicated that any material difference would arise due to a change in input variables. The following table categorizes the inputs used in valuation methods for the Trust’s financial liabilities measured under FVTPL: As at Recurring measurements: Financial assets Fair value of total return swap agreements Fair value of interest rate swap agreements Financial liabilities Units classified as liabilities Deferred unit plan LTIP EIP Fair value of currency swap agreements Fair value of interest rate swap agreements December 31, 2022 December 31, 2021 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 — — 137,526 34,281 — — — — — — 211,497 48,402 580 16,204 717 — — — — — — — — — — — — — — — — — 46,869 — 254,223 50,660 697 10,377 2,374 7,754 — — — — — — — — Refer to Note 13, “Other financial liabilities”, for a reconciliation of fair value measurements. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 49 147 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. Unit equity The following table presents the number of Units issued and outstanding and the related carrying value of Unit equity. The Limited Partnership Units are classified as non-controlling interests in the consolidated balance sheets and the consolidated statements of equity. Number of Units Issued and Outstanding (#) Carrying Value ($) Note Trust Units Smart LP Units Total Units Trust Units Smart LP Units Total Balance – January 1, 2021 144,618,657 25,502,085 170,120,742 3,090,188 640,206 3,730,394 Options exercised 4(d), 13(b) — 66,603 66,603 — 1,738 1,738 Deferred Units exchanged for Trust Units Unit issuance costs 13(c) 6,665 — — — 6,665 — 198 (18) — — 198 (18) Balance – December 31, 2021 144,625,322 25,568,688 170,194,010 — 3,090,368 641,944 3,732,312 Balance – January 1, 2022 144,625,322 25,568,688 170,194,010 3,090,368 641,944 3,732,312 Options exercised Unit issuance costs 4(d), 13(b) — — 42,272 42,272 — 1,279 1,279 — — (250) — (250) Balance – December 31, 2022 144,625,322 25,610,960 170,236,282 3,090,118 643,223 3,733,341 Table A: Number of LP Units issued and outstanding The following table presents the number and carrying values of LP Class B Units issued and outstanding: LP Class B Unit Type Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership II Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership IV Class and Series Class B Series 1 Class B Series 2 Class B Series 3 Class B Class B Series 4 Class B Series 5 Class B Series 6 Class B Series 7 Class B Series 8 Class B Series 1 Smart Oshawa South Limited Partnership Class B Series 1 Smart Oshawa Taunton Limited Partnership Class B Series 1 Smart Boxgrove Limited Partnership Class B Series 1 Balance – January 1, 2022 Options Exercised (Note 13(b)) Balance – December 31, 2022 14,746,176 957,822 720,432 756,525 706,591 572,337 627,640 434,598 1,698,018 3,093,910 710,416 374,223 170,000 — — — — — 11,198 12,419 — — 18,655 — — — 14,746,176 957,822 720,432 756,525 706,591 583,535 640,059 434,598 1,698,018 3,112,565 710,416 374,223 170,000 25,568,688 42,272 25,610,960 50 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 148 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT LP Class B Unit Type Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership II Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership IV Smart Oshawa South Limited Partnership Class and Series Class B Series 1 Class B Series 2 Class B Series 3 Class B Class B Series 4 Class B Series 5 Class B Series 6 Class B Series 7 Class B Series 8 Class B Series 1 Class B Series 1 Smart Oshawa Taunton Limited Partnership Class B Series 1 Smart Boxgrove Limited Partnership Class B Series 1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Balance – January 1, 2021 Options Exercised (Note 13(b)) Balance – December 31, 2021 14,746,176 — 14,746,176 950,059 720,432 756,525 705,420 572,337 596,288 434,598 1,698,018 3,067,593 710,416 374,223 170,000 7,763 — — 1,171 — 31,352 — — 26,317 — — — 957,822 720,432 756,525 706,591 572,337 627,640 434,598 1,698,018 3,093,910 710,416 374,223 170,000 25,502,085 66,603 25,568,688 Table B: Carrying values of LP Units The following table presents the carrying values of LP Class B Units issued and outstanding: LP Class B Unit Type Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership II Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership IV Class and Series Class B Series 1 Class B Series 2 Class B Series 3 Class B Class B Series 4 Class B Series 5 Class B Series 6 Class B Series 7 Class B Series 8 Class B Series 1 Smart Oshawa South Limited Partnership Class B Series 1 Smart Oshawa Taunton Limited Partnership Class B Series 1 Smart Boxgrove Limited Partnership Class B Series 1 Balance – January 1, 2022 347,675 27,816 16,836 17,680 17,217 15,356 15,124 11,668 48,732 88,857 20,441 11,033 3,509 Value From Options Exercised (Note 13(b)) — — — — — 315 392 — — 572 — — — Balance – December 31, 2022 347,675 27,816 16,836 17,680 17,217 15,671 15,516 11,668 48,732 89,429 20,441 11,033 3,509 641,944 1,279 643,223 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 51 149 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LP Class B Unit Type Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership II Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership IV Smart Oshawa South Limited Partnership Class and Series Class B Series 1 Class B Series 2 Class B Series 3 Class B Class B Series 4 Class B Series 5 Class B Series 6 Class B Series 7 Class B Series 8 Class B Series 1 Class B Series 1 Smart Oshawa Taunton Limited Partnership Class B Series 1 Smart Boxgrove Limited Partnership Class B Series 1 Balance – January 1, 2021 Value From Options Exercised (Note 13(b)) 347,675 27,587 16,836 17,680 17,183 15,356 14,344 11,668 48,732 88,162 20,441 11,033 3,509 — 229 — — 34 — 780 — — 695 — — — Balance – December 31, 2021 347,675 27,816 16,836 17,680 17,217 15,356 15,124 11,668 48,732 88,857 20,441 11,033 3,509 640,206 1,738 641,944 a) Authorized Units i) Trust Units (authorized – unlimited) Each voting Trust Unit represents an equal undivided interest in the Trust. All Trust Units outstanding from time to time are entitled to participate pro rata in any distributions by the Trust and, in the event of termination or windup of the Trust, in the net assets of the Trust. All Trust Units rank among themselves equally and rateably without discrimination, preference or priority. Unitholders are entitled to require the Trust to redeem all or any part of their Trust Units at prices determined and payable in accordance with the conditions provided for in the Declaration of Trust. A maximum amount of $50 may be redeemed in total in any one month unless otherwise waived by the Board of Trustees. In accordance with the Declaration of Trust, distributions to Unitholders are declared at the discretion of the Trustees. The Trust endeavours to declare distributions in each taxation year in such an amount as is necessary to ensure that the Trust will not be subject to tax on its net income and net capital gains under Part I of the Tax Act. The Trust is authorized to issue an unlimited number of Special Voting Units that will be used to provide voting rights to holders of securities exchangeable, including all series of Class B Smart LP Units, Class D Smart LP Units, Class B Smart LP II Units, Class B Smart LP III Units, Class B Smart LP IV Units, Class B Smart Oshawa South LP Units, Class D Smart Oshawa South LP Units, Class B Smart Oshawa Taunton Units, Class D Oshawa Taunton Units, Class B Smart Boxgrove LP Units, Class B ONR LP Units and Class B ONR LP I Units, into Trust Units. Special Voting Units are not entitled to any interest or