B U I L D I N G F O R T H E F U T U R E
WPT Industrial Real Estate Investment Trust
2019 Annual Report
WPT Industrial Real Estate Investment Trust (the “REIT”) is an
unincorporated, open‑ended real estate investment trust focused on
acquiring, developing, managing and owning institutional‑quality
industrial properties in strategic U.S. markets. As of December 31, 2019,
the REIT indirectly owned 74 industrial properties and one offic
property totaling approximately 22.9 million square feet of gross leasable
area (GLA) located in 18 markets and 16 U.S. states. TheREIT currently
pays monthly cash distributions at approximately $0.76 per trust unit
on an annualized basis in U.S. funds.
F I N A N C I A L H I G H L I G H T S
(US$ 000, except per unit amounts)
Number of investment properties
Investment properties revenue
Management fee revenue
Net operating income
Funds from operations
Funds from operations per unit (diluted)
Adjusted funds from operations
Adjusted funds from operations (diluted)
Cash fl w from operations
ACFO payout ratio
Weighted‑average units outstanding (diluted) (000)
Average remaining lease term (years)
Debt to gross book value
Weighted‑average effecti e interest rate
Interest coverage ratio
Debt to adjusted EBITDA
NAV per unit
Year Ended
Dec. 31
2019
74
115,129
3,587
84,238
$
$
$
$
51,562
0.853
39,510
0.654
72,864
99.0%
60,428
4.9
43.6%
3.8%
3.1x
8.2x
13.31
$
$
$
$
Year Ended
Dec. 31
2018
57
92,454
2,790
67,816
44,413
0.893
37,803
0.761
55,505
91.1%
49,7077
4.7
46.5%
3.9%
3.5x
7.6x
12.26
F E L L O W U N I T H O L D E R S
In our first full ear as an internally managed company,
we continued to expand and diversify the REIT’s platform through
accretive acquisitions and third‑party capital management.
Some of the REIT’s successes from 2019 include:
• Completed approximately $368.3 million in stabilized
acquisitions in key U.S. logistics markets, including
approximately $109.3 million in properties from the
REIT’s proprietary develepment pipeline;
• Expanded the REIT’s private capital pipeline and assets
under management through new development and
value‑add investments, providing future off‑market
acquisition opportunities for the REIT and generating
fee income;
• Raised approximately $232.8 million in gross
proceeds from two equity offerings and inc eased
borrowing capacity on the REIT’s credit facility
by $275 million; and
• Achieved solid same properties NOI (“SPNOI”) and
re‑leasing spreads through proactive leasing activity,
maintaining high occupancy levels and strategically
managing our portfolio capital requirements.
P R O V E N G R O W T H S T R A T E G I E S
Maintaining
consistently
high occupancy
Contractual
rent increases
Off-market
investment
pipeline
Fee revenue
from private
capital
Rolling rents
to market
at renewal
Internal
growth
WPT
management
platform
External
growth
Extensive
industry
relationships
Property
expansion and
development
Strategic
financing
Entry into
new U.S.
markets
Partnerships
with premier
global
investors
1
I N V E S T M E N T P R O P E R T Y
R E V E N U E S
Investment property revenues increased 24.5% in 2019
to $115.1 million (up from $92.5 million in 2018) due
to contributions from property acquisitions and increased
base rents.
N E T O P E R A T I N G I N C O M E
Net operating income (“NOI”) increased 24.2% to
$84.2 million (up from $67.8 million in 2018), driven
by property acquisitions and 3.7% growth in same
properties NOI.
F U N D S F R O M
O P E R A T I O N S
Funds from Operations (“FFO”) increased to
$51.6 million, a 16.1% increase.
A D J U S T E D F U N D S
F R O M O P E R A T I O N S
Adjusted funds from operations (“AFFO”) increased to
$39.5 million, a 4.5% increase from 2018.
B O O K V A L U E P E R U N I T
Book value per unit increased for the year 8.6% to
$13.31, compared to $12.26 in 2018.
2
$115.1 million
$84.2 million
16.1%
increase
$39.5 million
8.6%
increase
67,423
71,110
92,454
81,786
115,129
2015
2016
2017
2018
2019
50,602
52,660
67,816
59,812
84,238
2015
2016
2017
2018
2019
40,758
44,413
51,562
30,871
34,221
2015
2016
2017
2018
2019
37,802
39,510
34,465
26,637
29,346
2015
2016
2017
2018
2019
11.12
11.14
11.89
12.26
13.31
2015
2016
2017
2018
2019
3
E X P A N D I N G U . S . F O O T P R I N T
Seattle
Portland
Reno
San Francisco
Salt Lake City
Los Angeles
Phoenix
Current markets
Target markets
* Light blue areas represent 1,000 people
Source: US Census Bureau
Minneapolis
Denver
Kansas City
Milwaukee
Chicago
Indianapolis
St. Louis
Detroit
Eastern PA
Columbus
New Jersey
Cincinnati
Louisville
Nashville
Charlotte
Memphis
Atlanta
Dallas
Houston
Jacksonville
Central Florida
South Florida
P O R T F O L I O
M A R K E T S
( 0 0 0 S Q . F T . )
Atlanta
Memphis
Indianapolis
Minneapolis
Columbus
Chicago
St. Louis
Louisville
Milwaukee
Cincinnati
Jacksonville
Lehigh Valley
Kansas City
Portland
Houston
Los Angeles
Detroit
Reno
3,696
3,244
2,068
1,895
1,718
1,547
1,263
1,160
1,075
1,070
1,017
936
621
493
411
312
248
98
Total
22,871
T R A C K R E C O R D O F G R O W I N G
U N I T H O L D E R V A L U E
( I P O T O D E C E M B E R 3 1 , 2 0 1 9 )
2 0 1 9 N E T O P E R A T I N G I N C O M E
( N O I ) B Y S T A T E ( $ T H O U S A N D S )
$275
$225
$175
$125
$75
April 2013
December 2019
WIR (US$)
S&P/TSX Composite Index (CAD$)
WIR (CAD$)
S&P/TSX Capped REIT Index (CAD$)
4
CAD $278.2
US $213.6
CAD $163.9
CAD $160.8
O t h er
M
N
A
C
R
O
FL
PA
I
W
O
H
I
N
KY
T N
G
A
IL
State
Minnesota
Georgia
Illinois
Tennessee
Kentucky
Indiana
Ohio
Wisconsin
Pennsylvania
Florida
Oregon
California
Kansas
Mississippi
Michigan
Nevada
Number of
Investment
Properties
2019
Annual
NOI
($ 000)
Percent
of NOI
No. of
Tenants
Owned
GLA
10
9
9
7
5
4
5
8
1
6
1
2
3
1
1
1
$ 12,905
10,757
9,652
7,410
8,088
5,879
5,899
3,860
4,575
3,362
2,845
1,790
2,755
517
1,313
464
14.8%
13.3%
11.5%
9.7%
8.7%
6.7%
6.4%
5.7%
4.6%
4.1%
3.1%
2.6%
2.5%
1.8%
1.5%
0.5%
48
15
13
11
5
7
7
17
2
10
2
2
4
2
2
1
8.3%
16.2%
12.3%
12.4%
9.3%
9.0%
7.9%
4.7%
4.1%
4.4%
2.2%
1.4%
2.7%
1.8%
1.5%
0.4%
74
$ 84,237
100.0%
154
100%
Overhead view of 201 Richard Knock Highway, Walton (Cincinnati), Kentucky.
Strong Operating Performance
2019 was another successful year for the REIT with
consistently strong financial and operating performance
driven by continued strategic acquisitions and organic
growth from leasing activities.
• Investment property revenues increased 24.5% in 2019
to $115.1 million (up from $92.5 million in 2018)
due to contributions from property acquisitions and
increased base rents. Net operating income (“NOI”)
increased 24.2% to $84.2 million (up from $67.8
million in 2018), driven by property acquisitions and
3.7% growth in SPNOI.
• Funds from Operations (“FFO”) increased to
$51.6 million, a 16.1% increase, and adjusted funds
from operations (“AFFO”) increased to $39.5 million,
a 4.5% increase from 2018.
• Balance sheet and liquidity position remained strong at
year end with a debt‑to‑gross book value ratio of 42.3%
and interest and fixed charge coverage ratios of 3.1
and 2.7 times, respectively. Weighted average effecti e
interest rate on outstanding debt was 3.8%, with a
weighted average maturity of 3.2 years.
3.7%
growth in
SPNOI
SPNOI increased 3.7% due to favorable re‑leasing spreads,
contractual rent increases and maintaining high occupancy.
Tenant Retention, Lease Expiration
and Renewal Highlights
The REIT successfully enewed and re‑leased 95.6%
of the approximately 4,033,000 square feet that was
scheduled to expire in 2019. Renewals commencing in
2019 had a weighted average cash re‑leasing spread and
straight‑line rent re‑leasing spread of 2.6% and 9.6%,
respectively. The REIT also enewed approximately
1,598,000 square feet of leases with commencement dates
after December 31, 2019 with a weighted average cash
re‑leasing spread and straight‑line rent re‑leasing spread of
10.5% and 15.7%, respectively. At December 31, 2019,
the REIT’s occupancy was 99.0% and the REIT’s
weighted average remaining lease term was 4.9 years.
Sustainability
In 2019, we continued to strive to enhance financial
and operational performance through responsible
investment policies and sustainability initiatives.
Responsible investment and sustainability benefit all our
stakeholders – from employees and investors to tenants
and local communities. We also believe sustainability
directly enhances the competitiveness of our business by
reducing operating costs for our tenants and attracting
forward‑thinking and sustainably‑minded businesses to
our buildings.
Sustainability also influences our corporate and human
resources practices. During 2019, we re‑located our
corporation headquarters to a LEED‑certified building,
offe ed employee incentives for alternative, lower emission
transportation, and added LEED‑certified p ofessionals
on our staff to facilitate inc eased sustainability in
our operational and investment initiatives. We also
5
Acquisitions included 18
distribution properties totaling
4.2 million square feet and three
land parcels, expanding the
REIT’s scale, diversification and
development pipeline.
I N V E S T M E N T P R O P E R T I E S
G R O W T H S I N C E I P O
2,000
1,500
1,000
)
s
n
o
i
l
l
i
m
$
(
e
u
l
a
V
r
i
a
F
500
436
1,118
1,039
806
743
633
24,000
1,573
18,000
)
s
d
n
a
s
u
o
h
t
(
a
e
r
A
e
l
b
a
s
a
e
L
s
s
o
r
G
12,000
6,000
0
0
IPO
2014
2015
2016
2017
2018
2019
Fair Value
Gross Leasable Area
incorporated sustainable construction techniques into
the development and construction of new buildings,
including: roof designs to accommodate future solar
arrays; LED lighting with motion sensors to minimize
energy consumption; cool reflecti e roofing materials to
lower indoor air temperature, repel sunlight and reduce
the heat island effect; Ductilcrete floor slab systems, which
significantly educe silica exposure and carbon dioxide
emissions; recycled and reclaimed water systems for using
greywater in irrigation and landscaping applications;
and skylights to reduce energy consumption, improve
indoor environment and boost employee well‑being. We
also actively pursued development and re‑development
of “brownfiel ” sites, including our project in Bayonne,
New Jersey (pictured below), which can spur economic
development and allow us to remediate and repurpose
environmentally contaminated sites.
Additional Credit Facility Capacity
During 2019, the REIT amended and restated its
unsecured credit facility (the “Credit Facility”),
increasing availability to $575 million, comprised
of a $245 million unsecured revolving facility and
$330 million in delayed draw term loans.
At December 31, 2019, the REIT had drawn
$375 million on its unsecured revolving facility,
with total remaining capacity of $200 million.
Remaining availability under the credit facility as
of year‑end was approximately $106.8 million.
Properties located at 99 and 105 Avenue A, Bayonne, New Jersey.
6
$368.3
million in
acquisitions
including $109.3 million in assets
acquired off‑market through the REIT’s
proprietary development pipeline.
Building at 5201 South International Drive, Milwaukee, Wisconsin.
Portfolio Growth
In 2019, the REIT continued its strategic growth with
approximately $368.3 million in acquisitions, including
$109.3 million in assets acquired on an off‑market basis
through the REIT’s proprietary development pipeline.
Acquisitions included 18 distribution properties totaling
4.2 million square feet and three land parcels. These
2019 acquisitions also expanded the REIT’s scale in the
Chicago, Milwaukee and Minneapolis markets and added
properties in three new markets for the REIT, including
the high‑barrier coastal markets of Los Angeles and Miami.
Private Capital Pipeline
In the REIT’s first full ear operating a private capital
platform, the REIT generated approximately $3.6 million
from third‑party asset and property management fees
related to managing, developing and operating industrial
value‑add and development investments on behalf of
private capital investors. The REIT also e ercised its right
of first oppo tunity to acquire four investment properties
from its private capital pipeline on an off‑market basis.