share in the distributions or net assets of the Trust. Each Special Voting Unit entitles the holder to the number of votes at any meeting of Unitholders of the Trust that is equal to the number of Trust Units into which the exchangeable security is exchangeable or convertible. Special Voting Units are cancelled on the issuance of Trust Units on exercise, conversion or cancellation of the corresponding exchangeable securities. As at December 31, 2022, there were 33,499,823 (December 31, 2021 – 33,457,551) Special Voting Units outstanding, which are associated with those LP Units that have voting rights. There is no value assigned to the Special Voting Units. These Special Voting Units are not entitled to any interest or share in the distributions or net assets of the Trust; nor are they convertible into any Trust securities. Pursuant to the Voting Top-Up Right agreement made in December 2020 between the Trust and Penguin, which was approved by Unitholders, the following amendments were made: i) extension of the Voting Top-Up Right for five years, ending December 31, 2025, ii) extension of the designation of Units as Variable Voting Units until December 31, 2025, and iii) an increase to the alternative ownership threshold from 20,000,000 Units to 22,800,000 Units, including exchangeable LP Units. The total number of Special Voting Units is adjusted for each annual meeting of the Unitholders based on changes in Penguin’s ownership interest (see also Note 22, “Related party transactions”). 52 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 150 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT ii) Limited Partnership Units (authorized – unlimited) The following tables summarize the Class A and Class B Limited Partnership Units: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Class A(1)(2) Smart Limited Partnership Smart Limited Partnership II Smart Limited Partnership III Smart Limited Partnership IV Smart Oshawa South Limited Partnership Smart Oshawa Taunton Limited Partnership SmartVMC West Limited Partnership Smart Boxgrove Limited Partnership ONR Limited Partnership ONR Limited Partnership I Class B(3)(4) Classified as Equity Limited Partnership Units(5) Classified as Liabilities ONR Limited Partnership Class B(6) ONR Limited Partnership I Class B Series 1(6) ONR Limited Partnership I Class B Series 2(6) December 31, 2022 December 31, 2021 80,715,971 75,062,169 284,178 281,892 14,365,691 12,556,688 7,028,822 3,168,190 637,895 860,095 397,438 6,469,215 3,168,190 637,895 860,095 397,438 3,912,943,532 3,912,943,532 38,000,010 38,000,010 December 31, 2022 December 31, 2021 25,610,960 25,568,688 1,248,140 1,248,140 132,881 139,302 132,881 139,302 (1) (2) (3) (4) (5) (6) Entitled to all distributable cash of the LP after the required distributions on the other classes of Units have been paid; owned directly by the Trust and eliminated on consolidation. At the meetings of the respective LP, Class A partners have 20 votes for each Class A Unit held with exception to Smart LP II, in which a Class A LP II partner has five votes for each Class A Unit held. Non-transferable, except under certain limited circumstances; exchangeable into an equal number of Trust Units at the holder’s option; entitled to receive distributions equivalent to the distributions on Trust Units; entitled to one Special Voting Unit, which will entitle the holder to receive notice of, attend and vote at all meetings of the Trust; considered to be economically equivalent to Trust Units. Class B partners have one vote for each Class B Unit held at the meetings of the respective LPs. Units have been presented as non-controlling interest. See further details in Table A above. Units have been presented as liabilities. The following table summarizes the Class C Limited Partnership Units: Class C(1)(2) Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership IV Smart Oshawa South Limited Partnership Smart Oshawa Taunton Limited Partnership Smart Boxgrove Limited Partnership ONR Limited Partnership I Series Series 1(3) Series 2(3) Series 3(3) Series 4(4) Series 5(4) Series 6(4) Series 7(4) Series 1(4) Series 1(4) Series 1(4) Series 1(4)(5) Series 2(4) December 31, 2022 December 31, 2021 3,445,341 3,019,186 3,445,341 3,019,186 674,437 459,450 563,253 409,673 259,704 375,758 21,082 132,711 267,179 429,599 674,437 562,819 596,219 427,730 259,704 397,543 21,082 132,711 267,179 429,599 (1) (2) (3) (4) (5) Entitled to receive 0.01% of any distributions of the LP and have nominal value assigned in the consolidated financial statements. Class C partners have no votes at the meetings of the respective LPs. At the holder’s option, and on the completion and rental of additional space on specific properties and payment of a specific predetermined amount per Unit, Units are exchangeable into Class B Units of the respective LP, except for Class C Series 3 LP Units, which are exchangeable into Class F Series 3 LP Units. At the holder’s option, and on the completion and rental of additional space on specific properties and payment of a specific formula amount per Unit based on the market price of Trust Units, and exchangeable into Class B Units of the respective LP. In August 2020, pursuant to the updated limited partnership agreement, there was a 3-for-1 Unit split of Class C Series 1 Smart Boxgrove LP Units, which resulted in 510,000 Class C Smart Boxgrove LP Units outstanding after the Unit split. Subsequent to the 3-for-1 Unit split and at the holder’s option, 122,258 Class C Series 1 Smart Boxgrove LP Units were cancelled in exchange of 170,000 Class B Series 1 Smart Boxgrove LP Units, and 120,563 Class C Series 1 Smart Boxgrove LP Units were cancelled in exchange of 120,563 Class G Series 1 Units (see further details below in footnote 8). SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 53 151 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the Class D, Class E, Class F and Class G Limited Partnership Units: Unit type Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership Smart Oshawa South Limited Partnership Smart Oshawa South Limited Partnership Smart Oshawa Taunton Limited Partnership SmartVMC West Limited Partnership SmartVMC West Limited Partnership Smart Boxgrove Limited Partnership Class and Series Class D Series 1(1)(5)(6) Class E Series 1(2)(3)(7) Class E Series 2(2)(3)(7) Class F Series 3(4)(5)(7) Class D Series 1(1)(5)(6) Class E Series 1(2)(3)(7) Class E Series 1(2)(3)(7) Class D Series 1(1)(5) Class D Series 2(1)(5) Class G Series 1(3)(7)(8) December 31, 2022 December 31, 2021 311,022 16,704 800,000 8,708 260,417 5,503 132,711 3,623,188 2,173,913 120,563 311,022 16,704 800,000 8,708 260,417 5,503 132,711 3,623,188 2,173,913 120,563 (1) (2) (3) (4) (5) (6) (7) (8) Non-transferable, except under certain limited circumstances; exchangeable into an equal number of Trust Units at the holder’s option; entitled to receive distributions equivalent to the distributions on Trust Units; entitled to one Special Voting Unit, which will entitle the holder to receive notice of, attend, and vote at all meetings of the Trust; considered to be economically equivalent to Trust Units; Units owned by outside parties have been presented as liabilities. At the holder’s option, and on the completion and rental of additional space on specific properties and payment of a specific formula amount per Unit based on the market price of Trust Units, and exchangeable into Class D Units of the respective LP. Entitled to receive 0.01% of any distributions of the LP and have nominal value assigned in the consolidated financial statements. Entitled to 65.5% of the distribution on Trust Units and