Th oughout 2019, the REIT continued to source value‑
add and development opportunities with a number of
projects at various stages of completion at year‑end.
Generating Unitholder Value
In 2019, the U.S. industrial real estate market maintained
positive momentum driven by e‑commerce growth,
ground‑up development activity in most markets, falling
capitalization rates for Class A distribution properties,
strong tenant demand, and increased investor interest
in the sector.
Looking ahead to 2020, we remain focused on building
long‑term unitholder value by delivering strong
operating results, expanding our presence in strategic and
high‑growth logistics markets, growing our proprietary
acquisition and development pipelines, and driving
revenue growth through increased private capital assets
under management.
On behalf of the entire WPT team, I would like to thank
you for your continued support and investment in our
company. We look forward to reporting back on our
progress throughout 2020.
Scott Frederiksen
Chief Executive Offic
7
B O A R D O F T R U S T E E S
Scott T. Frederiksen, 54, Eden Prairie, Minnesota, USA – Chief Executive Officer
and Trustee. Mr. Frederiksen is the CEO of the REIT. Mr. Frederiksen served in
many distinguished roles during his 30‑year tenure with Welsh and its predecessor
entities. Starting as an industrial broker in 1987, he was named Senior Vice
President in 1996 and became a Principal in 2006. In his current role as CEO of
the REIT, Mr. Frederiksen is responsible for strategic oversight of the asset‑based
growth of the REIT, leading a team of dedicated professionals in the areas of
financial analysis, acquisitions, due diligence, legal, in estor relations, financing,
asset management and dispositions. Mr. Frederiksen serves as a frequent speaker
and panellist for regional and national industry organizations in the U.S. and
Canada. Mr. Frederiksen holds a Bachelor of Science degree from St. Cloud State
University, where he graduated summa cum laude. He is a Certified Comme cial
Investment Member, a member of the National Association of Real Estate
Investment Trusts and the Society of Industrial and Office
Real Estate Broker’s License in the State of Minnesota. Mr. Frederiksen also holds
his Series 24, 7 and 63 securities licenses.
ealtors, and holds a
Milo D. Arkema, 69, Minneapolis, Minnesota, USA – Independent Trustee.
Mr. Arkema is an independent consultant with Chima Consulting, LLC. Prior to
joining Chima Consulting, LLC in 2013, Mr. Arkema was a director and
employee of Baker Tilly Virchow Krause, LLP, an accounting and advisory firm,
from 2007 to 2012. Prior to 2007, Mr. Arkema was a partner at Baker Tilly
Virchow Krause LLP, and served as a member of its executive committee for fi e
years. Mr. Arkema’s principal focus has been advising and consulting with
entrepreneurs, shareholders, family businesses, and boards regarding strategy,
capital formation, management issues, executive compensation and general
business issues. Currently, he also leads and manages financial due diligence
engagements for private equity firms and strategic bu ers. Mr. Arkema is a former
member of the board of Data Sciences International Inc., and the former
Chairman of the board of directors of CaringBridge, a non‑profit organization
that provides free websites to connect family and friends during serious health
events. He is a member of the American Institute of Certified ublic Accountants
and the Minnesota Society of Certified ublic Accountants. Mr. Arkema holds a
Bachelor of Arts in Accounting from Dordt University.
Sarah B. Kavanagh, 63, Toronto, Ontario, Canada – Independent Trustee.
Ms. Kavanagh is a corporate director. She is currently a Director, Chair of the
Environmental, Health, Safety and Sustainability Committee, member of the
Nominating and Governance Committee and former Chair of the Audit
Committee of Hudbay Minerals Inc. (TSX: HBM; NYSE: HBM) and a Director
and member of the Audit and Risk Committee and Nominating and Corporate
Governance Committee of Bausch Health Companies, Inc. (TSX: BHC; NYSE:
BHC). In addition to her public company directorships, she is a Director and
Chair of the Audit Committee at the AST and AST (Canada), a Director, Vice
Chair and Chair of the Audit and Investment Committee of Sustainable
Development Technology Canada, and a former director of Canadian Tire Bank.
From June 2011 through May 2016, she served as a Commissioner, and as Chair
of the Audit Committee, at the Ontario Securities Commission. Between 1999
and 2010, Ms. Kavanagh served in various senior investment banking roles at
Scotia Capital Inc., including Vice‑Chair and Co‑Head of Diversified ndustries
Group, Head of Equity Capital Markets, Head of Investment Banking. Prior to
Scotia Capital, she held several senior financial positions with operating
companies. She started her career as an investment banker with a bulge bracket
firm in ew York. She completed the Directors Education Program at the
Institute of Corporate Directors in May 2011 and is an ICD.D. She sits on the
Ontario Chapter Board of the ICD. Ms. Kavanagh graduated from Harvard
Business School with a Masters of Business Administration and received a
Bachelor of Arts degree in Economics from Williams College.
Louie DiNunzio, 52, Toronto, Ontario, Canada – Independent Trustee.
Mr. DiNunzio has more than 20 years of experience in the real estate sector in
North America and Europe. In his current role as Senior Vice President,
Investments at Cadillac Fairview, he is responsible for investments and
divestments with a focus on the Canadian and US markets. Earlier in his tenure
at Cadillac Fairview, he was responsible for building and leading the organization’s
Strategic Insight group. Prior to joining Cadillac Fairview in 2003, he held
progressively senior positions within the investment banking industry at both
BMO Nesbitt Burns Inc. and Merrill Lynch Canada. Mr. DiNunzio is a
Chartered Accountant and holds a Masters in Business Administration from The
Schulich School of Business at York University and a Bachelors of Commerce
from the University of Toronto. He has also completed the ICD‑Rotman
Directors Education Program.
8
Stuart H. B. Smith, 74, Toronto, Ontario, Canada – Independent Trustee.
Mr. Smith, from 2016 to 2019, served as the Chairman of EPIC Investment
Services Inc. (“EPIC”), a company formed following an amalgamation of three
companies and an equity investment by a major Canadian institution. As
Chairman, he was responsible for EPIC’s overall vision, leadership and growth
strategy. From 2005 to 2016, he served as the Chairman of EPIC Realty
Partners Inc., a real estate advisory company serving the Canadian marketplace,
which he formed with a partner. Prior to forming EPIC Realty Partners, Inc.,
Mr. Smith served as the President and CEO of Oxford Properties Group, one of
the Canada’s largest property owners and managers, where he held progressively
senior positions beginning in 1989 and led Oxford’s transition following the
acquisition by Ontario Municipal Employees Retirement System (OMERS). Prior
to joining Oxford, Mr. Smith was President of Shipp Corporation Limited, a real
estate development and management company involved in office, etail and
residential properties. He served as a Director of Look Communications Inc.
from 2003 to 2010 and Yellow Media Limited from 2004 to 2011. He served as a
Director of Altus Group Limited from 2005 to 2013 and also served as the
Executive Chairman and CEO of Altus Group Limited during the period of
2011‑2013. He was previously on the Board of Directors of Knowledge First
Financial (formerly The nternational Scholarship Foundation) and Yellow Pages
Group. Mr. Smith is a graduate of University of Western Ontario in Economics.
As a Chartered Accountant, he has been involved in a number of accounting and
rban Land Institute, a member of
professional organizations, more specifically
the Chief Executives’ Organization and a member of The Canadian nstitute of
Chartered Accountants’ Innovation Council. In 2017, Mr. Smith was awarded a
Fellowship in the Chartered Professional Accountants and in 2005, he was
awarded the NAIOP‑REX Award for Community Service.
Pamela J. Spackman, 68, Toronto, Ontario, Canada – Independent Trustee.
Ms. Spackman, a corporate director, currently serves on the board of Timbercreek
Financial Corp., a TSX‑listed non‑bank lender whose focus is providing shorter
duration structured financing on comme cial real estate. Ms. Spackman is also a
member of the Advisory Committee for Crestpoint Real Estate Investments Ltd.,
responsible for the valuation of the limited partnership units. Crestpoint is a part
of the Connor, Clark and Lunn group of companies, and owns a growing
portfolio of approximately $4.0 billion of commercial properties on behalf of its
limited partnership investors. Ms. Spackman also serves as a member of the
Independent Investment Committee of the Bentall Kennedy High Yield
Canadian Property Fund (a fund investing in high yield mortgage debt and real
estate equity in Canada). Ms. Spackman previously served on the board of Slate
Office REIT om December 2012 to May 2019, as Chair of the Timbercreek
Mortgage Advisory Committee from July 2008 until June 2016 and on the board
of Gazit America Inc. from July 2009 until August 2012 (the date of its
privatization). Ms. Spackman served as President and CEO of Column Canada
Financial Corporation, a wholly owned subsidiary of Credit Suisse Group AG,
from July 2000 to July 2008. Prior to that, Ms. Spackman served as Vice‑
President Mortgage Investments, at the Ministry of Finance, Province of British
Columbia and an Investment Manager for the Workers’ Compensation Board
Investment Fund in Ontario. Ms. Spackman acquired the ICD.D designation in
2010 following completion of the Institute of Corporate Directors program at
University of Toronto.
Robert T. Wolf, 60, Toronto, Ontario, Canada – Independent Trustee. Mr. Wolf is a
corporate director, active investor and financial management p ofessional. Since
2008, through RTW Capital Corporation, he has been making active investments
in and providing advisory services to North American businesses in a variety of
sectors. Mr. Wolf is currently a trustee/director of (i) Alignvest Student Housing
REIT (Private REIT); and (ii) Crosswinds Holdings Inc., serving as Chair of the
Audit Committee. Mr. Wolf previously was also a director of (i) InnVest REIT
(TSX:INN.UN), serving as Chair of the Investment Committee and member of
the Audit Committee, Nominating and Governance Committee and Capital
Structure Task Force; (ii) OneREIT (TSX:ONR.UN), serving as Chair of the
Investment Committee and member of the Governance and Compensation
Committee; (iii) C.A. Bancorp Canadian Realty Finance Corp. (TSX:RF.A),
(iv) Monarch National Insurance Company, serving as Chair of the Audit
Committee, and (v) Sarment Holding Limited (TSXV:SAIS). Prior to 2008,
Mr. Wolf was the Chief Financial Officer of RioCan REIT TSX: REI.UN) from
its inception in 1994. In this role, he led all effo ts to successfully raise over
C$3 billion of equity and debt capital. In addition to being responsible for all
financial eporting and compliance functions, he also played a key role in number
of significant transactions, including corporate acquisitions, joint entures and
debt restructurings. Prior to 1994, Mr. Wolf held a variety of positions in both
public accounting and private/public real estate companies. He obtained his
Chartered Accountancy designation in 1984 and holds a Masters of Business
Administration from the Schulich School of Business at York University (1982)
and a Bachelor of Commerce from McGill University (1981).
WPT INDUSTRIAL REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE YEAR ENDED DECEMBER 31, 2019
March 11, 2020
9
CONTENTS
PART I
BASIS OF PRESENTATION
NON-IFRS MEASURES
FORWARD LOOKING STATEMENTS
OVERVIEW
OBJECTIVES
STRATEGIC FOCUS AND OUTLOOK
ASSETS
SELECTED ANNUAL INFORMATION
FINANCIAL AND OPERATIONAL HIGHLIGHTS
PART II
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
EQUITY
PART III
DISCLOSURE AND INTERNAL CONTROLS
PART IV
RISK FACTORS
PART V
RELATED PARTY TRANSACTIONS
PART VI
SIGNIFICANT ACCOUNTING POLICIES
10
PART I
BASIS OF PRESENTATION
The following Management’s Discussion and Analysis (“MD&A”) is prepared as at March 11, 2020 and outlines WPT
Industrial Real Estate Investment Trust’s (the “REIT”) operating strategies, risk profile considerations, business outlook and
analysis of its financial performance and financial condition for the three months and years ended December 31, 2019 and
2018. This MD&A should be read in conjunction with the REIT’s audited consolidated financial statements and
accompanying notes for the years ended December 31, 2019 and 2018. These documents, as well as additional
information relating to the REIT (including the REIT’s most recently filed annual information form (the “Annual Information
Form”)) can be accessed on the REIT’s website at www.wptreit.com and under the REIT’s SEDAR profile at www.sedar.com.
This MD&A is based on financial statements prepared by management in accordance with International Financial
Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”), unless otherwise
stated, amounts are listed in thousands of United States dollars, unless otherwise stated.