exchangeable for $20.10 in cash per Unit or on the completion and rental of additional space on specific properties. Units have been presented as liabilities. Class D partners have one vote for each Class D Unit held at the meetings of the respective LPs. Class E, F and G partners have no votes at the meetings of the respective LPs. Class G Series 1 Smart Boxgrove LP Units represent a new class of units that were issued in August 2020 as part of the 120,563 Class C Series 1 Smart Boxgrove LP Units exchange discussed in Class C table above (see footnote 5). Concurrent with this issuance, Smart Boxgrove LP issued a loan receivable to the holders of Class G Series 1 Smart Boxgrove LP Units (as discussed in Note 6(b)). The holders of Class G Series 1 Smart Boxgrove LP Units have the right to receive a distribution equal to the loan amount and, as such, the Trust has recorded a distribution payable presently reflected in Other payables in the consolidated financial statements (see also, Note 14 “Accounts and other payables”). Subsequent to this distribution, Smart Boxgrove LP is entitled to redeem all Class G Series 1 Units outstanding for an amount equal to the nominal value assigned to them. b) Trust Units issued for cash During the year ended December 31, 2022, no Trust Units were issued for cash (Trust Units issued for cash for the year ended December 31, 2021 – nil). c) Normal Course Issuer Bid The Trust renewed a normal course issuer bid (“NCIB”) program on March 31, 2021 with acceptance by the TSX. The NCIB program terminated on March 30, 2022. Under the NCIB program, the Trust is authorized to purchase up to 12,935,063 (previously 6,500,835) of its Trust Units representing approximately 10% (previously 5%) of the public float as at March 21, 2021 (previously March 23, 2020) by way of normal course purchases effected through the facilities of the TSX and/or alternative Canadian trading systems. All Trust Units purchased by the Trust will be cancelled. During the year ended December 31, 2022, the Trust did not purchase for cancellation any Trust Units under the NCIB (Trust Units purchased for cancellation for the year ended December 31, 2021 – nil). 54 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 152 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. Unit distributions Pursuant to the Declaration of Trust, the Trust endeavours to distribute annually such amount as is necessary to ensure the Trust will not be subject to tax on its net income under Part I of the Tax Act. The following table presents Unit distributions declared: Unit Type Subject to Distributions Class and Series 2022 2021 Distributions on Units classified as equity: Trust Units N/A 267,563 267,552 Year Ended December 31 Distributions on Limited Partnership Units Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership II Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership IV Smart Boxgrove Limited Partnership Smart Oshawa South Limited Partnership Smart Oshawa Taunton Limited Partnership Total distributions on Limited Partnership Units Class B Series 1 Class B Series 2 Class B Series 3 Class B Class B Series 4 Class B Series 5 Class B Series 6 Class B Series 7 Class B Series 8 Class B Series 1 Class B Series 1 Class B Series 1 Class B Series 1 Distributions on other non-controlling interest N/A Distributions on Units classified as equity Distributions on Units classified as liabilities: Smart Limited Partnership Smart Limited Partnership Smart Oshawa South Limited Partnership ONR Limited Partnership ONR Limited Partnership I ONR Limited Partnership I Smart VMC West Limited Partnership Distributions on Units classified as liabilities Total Unit distributions Class D Series 1 Class F Series 3 Class D Series 1 Class B Class B Series 1 Class B Series 2 Class D Series 1 and 2 27,281 27,281 1,772 1,333 1,400 1,307 1,064 1,184 804 3,141 5,756 315 1,314 692 47,363 282 315,208 575 11 482 2,309 246 258 10,725 14,606 329,814 1,765 1,333 1,400 1,306 1,059 1,156 804 3,141 5,716 315 1,314 692 47,282 420 315,254 575 11 482 2,309 246 258 38 3,919 319,173 On January 17, 2023, the Trust declared a distribution for the month of January 2023 of $0.15417 per Unit, representing $1.85 per Unit on an annualized basis, to Unitholders of record on January 31, 2023. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 55 153 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. Rentals from investment properties and other The following table presents rentals from investment properties and other: Gross base rent Less: Amortization of tenant incentives Net base rent Property tax and insurance recoveries Property operating cost recoveries Miscellaneous revenue Rentals from investment properties Service and other revenues(1) Earnings from other Year Ended December 31 2022 515,110 (7,087) 508,023 171,874 93,407 265,281 15,393 788,697 14,652 1,249 2021 502,504 (7,512) 494,992 169,180 83,852 253,032 17,891 765,915 14,843 38 Rentals from investment properties and other 804,598 780,796 (1) For the year ended December 31, 2022, service and other revenues included $12,904 relating to the recovery of costs and billed as fees associated with the Development and Services Agreement with Penguin (year ended December 31, 2021 – $12,872). See also Note 19, “Property operating costs and other” and Note 22, “Related party transactions”. The following table summarizes the future contractual minimum base rent payments under non-cancellable operating leases expected from tenants in investment properties: As at 2022 2023 2024 2025 2026 2027 Thereafter 19. Property operating costs and other The following table summarizes property operating costs and other: Recoverable property operating costs(1) Property management fees and costs Expected credit loss/(recovery) Non-recoverable costs Property operating costs Residential inventory marketing costs Other expenses relating to service and other revenues(2) Other expenses Property operating costs and other (1) (2) Includes recoverable property tax and insurance costs. Relate to service and other revenues as disclosed in Note 18, “Rentals from investment properties and other”. December 31, 2022 December 31, 2021 — 503,014 436,753 365,162 299,049 235,407 502,240 485,283 427,676 355,231 287,942 224,936 166,100 356,809 Year Ended December 31 2022 2021 279,597 267,707 4,288 (3,448) 6,465 1,469 3,652 7,246 286,902 280,074 435 14,657 15,092 40 14,842 14,882 301,994 294,956 56 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 154 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT 20. General and administrative expense, net The following table summarizes general and administrative expense, net: Salaries and benefits Services fee – to Penguin Professional fees Public company costs Amortization of intangible assets Other costs including office rent, information technology, marketing, communications, and other employee expenses Subtotal Previously capitalized general and administrative expenses on completed developments Previously capitalized general and administrative expenses on sale of real estate assets Total general and administrative expense before allocation Less: Capitalized to properties under development and other assets Allocated to property operating costs Recoverable costs billed to Penguin and others Total amounts capitalized, allocated and charged NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 22 9 Year Ended December 31 2022 73,607 7,416 6,172 1,343 1,332 11,134 101,004 60 332 101,396 (35,394) (18,558) (14,175) (68,127) 2021 66,345 7,062 6,338 1,681 1,331 12,248 95,005 1,050 946 97,001 (36,465) (15,434) (13,180) (65,079) General and administrative