NON-IFRS MEASURES
Certain terms used in this MD&A such as funds from operations (“FFO”), adjusted funds from operations (“AFFO”), adjusted
cash flows from operations (“ACFO”), ACFO payout ratio, net operating income (“NOI”), same properties NOI (“Same
properties NOI”), book value per unit, proportionate share basis, cash re-leasing spread, straight-line rent re-leasing
spread, Adjusted EBITDA (as defined herein), debt to Adjusted EBITDA, debt-to-gross book value, interest coverage ratio,
fixed charge coverage ratio, capitalization rate and any related per unit amounts used by management to measure,
compare and explain the operating results and financial performance of the REIT are not recognized terms under IFRS, and
therefore should not be construed as alternatives to net income and comprehensive income or cash flows from operating
activities calculated in accordance with IFRS. Management believes that these terms are relevant measures in comparing
the REIT’s performance to industry data, the REIT’s ability to earn and distribute cash returns to holders of the REIT’s
trust units (“REIT Units”) and Class B units (Collectively, the “Units”), and the REIT’s ability to meet its ongoing obligations.
These terms are defined below and, where applicable, are reconciled to the most directly comparable measure specified
in the consolidated financial statements of the REIT for the three months and years ended December 31, 2019 and 2018,
in Part II. Such terms do not have a standardized meaning prescribed by IFRS and may not be comparable to similarly
titled measures presented by other issuers.
FFO is defined as net income, in accordance with IFRS, (i) plus or minus fair value adjustment to investment properties; (ii)
plus or minus gains or losses from sales of investment properties; (iii) plus or minus other fair value adjustments; (iv) plus
amortization of tenant incentives or other intangibles arising from business combinations; (v) plus transaction costs
expensed as a result of the purchase of an entity being accounted for as a business combination; (vi) plus distributions on
redeemable or exchangeable units treated as interest expense; (vii) plus or minus any negative goodwill or goodwill
impairment; (viii) plus deferred income tax expense, after adjustments for equity accounted entities and joint ventures
calculated to reflect FFO on the same basis as consolidated investment properties; (ix) plus or minus adjustments for
property taxes accounted for under International Financial Reporting Interpretations Committee (“IFRIC”) 21; (x) plus
expenses from Right of Use (“ROU”) assets, net of lease principal payments on the ROU asset for those leases; and (xi) plus
adjustments from equity-accounted joint ventures. Except as noted below, FFO has been prepared consistently with the
definition presented in the white paper on funds from operations prepared by the Real Property Association of Canada
(“REALPAC”) issued in February 2019 and is intended to be used as a sustainable, economic earnings metric. However,
from time to time the REIT may enter into transactions that materially impact the calculation of FFO and are adjusted as
determined by the board of trustees of the REIT (the “Board” or the “Board of Trustees”) in their sole discretion. The REIT
considers FFO to be a useful measure of operating performance and adjusts for items included in net income (or net loss)
that do not arise from operating activities or do not necessarily provide an accurate depiction of the REIT’s past, current
or recurring performance.
AFFO is defined as FFO subject to certain adjustments, including: (i) any differences resulting from recognizing investment
property rental revenues on a straight-line basis; and (ii) minus a reserve for normalized maintenance capital expenditures,
tenant inducements and leasing commissions, as determined by the REIT. AFFO has been prepared consistently with the
definition presented in the white paper on adjusted funds from operations prepared by REALPAC issued on February 2019
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for all periods presented. However, from time to time the REIT may enter into transactions that materially impact the
calculation of AFFO and are adjusted as determined by the Board of Trustees in their sole discretion. The REIT considers
AFFO to be a useful measure of operating performance and adjusts for items included in net income (or net loss) that do
not arise from operating activities or do not necessarily provide an accurate depiction of the REIT’s past, current or
recurring performance.
ACFO is defined as cash flows from operations in accordance with IFRS, (i) plus or minus the change in non-cash working
capital, which includes only items that are not indicative of sustainable cash available for distributions; (ii) minus interest
expense included in cash flow from financing; (iii) minus a reserve for normalized maintenance capital expenditures, tenant
inducements and leasing commissions, as determined by the REIT; (iv) plus or minus transaction costs associated with an
acquisition or disposition of an investment property that was expensed during the period; (v) plus or minus the non-cash
amortization of the deferred financing costs and the debt premium (discount) mark-to-market adjustments; (vi) plus or
minus the difference in recognized interest expense in accordance with IFRS to interest paid due to timing differences; (vii)
plus expenses from ROU assets, net of lease principal payments on the ROU asset for those leases; and (viii) plus
adjustments from equity-accounted joint ventures. Management believes ACFO is intended to be used as a sustainable,
economic cash flow metric. Except as noted below, ACFO has been prepared consistently with the definition presented in
the white paper on adjusted cash flows from operations prepared by REALPAC issued in February 2019 for all periods
presented. However, from time to time the REIT may enter into transactions that materially impact the calculation of ACFO
and are adjusted as determined by the Board of Trustees in their sole discretion. The REIT considers ACFO to be a useful
measure of operating performance as it adjusts for items included in operating cash flows that do not arise from operating
activities or do not necessarily provide an accurate depiction of the REIT’s past, current or recurring performance.
In Q3 2018, the REIT incurred transaction costs related to the internalization of management on July 31, 2018. All expenses
associated with this transaction were added back to FFO, AFFO and ACFO, which is not consistent with the REALPAC white
papers issued in February 2019. These transaction costs are not indicative of the REIT’s normal operations nor a useful
measure of recurring economic earnings or operating cash flow and are therefore appropriately excluded from each
performance measure.
NOI is used by industry analysts, investors and management to measure operating performance of real estate investment
trusts. NOI represents investment properties revenue less investment properties operating expenses less fair value
adjustment to investment properties in respect of IFRIC 21. Accordingly, NOI excludes certain expenses included in the
determination of net income and comprehensive income, such as interest expense.
Same properties NOI is used by management to evaluate period-over-period performance of investment properties fully-
owned by the REIT. Same properties NOI represents NOI from investment properties having consistent leasable areas for
consistent periods and excludes non-stabilized properties under development, amortization of straight-line rent,
amortization of lease incentives, tenant incentives – free rent, and other rental income. Same properties NOI has been
reconciled to NOI for the consolidated portfolio under the headings “Same properties NOI” and “Same properties NOI prior
quarter comparison”.
“ACFO payout ratio” is defined as distributions of the REIT (including distributions on Class B limited partnership units
(“Class B Units”) and deferred limited partnership units (“DPUs”) of WPT Industrial, LP (the “Partnership”), divided by
ACFO.
“Adjusted EBITDA” is defined as earnings before fair value adjustments to investment properties, derivative instruments,
and deferred compensation, interest (inclusive of finance costs), taxes, depreciation and amortization.
“book value per Unit” is defined as the total equity (including Class B Units) divided by the number of REIT Units and Class
B Units.
“capitalization rate” is defined as the overall capitalization rate obtained by dividing the projected NOI of an investment
property for the first twelve months of ownership by the purchase price.
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“cash re-leasing spread” is defined as the difference between the weighted average renewal rate to the weighted average
expiring rate on a per square foot basis over the weighted average expiring rate on a per square foot basis.
“Debt to Adjusted EBITDA” is defined as the average rolling twelve-month consolidated debt balance (excluding mark-to-
market adjustments and financing costs) divided by a rolling twelve-month Adjusted EBITDA.
“Debt-to-gross book value” is calculated by dividing total principal amounts outstanding under mortgages payable and the
Credit Facility (as defined herein), by the total carrying value of investment properties and investment properties under
development.
“Fixed charge coverage ratio” is defined as year-to-date Adjusted EBITDA divided by the sum of the REIT’s year-to-date
interest on mortgages payable, derivative instrument, senior secured revolving credit facility (“Secured Revolving Facility”)
and the Credit Facility, and scheduled principal repayments of mortgages payable.
“Interest coverage ratio” is defined as year-to-date Adjusted EBITDA divided by the sum of the REIT’s year-to-date interest
on mortgages payable, derivative instrument, Secured Revolving Facility and the Credit Facility.
“Proportionate share basis” is defined as the REIT’s proportionate interest in the financial position and results of
operations of its portfolio, including the difference in accounting for the REIT’s share of equity accounted joint ventures
using proportionate consolidation versus equity accounting.
“straight-line rent re-leasing spread” is defined as the difference between the weighted average total cash rent to be
received over the term of the new and expiring lease on a per square foot basis over the weighted average total cash rent
received over the term of the expiring lease on a per square foot basis.
FORWARD LOOKING STATEMENTS
This MD&A contains “forward-looking information” as defined under Canadian securities laws (collectively, “forward-
looking statements”) which reflect management’s expectations regarding objectives, plans, goals, strategies, future
growth, results of operations, performance, business prospects and opportunities of the REIT. The words “plans”,
“expects”, “scheduled”, “estimates”, “intends”, “anticipates”, “projects”, “believes”, or variations of such words and
phrases (including negative variations) or statements to the effect that certain actions, events or results “may”, “will”,
“could”, “would”, “might”, “be achieved”, or “continue” and similar expressions identify forward-looking statements.
Some of the specific forward-looking statements in this MD&A include, but are not limited to statements regarding the
objectives and strategic focus of the REIT; the impacts of the internalization of management; future distributions by the
REIT; predictability and certainty of cash flow; investment opportunities in the U.S. industrial real estate market; U.S.
vacancy rate trends; tenant demand in the distribution sub-segment; including demand for state-of-the-art distribution
and logistics space; development in distribution markets; vacancy rates in the state-of-the-art distribution market and
absorption of vacancy in distribution investment properties in major distribution markets in the U.S. over the past years;
re-tenanting costs; key trends and continued and increased demand within the industrial real estate market; the effect of
the experience of the asset and property manager of the REIT; in the U.S. industrial real estate market on tenant retention
and future acquisitions by the REIT; the expected accretion to the REIT’s FFO per Unit and AFFO per Unit from completed
acquisitions; the sources of organic growth; including initiatives aimed at optimizing the performance; value and long-term
cash flow of the REIT’s investment property portfolio; the REIT’s external growth strategy; including diversification; the
REIT’s cost of capital; borrowing costs and opportunities to increase the cash flow and value of the existing portfolio of
investment properties through initiatives designed to enhance operations; future maintenance expenditures; future
project costs related to the development of investment properties; expected use of proceeds from the February 2020
Offering (as defined herein); the expected closing date for the PIRET Portfolio Acquisition (as defined herein); the
attractiveness of newer investment properties to prospective tenants; the quality and future valuations of the REIT’s
portfolio of investment properties; lease terms; termination and future maintenance and leasing expenditures; the REIT’s
ability to meet all of its ongoing obligations with current cash generated from operations; draws on its Credit Facility and
new equity and debt issuances; the fair values of the REIT’s investment properties and the REIT’s debt strategy;
including the REIT’s intention to maintain staggered mortgages payable maturities.
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Forward-looking statements are necessarily based on a number of estimates, beliefs and assumptions that are inherently
subject to significant business, economic and competitive uncertainties and contingencies which could cause actual results
to differ materially from those that are disclosed in such forward-looking statements. While considered reasonable by
management of the REIT as at the date of this MD&A, any of these estimates, beliefs or assumptions could prove to be
inaccurate, and as a result, the forward-looking statements based on those estimates, beliefs or assumptions could be
incorrect. Such estimates, beliefs and assumptions include the various estimates, beliefs and assumptions set forth herein,
and include but are not limited to, the desirability of investment properties in the distribution subsector of the U.S.
industrial real estate market to investors, including the industrial investment properties in the REIT’s portfolio; key trends
and continued and increased demand within the industrial investment property real estate market; the effect of the
external manager’s experience in the U.S. industrial real estate market on tenant retention and future acquisitions by the
REIT; the future growth potential of the REIT and its properties; anticipated amounts of expenses; results of operations;
future prospects and opportunities; the demographic and industry trends remaining unchanged; no change in
legislative or regulatory matters; future levels of indebtedness; the tax laws in both Canada and the U.S. as currently in
effect remaining unchanged; current levels of volatility in the demand for space in the distribution sub-segment remaining
unchanged; the continued availability of capital; the current economic conditions remaining unchanged and increased
tenant demand for industrial investment properties and declining vacancy rates in the markets in which the REIT’s
investment properties are located.
When relying on forward-looking statements to make decisions, the REIT cautions readers not to place undue reliance on
these statements, as forward-looking statements involve significant risks and uncertainties and should not be read as
guarantees of future performance or results, and will not necessarily be accurate indications of whether or not the
times at or by which such performance or results will be achieved, if achieved at all. A number of factors could cause
actual results to differ materially from the results discussed in the forward-looking statements, including but not limited
to those factors discussed or referenced under the “Risk Factors” section of this MD&A.
Certain statements included in this MD&A may be considered a “financial outlook” for purposes of applicable Canadian
securities laws, and as such, the financial outlook may not be appropriate for purposes other than to understand
management’s current expectations and plans relating to the future, as disclosed in this MD&A. These forward-looking
statements have been approved by management to be made as at the date of this MD&A. Except as expressly required
by applicable law, the REIT assumes no obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise. All forward-looking statements in this MD&A are qualified by
these cautionary statements.