expense, net 33,269 31,922 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 57 155 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. Supplemental cash flow information The following table presents items not affecting cash and other items relating to the Trust’s operating activities: Fair value adjustments Gain on sale of investment properties Earnings from equity accounted investments Interest expense Other financing costs Interest income Amortization of other assets and intangible assets Lease obligation interest Deferred unit compensation expense, net of redemptions LTIP and EIP amortization, net of payment The following table presents changes in other non-cash operating items: Amounts receivable and other Prepaid expenses, deposits and deferred financing costs Accounts payable Realty taxes payable Tenant prepaid rent, deposits and other payables, and residential sales deposits Other working capital changes The following table presents the Trust’s non-cash investing and financing activities: Non-cash investing and financing activities Mortgage assumed on acquisition Total return swap receivable Unit issued under DUP Units issued on acquisition Liabilities assumed on acquisition, net of other assets Distributions payable at year end Total return swap debt Note 26 5 12(d) 13 13 Note 11 11 14 14 14 Note 3 8 13(c) 3 3 14 12 Year Ended December 31 2022 2021 (293,080) (457,301) (315) (4,199) 148,702 (1,813) (18,036) 10,310 578 204 3,010 (27) (211,420) 144,540 (1,146) (12,341) 12,464 565 2,971 1,894 (154,639) (519,801) Year Ended December 31 2022 (7,582) (2,185) 8,074 (247) 1,222 (7,299) (8,017) 2021 9,102 (3,847) 1,175 (1,771) 31,313 3,268 39,240 Year Ended December 31 2022 — 137,526 — 1,279 1,756 26,569 143,232 2021 13,076 46,869 198 182,974 12,315 26,600 42,191 The following table presents the composition of the Trust’s cash and cash equivalents: As at Cash Cash and cash equivalents December 31, 2022 December 31, 2021 35,255 35,255 62,235 62,235 58 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 156 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT 22. Related party transactions Transactions with related parties are conducted in the normal course of operations. The following table presents Units owned by Penguin (the Trust’s largest Unitholder) as at December 31, 2022, which in total represent approximately 20.8% of the issued and outstanding Units (December 31, 2021 – 20.8%) of the Trust: Units owned by Penguin NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Type Trust Units Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership IV Smart Oshawa South Limited Partnership Smart Oshawa Taunton Limited Partnership Smart Boxgrove Limited Partnership ONR Limited Partnership I ONR Limited Partnership I Units owned by Penguin Distributions declared to Penguin (in thousands of dollars) Class N/A Class B Series 1 Class B Series 2 Class B Series 3 Class F Series 3 Class B Series 4 Class B Series 5 Class B Series 6 Class B Series 7 Class B Series 8 Class B Series 1 Class B Series 1 Class B Series 1 Class B Series 1 Class B Series 1 Class B Series 2 December 31, 2022 December 31, 2021 15,032,063 15,076,163 12,488,816 375,313 720,432 8,708 706,591 583,535 640,059 434,598 1,698,018 2,873,132 630,880 374,223 170,000 132,881 139,302 12,488,816 375,313 720,432 8,708 706,591 572,337 627,640 434,598 1,698,018 2,858,950 630,880 374,223 170,000 132,881 139,302 37,052,651 36,970,752 Year Ended December 31, 2022 Year ended December 31, 2021 68,471 68,372 Pursuant to the Declaration of Trust, provided certain ownership thresholds are met, the Trust is required to issue or cancel such number of additional Special Voting Units to Penguin that will entitle Penguin to cast 25.0% of the aggregate votes eligible to be cast at a meeting of the Unitholders and Special Voting Unitholders (“Voting Top-Up Right”). As at December 31, 2022, there were 10,053,123 additional Special Voting Units outstanding (December 31, 2021 – 8,163,976). These Special Voting Units are not entitled to any interest or share in the distributions or net assets of the Trust, nor are they convertible into any Trust securities. There is no value assigned to the Special Voting Units. A five-year extension of the Voting Top-Up Right was approved by Unitholders at the Trust’s annual general and special meeting held on December 9, 2020. For further details, see the Trust’s management information circular dated November 6, 2020, filed on the System for Electronic Document Analysis and Retrieval (“SEDAR”). The following table presents those Units which Penguin has Earnout options to acquire, upon completion of Earnout events: Type Trust Units Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership III Smart Limited Partnership IV Smart Oshawa South Limited Partnership Smart Oshawa Taunton Limited Partnership Smart Boxgrove Limited Partnership ONR Limited Partnership I Class and Series N/A Class B Series 1 Class B Series 2 Class B Series 3 Class B Series 4 Class B Series 5 Class B Series 6 Class B Series 7 Class B Series 1 Class B Series 1 Class B Series 1 Class B Series 1 Class B Series 2 December 31, 2022 December 31, 2021 1,286,833 1,337,449 3,019,186 674,437 562,819 596,219 427,730 259,704 369,472 18,983 132,711 267,179 429,599 1,286,833 1,337,449 3,019,186 674,437 459,450 563,253 409,673 259,704 353,135 18,983 132,711 267,179 429,599 9,211,592 9,382,321 At December 31, 2022, Penguin’s ownership would increase to 24.6% (December 31, 2021 – 24.6%) if Penguin were to exercise all remaining Earnout options. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 59 157 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pursuant to its rights under the Declaration of Trust, at December 31, 2022, Penguin has appointed two Trustees out of eight. The other non-controlling interest, which is included in equity, represents a 5.0% equity interest by Penguin in five consolidated investment properties. The Trust entered into various agreements with Penguin in November 2020 coincident with the extension of the term of the Voting Top-Up Right. For further details, see the Trust’s management information circular dated November 6, 2020, filed on SEDAR and below. Supplement to Development Services Agreement between the Trust and its Affiliates and Penguin The following represent the key elements of this agreement which is effective from July 1, 2020 until December 31, 2025: a) Penguin shall be reimbursed for 50% of disposition fees otherwise payable pursuant to the Development Services b) Agreement related to Penguin’s interest in properties sold by the Trust, for future SmartVMC commercial phases and certain properties currently owned by Penguin (for which the Trust has historically assisted with development and planning requirements), all development fees are payable to Penguin and all other fees (management, leasing, etc.) are payable to the Trust, d) c) when Penguin utilizes employees of the Trust to assist with its development projects, Penguin will pay for these services provided by employees of the Trust based on annual estimates of time billings related to these projects, charged at estimated total cost, including compensation, for a property owned by a third party which is managed by Penguin in Richmond, British Columbia, the Trust will be paid 50% of the management and leasing fees, and 100% of costs associated with the Trust’s employees/personnel who service this particular property, for Penguin’s 50% interest in a property in Toronto co-owned with Revera to develop a retirement home, Penguin will pay 50% of the development fees it earns to the Trust for the development services provided