OVERVIEW
The REIT is an unincorporated, open-ended real estate investment trust established pursuant to a declaration of trust
dated March 4, 2013 under the laws of the Province of Ontario, as amended and restated on April 26, 2013 (the
“Declaration of Trust”). A copy of the Declaration of Trust is available on the REIT’s website at www.wptreit.com and on
the SEDAR website at www.sedar.com. The REIT’s Units are listed and publicly traded in Canada on the Toronto Stock
Exchange (“TSX”), in U.S. and Canadian dollars, under the symbols “WIR.U” and “WIR.UN”, and in the U.S., in U.S. dollars,
on the OTCQX marketplace (“OTCQX”) under the symbol “WPTIF”. As at December 31, 2019, there were 64,376,838 REIT
Units outstanding.
The REIT acquires, develops, manages, and owns industrial investment properties located in the U.S., with a particular
focus on warehouse and distribution properties. As at December 31, 2019, the REIT owned a portfolio of investment
properties across 18 states throughout the U.S. consisting of 22,870,482 square feet of gross leasable area (‘‘GLA’’),
comprised of 73 industrial investment properties and one office investment property. The REIT also holds an equity
interest through a joint venture in two properties totaling 348,918 square feet.
Capitalization and other activity
On February 25, 2019, the REIT issued 10,000,000 REIT Units at a price of $13.50 per REIT Unit to a syndicate of underwriters
on a bought deal basis for net cash proceeds to the REIT of approximately $128,948 (the “February 2019 Offering”)
(inclusive of underwriters’ fees and issuance costs of $6,052). The REIT used a portion of the funds from the February 2019
Offering to repay the outstanding balance on the unsecured revolving credit facility of $105,000.
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On March 26, 2019, the REIT amended and restated the unsecured credit facility (the “Credit Facility”), thereby increasing
the availability from $300,000 to $450,000 (subject to requisite unencumbered assets). The increase was comprised of a
new delayed draw term loan (the “Term Loan II”) of $80,000 and an increase to the unsecured revolving credit facility of
$70,000. The amended and restated Credit Facility also extended the maturity date of the unsecured revolving facility to
March 26, 2023, with the option for two six-month extensions. The Term Loan II has a draw availability period of one year
and a maturity date of March 26, 2024. See Part II: Liquidity and Capital Resources for additional disclosures.
On September 26, 2019, the REIT amended and restated the Credit Facility, thereby increasing the availability from
$450,000 to $575,000 (subject to requisite unencumbered assets). The increase was comprised of a new delayed draw
term loan (the “Term Loan III”) of $125,000. Term Loan III has a draw availability period of one year and a maturity date of
January 15, 2025. The amended and restated Credit Facility also contains an accordion feature which increases the REIT’s
availability to $875,000 (subject to requisite unencumbered assets and lender approval). See Part II: Liquidity and Capital
Resources for additional disclosures.
On October 29, 2019, the REIT issued 6,160,000 REIT Units at a price of $13.80 per REIT Unit to a syndicate of underwriters
on a bought deal basis for net cash proceeds to the REIT of approximately $80,883 (the “October 2019 Offering”) (inclusive
of underwriters’ fees of approximately $4,125 and other issuance costs). The REIT used the funds from the October 2019
Offering to repay a portion of the outstanding balance on the Credit Facility. On November 27, 2019, the REIT issued an
additional 924,000 REIT Units at a price of $13.80 per REIT unit pursuant to the exercise in full of the over-allotment granted
by the REIT to the underwriters of the October 2019 Offering for net cash proceeds to the REIT of approximately $12,241
(inclusive of underwriters’ fees of $510).
For the years ended December 31, 2019 and 2018, the REIT incurred $1,503 and $0, respectively, in severance costs,
including the acceleration of Deferred Trust Units (“DTUs”) and DPUs. For more detail on the acceleration costs, see Part
II: Equity. The REIT did not incur any additional costs in 2019 related to this event.
Subsequent to December 31, 2019, the REIT completed the following:
On January 15, 2020, the REIT announced a Canadian dollar listing of the REIT Units on the TSX. The Canadian dollar
denominated REIT Units began trading on the TSX under the symbol “WIR.UN” on January 17, 2020.
On February 3, 2020, the REIT entered into an agreement to economically fix the interest for the $125,000 Term Loan III
using an interest rate swap at LIBOR of 1.31% plus an applicable margin based on leverage. The interest rate swap
eliminates the risk of fluctuating cash flow with the variable interest rate on Term Loan III.
On February 27, 2020, the REIT issued 16,272,500 subscription receipts of the REIT (including subscription receipts issued
pursuant to the exercise in full of the over-allotment option granted by the REIT to the underwriters of the offering) (the
“Subscription Receipts”) at a price of $14.35 per Subscription Receipt to a syndicate of underwriters on a bought deal basis
for gross cash proceeds to the REIT of approximately $233,510 (exclusive of underwriters’ fees of $9,340 and other issuance
costs) (the “February 2020 Public Offering”), and 2,578,000 Subscription Receipts at a price of $14.35 per Subscription
Receipt to Alberta Investment Management Corporation and its affiliates (“AIMCo”) for cash proceeds to the REIT of
approximately $37,000 (the “February 2020 Private Offering” and together with the February 2020 Public Offering, the
“February 2020 Offering”). Each Subscription Receipt entitles the holder thereof to receive one REIT Unit upon completion
of the Acquisition (as defined below) by the REIT without payment of any additional consideration or any further action on
the part of the holder of the Subscription Receipt. The REIT intends to use the net proceeds from the February 2020
Offering to pay a portion of the purchase price of the Acquisition. For additional information on the February 2020
Offering, see the REIT’s prospectus supplement filed on February 20, 2020.
On February 29, 2020, the REIT entered into a forward agreement to economically fix the interest for $470,000 of term
loans using an average interest rate swap at LIBOR of 0.93% plus an applicable margin based on leverage. The REIT is
expected to draw the $470 million from increased capacity on the three delayed draw term loans under the Credit Facility
and use the proceeds to partially fund the Acquisition.
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On March 2, 2020, the REIT repaid a mortgage payable bearing a fixed interest rate of 2.87% with a remaining principal
balance of $51,750, with funds from Term Loan III. The properties, previously encumbered by a mortgage payable, were
added to the unencumbered asset pool thereby increasing the availability on the Credit Facility.
The REIT declared monthly distributions throughout the year ended December 31, 2019 at its annualized distribution rate
of $0.76 per Unit, or $0.0633 per Unit on a monthly basis.