by the Trust, and the Trust will continue to manage and develop all other Penguin properties. e) f) Support services are provided for a fee based on an allocation of the Trust’s relevant costs of the support services to Penguin. Such relevant costs include: office administration, human resources, information technology, insurance, legal and marketing. Penguin Services Agreement The amended and restated services agreement entered into on November 5, 2020 (the “Penguin Services Agreement”), and effective from February 2018 reflects the additional services provided by Penguin since that time. Under the agreement, Penguin provides specified services to the Trust in connection with the development of its projects. In return for those services, Penguin is entitled to receive: i) a fixed quarterly fee of $1,000 (subject to inflation-related increments after 2018) and ii) an annual variable fee between $1,500 and $3,500 (also inflation-adjusted after 2018) that is based on the achievement of the Trust-level targets for “New Development Initiatives” and “New Projects” that the Trust uses to measure the performance of its executive officers and other annual targets (other than such Trust-level targets) of a similar nature that the Trust uses to measure the performance of its executive officers as determined by the Board of Trustees from time to time. Omnibus Agreement between the Trust and Penguin Effective December 9, 2020, pursuant to an omnibus agreement between the Trust and Penguin (the “Omnibus Agreement”), Penguin has the option to extend all Earnouts by two years from the previous expiry date, and the Trust has been given a right of first offer in connection with the sale of the economic and financial benefits and rights of any such development parcel during any extended period. In addition, this agreement provides for the payment of certain outstanding amounts between the parties. Mezzanine Loan Amending Agreements between the Trust and its Affiliates and Penguin Effective November 5, 2020, all loan maturity dates have been extended to August 31, 2028, with a new rate structure for the extension period of each mortgage receivable (see also Note 6, “Mortgages, loans and notes receivable”). The Trust’s purchase option periods have been extended and because these properties may now be subject to mixed-use development projects, the agreements provide that the parties establish a new framework for the purchase options for the Trust related to mixed-use development. Non-Competition Agreement Effective November 2020, a non-competition agreement with Penguin replaced and superseded the previous non-competition agreement extending the term by five years and broadening restricted competing initiatives to include various forms of mixed-use development. Executive Employment Agreement This agreement confirms Mr. Goldhar’s position as Executive Chairman of the Trust for the period from February 14, 2018 to December 31, 2025, for which Mr. Goldhar receives a salary, bonus, customary benefits, and is eligible to participate in the Trust’s Deferred Unit Plan and the Equity Incentive Plan (see below). 60 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 158 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Equity Incentive Plan In January 2021, the Trust granted 900,000 performance units to Mitchell Goldhar pursuant to the EIP adopted by Unitholders effective December 9, 2020, which are subject to the achievement of Unit price thresholds. The performance period for this award granted under the EIP is from January 1, 2021 to December 31, 2027. The vesting period for these performance units will commence on the date that the applicable performance measure is achieved, and will end on the earlier of the third anniversary of the date that the applicable performance period is achieved and the end of the performance period. Distributions on these performance units will accumulate from January 1, 2021. Provided the various performance measures are achieved, the performance units will be exchanged for Trust Units or paid out in cash. See also Note 13, “Other financial liabilities”. Related party transactions and balances are also disclosed elsewhere in these consolidated financial statements, which include: • • • • • • • • • • • Note 3(c) referring to the purchase of Earnouts Note 4(c) referring to Leasehold property interests Note 5(a)(ii) referring to a Supplemental Development Fee Agreement Note 6 referring to Mortgages, loans and notes receivable Note 7 referring to Other assets Note 11 referring to Amounts receivable and other Note 13 referring to Other financial liabilities Note 14 referring to Accounts and other payables (including future land development obligations) Note 18 referring to Rentals from investment properties and other Note 19 referring to Property operating costs and other, and Note 20 relating to General and administrative expense, net. The following table summarizes related party transactions and balances with Penguin and other related parties, including amounts relating to the Trust’s share in equity accounted investments: Year Ended December 31 Note 2022 2021 Related party transactions with Penguin Acquisitions and Earnouts: Earnouts Revenues: Service and other revenues: Management fee and other services revenue pursuant to the Development and Services Agreement Supplement to the Development Services Agreement fees – time billings Support services Interest income from mortgages and loans receivable Rents and operating cost recoveries included in rentals from income properties (includes rental income from Penguin Pick-Up of $355 (year ended December 31, 2021 – $271)) Expenses and other payments: Fees paid – capitalized to properties under development EIP – capitalized to properties under development Development fees and interest expense (capitalized to investment properties) Opportunity fees capitalized to properties under development(1) Marketing, time billings and other administrative costs (included in general and administrative expense and property operating costs) Disposition fees (included in general and administrative expense) Expenditures on tenant inducement 18 6 20 9,210 16,274 3,670 8,042 1,192 12,904 7,857 6,309 5,097 1,466 12,872 6,209 893 828 21,654 19,909 7,416 5,182 354 60 76 612 — 7,062 5,198 115 1,839 84 979 77 13,700 15,354 Related party transactions with PCVP Revenues: Interest income from mortgages and loans receivable 6 1,318 1,935 Expenses and other payments: Rent and operating costs (included in general and administrative expense and property operating costs) 19, 20 2,720 2,625 (1) These amounts include prepaid land costs that will offset the purchase price of future Earnouts. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 61 159 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As at Note December 31, 2022 December 31, 2021 Related party balances with Penguin disclosed elsewhere in the financial statements Receivables: Amounts receivable and other(1) Mortgages receivable Loans receivable Notes receivable Total receivables Payables and other accruals: Accounts payable and accrued liabilities Future land development obligations Total payables and other accruals 11 6(a) 6(b) 6(c) 14 14 18,734 39,456 100,280 2,924 161,394 3,504 17,646 21,150 14,953 139,589 116,966 2,924 274,432 3,370 18,931 22,301 (1) Excludes amounts receivable presented below as part of balances with equity accounted investments. This amount includes amounts receivable of $11,899 and other of $6,835 (December 31, 2021 – $6,966 and other of $7,987). The following table summarizes the related party balances with the Trust’s equity accounted investments: As at Note December 31, 2022 December 31, 2021 Related party balances disclosed elsewhere in the financial statements Amounts receivable(1) Loans receivable(2) Other unsecured debt(3) 11 6(b) 12(b)(iv) 616 164,628 141,131 581 139,152 195,562 (1) (2) (3) Amounts receivable includes Penguin’s portion, which represents $29 (December 31, 2021 – $4) relating to Penguin’s 50% investment in the PCVP and 50% in Residences (One) LP. Loans receivable includes Penguin’s portion, which represents $24,266 (December 31, 2021 – $23,607) relating to Penguin’s 50% investment in the PCVP. Other unsecured debt includes Penguin’s portion, which represents $163 (December 31, 2021 – $6,243) relating to Penguin’s 25% investment in the Residences LP. Other related party transactions The following table summarizes other related party transactions: Legal fees incurred from a law firm in which a partner is a Trustee: Capitalized to investment properties Included in general and administrative expense Year Ended December 31 2022 1,919 846 2,765 2021 2,628 2,129 4,757 62 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 160 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23. Key management and Trustees’ compensation Key management personnel are those individuals having authority and responsibility for planning, directing and controlling the activities of the Trust, directly or indirectly. Currently, the Trust’s key management personnel include the Executive Chairman and Chief Executive Officer (see also Note 22, “Related party transactions”), Chief Financial Officer, Executive Vice President – Portfolio Management and Investments, and two Executive Vice Presidents of Development. In addition, the Trustees have oversight responsibility for the Trust. The following table presents the compensation relating to key management: Salaries and other short-term employee benefits Deferred unit plan EIP LTIP The following table presents the compensation relating to Trustees: Trustees’ fees Deferred unit plan 24. Co-owned property interests Year Ended December 31 2022 2,720 2,936 5,477 (116) 11,017 2021 3,278 3,706 10,157 160 17,301 Year Ended December 31 2022 677 677 1,354 2021 748 748 1,496 The Trust has the following co-owned property interests and includes in these consolidated financial statements its proportionate share of the related assets, liabilities, revenues and expenses of these properties, as presented in the table below: As at December 31, 2022 December 31, 2021 Income properties(2) Properties under development Mixed-use Residential development Total Number of Co-owned Properties(1) 15 4 1 2 22 Ownership Interest (%) 40 – 60 25 – 67 67 50 Number of Co-owned Properties(1) 18 4 1 2 25 Ownership Interest (%) 40 – 60 25 – 67 67 50 (1) (2) Penguin is a co-owner of eight investment properties, consisting of four properties under development, three income properties and one mixed-use property (December 31, 2021 – eight investment properties, consisting of four properties under development, three income properties and one mixed-use property) (see also Note 22, “Related party transactions”). During the year ended December 31, 2022, the Trust acquired an additional 50% interest in three previously co-owned income properties. The following amounts presented in the table below, included in these consolidated financial statements, represent the Trust’s proportionate share of the assets and liabilities of the 22 co-owned property interests as at December 31, 2022 (25 co-ownership property interests at December 31, 2021). As at Assets(1)(2) Liabilities December 31, 2022 December 31, 2021 2,084,066 184,993 2,119,018 351,725 (1) (2) Includes cash and cash equivalents of $37,275 (December 31, 2021 – $30,713). Includes the Trust’s proportionate share of the investment properties classified as held for sale of $42,321 (December 31, 2021 – $nil). SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 63 161 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the results of operations and cash flows of the Trust’s co-owned property interests: Revenues Expenses Net income before fair value adjustment Fair value adjustment on revaluation of investment properties Net income and comprehensive income Cash flows provided by operating activities Cash flows used in financing activities Cash flows provided by investing activities Year Ended December 31 2021 2022 94,033 40,067 53,966 41,603 95,569 55,963 (148,691) 99,389 96,225 45,732 50,493 149,171 199,664 54,136 (66,226) 14,276 Management believes the assets of the co-owned property interests are sufficient for the purpose of satisfying the associated obligations of the co-owned property interests. 25. Segmented information As at December 31, 2022, the Trust has one reportable segment, which comprises the development, ownership, management and operation of investment properties located in Canada. In measuring performance, the Trust does not distinguish or group its operations on a geographical or any other basis and, accordingly, has a single reportable segment for disclosure purposes. The Trust’s major tenant is Walmart, accounting for 25.2% of the Trust’s annualized rentals from investment properties for the year ended December 31, 2022 (year ended December 31, 2021 – 25.2%). 26. Fair value adjustments The following table summarizes the fair value adjustments: Investment properties Income properties Properties under development Fair value adjustment on revaluation of investment properties Financial instruments Total return swap receivable Units classified as liabilities Deferred unit plan Long term incentive plan Equity incentive plan Interest rate swap agreements Fair value adjustment on financial instruments Total fair value adjustments Year Ended December 31 Note 2022 2021 4 4 8 13(a) 13(c) 13(d) 13(e) 8, 13 (54,122) 255,956 201,834 (4,918) 42,726 8,920 397 2,085 42,036 91,246 293,080 107,416 384,112 491,528 5,642 (24,508) (13,824) 808 (3,250) 905 (34,227) 457,301 64 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 162 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27. Risk management a) Financial risks The Trust’s activities expose it to a variety of financial risks, including interest rate risk, credit risk and liquidity risk. The Trust’s overall financial risk management focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Trust’s financial performance. The Trust may use derivative financial instruments to hedge certain risk exposures. i) Interest rate risk A significant proportion of the Trust’s debt is financed at fixed rates with maturities staggered over a number of years, thereby mitigating its exposure to changes in interest rates and financing risks. At December 31, 2022, approximately 24.98% (December 31, 2021 – 8.59%) of the Trust’s debt is financed at variable rates, of which 10.04% is subject to interest rate swap agreements with fixed interest rates. The remaining variable rate debt (14.94% of total debt) not subject to interest rate swap agreements represents the Trust’s exposure to changes in interest rates on such debt. The Trust analyzes its interest rate exposure on a regular basis. The Trust monitors the historical movement of 10-year Government of Canada bonds and performs a sensitivity analysis to identify the possible impact on net income of an interest rate shift. The simulation is performed on a regular basis to ensure the maximum loss potential is within the limit acceptable to management. Management performs the simulation for secured debt, unsecured debt, revolving operating facilities, and mortgages and loans receivable: Change in interest rate of: Net income increase (decrease) from variable- rate debt Net income increase (decrease) from variable- rate mortgages and loans receivable -1.50% -1.00% -0.50% +0.50% +1.00% +1.50% 11,170 7,446 3,723 (3,723) (7,446) (11,170) (2,773) (1,849) (924) 924 1,849 2,773 The Trust is managing risks arising from the interest rate benchmark reform through: i) managing the maturities of its debt agreements, ii) designating successor rates, and iii) holding onto CDOR and LIBOR rates for as long as practicable, prior to transitioning its financial and debt instruments to successor rates. From time to time, the Trust may enter into interest rate swaps as part of its strategy for managing certain interest rate risks. The Trust recognizes any change in fair value associated with interest rate swap agreements in the consolidated statements of income and comprehensive income. The sensitivity analysis in the table below reflects the fair value gain (loss) on interest rate swap agreements from possible changes in interest rates. Change in interest rate of: -1.50% -1.00% -0.50% +0.50% +1.00% +1.50% Fair value gain (loss) on interest rate swap agreements (36,700) (23,816) (11,075) 13,991 26,324 38,527 The Trust’s exposure to interest rate risk is monitored by management on a regular basis (see also Note 12, “Debt”). ii) Credit risk Credit risk arises from cash and cash equivalents, as well as credit exposures with respect to mortgages and loans receivable (see also Note 6, “Mortgages, loans and notes receivable”) and tenant receivables (see also Note 11, “Amounts receivable and other, deferred financing costs, and prepaid expenses and deposits”). Tenants may experience financial difficulty and become unable to fulfil their lease commitments. The Trust mitigates this risk of credit loss by reviewing tenants’ covenants, by ensuring its tenant mix is diversified and by limiting its exposure to any one tenant except Walmart. Further risks arise in the event that borrowers of mortgages and loans receivable default on the repayment of amounts owing to the Trust. The Trust endeavours to ensure adequate security has been provided in support of mortgages and loans receivable. The Trust limits cash transactions to high-credit-quality financial institutions to minimize its credit risk from cash and cash equivalents. The ECL model requires an entity to measure the loss allowance for a financial instrument at an amount equal to the lifetime ECL if the credit risk on that financial instrument has increased significantly since initial recognition or at an amount equal to 12-month expected credit losses if the credit risk on that financial instrument has not increased significantly since initial recognition. The Trust uses a provision matrix based on historical credit loss experiences to estimate 12-month expected credit losses as the Trust has deemed the risk of credit loss has not increased significantly for both mortgages and loans receivable (see also Note 6, “Mortgages, loans and notes receivable”) and tenant receivables (see also Note 11, “Amounts receivable and other, deferred financing costs, and prepaid expenses and deposits”). Credit risks for both have been mitigated by various measures including ensuring adequate security has been provided in support of mortgages and loans receivable and reviewing tenant’s covenants, ensuring its tenant mix is diversified and by limiting its exposure to any one tenant except Walmart for tenant receivables. However, the SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 65 163 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS assumptions and estimates underlying the manner in which ECLs have been implemented historically may not be appropriate in the current economic environment, including but not limit to the inflationary environment, rising interest rates, etc. Accordingly, the Trust has not applied its existing ECL methodology mechanically. Instead, during the current economic environment, the Trust has been in discussions with tenants on a case-by-case basis to determine optimal rent payment solutions and has incorporated this available, reasonable and supportable information when estimating ECL on tenant receivables. iii) Liquidity risk Liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities and the ability to lease out vacant units. In the next 12 months, $720,400 of liabilities (including $459,278 of secured and unsecured debt and $261,122 of accounts and other payable amounts) will mature and will need to be settled by means of renewal or payment. The Trust aims to maintain flexibility and opportunities in funding by keeping committed credit lines available, obtaining additional mortgages as the value of investment properties increases, issuing equity or unsecured debentures. The Trust’s ability to meet its financial obligations as they become due represents the Trust’s exposure to liquidity risk. It is management’s intention to either repay or refinance maturing liabilities with newly issued secured or unsecured debt, equity or, in certain circumstances not expected to occur frequently, the disposition of certain assets. Any net working capital deficiencies are funded with the Trust’s existing revolving operating facilities. As at December 31, 2022, the Trust had: a) cash and cash equivalents of $35,255; b) the remaining funds available to be drawn from its $650,000 in operating facilities and its $250,000 accordion feature; c) project-specific financing arrangements; and d) $8,415,900 in unencumbered assets that could be used to obtain additional secured financing to assist with its liquidity requirements. The key assumptions used in the Trust’s estimates of future cash flows when assessing liquidity risk are: the renewal or replacement of the maturing revolving operating facilities, secured debt and unsecured debentures, at reasonable terms and conditions in the normal course of business and no major bankruptcies of principal tenants. Management believes that it has considered all reasonable facts and circumstances in forming appropriate assumptions. The Trust’s liquidity position is monitored by management on a regular basis. A schedule of principal repayments on secured debt and other debt maturities is disclosed in Note 12, “Debt”. iv) Currency risk The Trust has drawn funds in U.S. dollars, and is exposed to currency risk in the fluctuation of the Canadian dollar to U.S. dollar exchange rate when the liabilities are repaid. At December 31, 2022, approximately 1.49% (December 31, 2021 – 3.05%) of the Trust’s debt is financed in U.S. dollar borrowings. The Trust analyzes its exchange rate exposure on a regular basis. From time to time, the Trust may enter into currency swaps as part of its strategy for managing certain currency risks. The Trust recognizes any change in fair value associated with currency swap agreements in the consolidated statements of income and comprehensive income. As currency gains or losses on the Trust’s debt are offset by fair value gains or losses in the currency swap agreements, the Trust is not exposed to significant currency risk on a net basis. The Trust’s exposure to currency risk is monitored by management on a regular basis (see also Note 12, “Debt”). b) Capital risk management The Trust defines capital as the aggregate amount of Unitholders’ equity, debt and Units classified as liabilities. The Trust’s primary objectives when managing capital are: i) to safeguard the Trust’s ability to continue as a going concern so that it can continue to provide returns for Unitholders; and ii) to ensure the Trust has access to sufficient funds for operating, acquisitions (including Earnouts) and development activities. The Trust sets the amount of capital in proportion to risk. The Trust manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Trust may adjust the amount of distributions paid to Unitholders, issue new Units and debt, or sell assets to reduce debt or fund operating, acquisition and development activities. The Trust anticipates meeting all current and future obligations. Management expects to finance operating, future acquisitions, mortgages receivable, development costs and maturing debt from: i) existing cash balances; ii) a mix of debt secured by investment properties, operating and credit facilities, issuance of equity and unsecured debentures; and iii) the sale of non-core assets. Cash flows generated from operating activities is the source of liquidity to service debt (except maturing debt), sustaining capital expenditures, leasing costs and Unit distributions. The Trust monitors its capital structure based on the following ratios: interest coverage ratio, debt to total assets and debt to total earnings before interest, taxes, depreciation and amortization and fair value changes associated with investment 66 SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 164 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTproperties and financial instruments. These ratios are used by the Trust to manage an acceptable level of leverage and are not considered measures in accordance with IFRS, nor are there equivalent IFRS measures. The following table shows the significant financial covenants that the Trust is required, pursuant to the terms of its revolving operating facilities and other credit facilities, to maintain: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Financial covenants Debt as a percentage of total aggregate assets Secured debt as a percentage of aggregate assets Fixed charge coverage multiple Unencumbered assets to unsecured debt multiple Minimum Unitholders’ equity Threshold ≤ 65% ≤ 40% ≥ 1.5X ≥ 1.3X ≥ $2,000,000 The Trust’s indentures require its unsecured debentures to maintain debt to gross book value including convertible debentures not more than 65%, an interest coverage ratio not less than 1.65X and Unitholders’ equity not less than $500,000. These covenants are required to be calculated based on Canadian generally accepted accounting principles (“GAAP”) at the time of debt issuance. If the Trust does not meet all externally imposed financial covenants, then the related debt will become immediately due and payable unless the Trust is able to remedy the default or obtain a waiver from lenders. For the year ended December 31, 2022, the Trust was in compliance with all financial covenants. 28. Commitments and contingencies The Trust has certain obligations and commitments pursuant to development management agreements to complete the purchase of Earnouts totalling approximately 121,000 square feet (December 31, 2021 – 131,000 square feet) of development space from Penguin and others, based on a pre-negotiated formula, as more fully described in Note 4, “Investment properties”. As at December 31, 2022, the carrying value of these obligations and commitments included in properties under development was $54,847 (December 31, 2021 – $60,700). The timing of completion of the purchase of the Earnouts, and the final prices, cannot be readily determined because they are a function of future tenant leasing. The Trust has also entered into various other development construction contracts totalling $20,669 (December 31, 2021 – $14,934) and commitments relating to equity accounted investments that total $200,956 (December 31, 2021 – $293,688), of which the Trust’s share is $90,161 (December 31, 2021 – $123,584), see Note 5, “Equity accounted investments”, that will be incurred in future periods. The Trust entered into agreements with Penguin in which the Trust will lend funds in the form of mortgages receivable, as disclosed in Note 6(a). The maximum amount that may be provided under the agreements totals $190,720 (December 31, 2021 – $300,796) (see also Note 6, “Mortgages, loans and notes receivable”), of which $39,456 has been provided as at December 31, 2022 (December 31, 2021 – $139,589). As at December 31, 2022, letters of credit totalling $48,312 (December 31, 2021 – $34,783) – including letters of credit drawn down under the revolving operating facilities described in Note 12(c) – have been issued on behalf of the Trust by financial institutions as security for debt and for maintenance and development obligations to municipal authorities. The Trust carries insurance and indemnifies its Trustees and officers against any and all claims or losses reasonably incurred in the performance of their services to the Trust to the extent permitted by law. The Trust, in the normal course of operations, is subject to a variety of legal and other claims. Management and the Trust’s legal counsel evaluate all claims on their apparent merits and accrue management’s best estimate of the likely cost to satisfy such claims. Management believes the outcome of current legal and other claims filed against the Trust, after considering insurance coverage, will not have a significant impact on the Trust’s consolidated financial statements. 29. Subsequent event The Trust together with an entity, PCVP, which is classified as investment in associates, entered into an agreement to dispose approximately 6.4 acres of land located in Vaughan, Ontario (VMC) to an unrelated party, which closed in February 2023, for gross proceeds of $95,550 that was satisfied with cash. The Trust’s share of such proceeds was $58,371, comprised of $42,321 relating to the Trust’s two-thirds share of the 4.3 acres of land on western part of SmartVMC which were previously consolidated in the Trust’s consolidated financial statements and presented as assets held for sale at December 31, 2022, and $16,050 relating to the Trust’s 50% share of 2.1 acres of land on eastern part of SmartVMC which were previously recorded in equity accounted investments. SMARTCENTRES REAL ESTATE INVESTMENT TRUST | 2022 ANNUAL REPORT 67 165 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSMARTCENTRES REAL ESTATE INVESTMENT TRUST 2022 ANNUAL REPORTCORPORATE INFORMATION TRUSTEES Mitchell Goldhar 2 Executive Chairman and CEO SmartCentres Real Estate Investment Trust, Owner The Penguin Group of Companies Paula Bustard Executive Vice President of Development Allan Scully Executive Vice President of Development Janet Bannister 1 Managing Partner Real Ventures Garry Foster 1, 2 Chief Executive Officer Cortleigh Capital Inc. Gregory Howard 2, 3 Partner Davies Ward Phillips & Vineberg LLP Sylvie Lachance 1 Managing Director Tribal Partners Canada Inc. Jamie McVicar 1, 3 Trustee Sharm Powell 2, 3 Trustee Michael Young 2, 3 Principal Quadrant Capital Partners Inc. BANKERS BMO Capital Markets Canaccord Genuity Corp. CIBC World Markets Desjardins Securities Inc. HSBC Bank Canada Mizuho Bank, Ltd. National Bank of Canada RBC Capital Markets Scotia Capital TD Bank Financial Group AUDITORS PricewaterhouseCoopers LLP Toronto, Ontario LEGAL COUNSEL Osler Hoskin & Harcourt LLP Toronto, Ontario Davies Ward Phillips & Vineberg LLP Toronto, Ontario 1 Audit Committee 2 Investment Committee 3 Corporate Governance and Compensation Committee REGISTRAR & TRANSFER AGENT Computershare Trust Company of Canada Toronto, Ontario EXECUTIVE OFFICERS Mitchell Goldhar Executive Chairman and CEO Peter Slan Chief Financial Officer Rudy Gobin Executive Vice President Portfolio Management & Investments INVESTOR RELATIONS Peter Slan Chief Financial Officer Tel: 905 326 6400 x7571 Fax: 905 326 0783 TSX: SRU.UN 

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