Acquisition, development, and disposition activity
On June 20, 2018, the REIT indirectly acquired from an arm’s length third party, a 100% occupied investment property
located in St. Paul, Minnesota totaling 124,800 square feet for a purchase price of $8,300 (exclusive of closing and
transaction costs), representing a capitalization rate (see “Non-IFRS Measures” section of this MD&A) of approximately
6.01%. The purchase price was satisfied with cash on hand and funds from the Secured Revolving Facility. The building has
the capability to expand to approximately 195,000 square feet.
On June 29, 2018, the REIT indirectly acquired from an arm’s length third party, a 100% occupied investment property
located in Rogers, Minnesota totaling 335,400 square feet for a purchase price of $20,425 (exclusive of closing and
transaction costs), representing a capitalization rate of approximately 6.09%. The purchase price was satisfied with cash
on hand and funds from the Credit Facility. The building has the capability to expand to approximately 476,000 square feet.
On September 28, 2018, the REIT indirectly acquired from AIMCo and a nominal interest (<1%) by certain members of the
REIT’s management team (who were also former principals of WPT Capital Advisors, LLC (“WPT Capital”)), a 100%
occupied, newly constructed investment property located in Louisville, Kentucky (the “Louisville Property”) totaling
224,000 square feet for a purchase price of $17,860 (exclusive of closing and transaction costs), representing a
capitalization rate of approximately 6.2%. The purchase price was satisfied with funds from the Credit Facility. See
additional disclosures in Part V: Related Party Transactions.
On November 6, 2018, the REIT indirectly acquired from a third party, a 100% occupied investment property located in
Franklin Park, Illinois totaling 536,800 square feet for a purchase price $26,800 (exclusive of closing and transaction costs),
representing a capitalization rate of approximately 7.5%. The purchase price was satisfied with funds from the Credit
Facility.
On February 28, 2019, the REIT invested $2,641 to fund the acquisition and development of an investment property
acquired by the private capital venture (the “Venture”) with Canada Pension Plan Investment Board (“CPPIB”) and AIMCo.
On April 5, 2019, the REIT indirectly acquired from an arm’s length third party, a 97.6% occupied portfolio of 13 investment
properties and three land parcels (the “Infill Logistics Portfolio”) located in five states across the U.S. totaling 2,222,098
square feet for a purchase price of $226,000 (exclusive of closing and transaction costs), representing a going-in
capitalization rate of 5.1% and a stabilized capitalization rate of approximately 5.3%. The purchase price was satisfied with
cash on hand and funds from the Credit Facility.
On May 23, 2019, the REIT sold the investment property located at 500 Sumner Way, New Century, Kansas to an arm’s
length third party purchaser for net cash proceeds of $4,174 (inclusive of closing and working capital adjustments).
On August 28, 2019, the REIT indirectly acquired four investment properties from the REIT’s private capital pipeline (the
“Private Capital Portfolio”) which were owned by certain affiliates of AIMCo and a nominal interest (<1%) by certain
members of the REIT’s management team (who were also former principals of WPT Capital). The properties were 100%
leased, modern, highly functional distribution properties totaling 1,492,688 square feet of GLA for a purchase price of
$109,300 (exclusive of credits, closing and transaction costs). The purchase price was satisfied with funds from the Credit
Facility. See additional disclosures in Part V: Related Party Transactions.
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On September 30, 2019, the REIT indirectly acquired from an arm’s length third party, a 100% occupied investment
property located in La Vergne (Nashville), Tennessee totaling 505,000 square feet for a purchase price of $33,000 (exclusive
of closing and transaction costs), representing a capitalization rate of 5.9%. The purchase price was satisfied with funds
from the Credit Facility and cash on hand.
Subsequent to December 31, 2019, the REIT completed the following:
On January 8, 2020, the REIT indirectly acquired from an arm’s length third party, a 100% occupied investment property
located in Portland, Oregon totaling 126,303 square feet for a purchase price of $16,200 (exclusive of closing and
transaction costs), representing a capitalization rate of 5.6%. The purchase price was satisfied with funds from the Credit
Facility and cash on hand.
On January 16, 2020, the REIT acquired from a third party, a land parcel located in Eagan, Minnesota, (the “Eagan
Development Property”) for a purchase price of $5,125 (exclusive of closing and transaction costs). The REIT intends to
contribute the Eagan Development Property into a joint venture with one or more institutional investors and develop a
distribution building totaling 206,384 square feet of GLA on the property.
On January 27, 2020, the REIT sold the investment property and land parcel located at 4350/4400 Baker Road, Minnetonka,
Minnesota to an arm’s length third party purchaser for net cash proceeds of approximately $29,400 (inclusive of closing
and working capital adjustments). Proceeds from the sale were used to partially repay outstanding debt on the Credit
Facility.
On February 5, 2020, the REIT acquired from a third party, a land parcel located in Katy (Houston), Texas, (the “Houston
Development Property”) for a purchase price of approximately $8,700 (exclusive of closing and transaction costs). The
REIT intends to contribute the Houston Development Property into a joint venture with one or more institutional investors
and develop an industrial building totaling 494,550 square feet of GLA on the property.
On February 18, 2020, the REIT waived the due diligence conditions in its favor under a membership purchase agreement
(the “Acquisition Agreement”) to indirectly acquire 26 investment properties and one parcel of land totaling 8,980,578
square feet of GLA for an aggregate purchase price of $730,000, subject to closing adjustments as provided in the
Acquisition Agreement (the “Acquisition”). The REIT intends to use the net proceeds of the February 2020 Offering
(including the net proceeds of the Over-Allotment Option) to fund a portion of the purchase price of the Acquisition and
related expenses in connection with the Acquisition. It is anticipated that the closing of the Acquisition will occur on or
about March 31, 2020.
OBJECTIVES
The REIT’s objectives are to:
● provide holders of REIT Units (“Unitholders”) with an opportunity to invest in a portfolio of institutional-quality
industrial properties in U.S. markets, with a particular focus on warehouse and distribution industrial real estate;
● provide Unitholders with predictable, sustainable and growing cash distributions on a tax-efficient basis (the
REIT pays its cash distributions in U.S. dollars);
● enhance the value of the REIT’s portfolio and maximize the long-term value of the REIT Units through the active
management of the REIT’s investment properties;
● significantly expand and diversify the asset base of the REIT through strategic acquisitions and development of
stabilized, high quality and well-located industrial properties located in U.S. markets; and
● increase Unitholder value and returns through leverage gained from management and performance fees generated
from third-party assets under management.
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STRATEGIC FOCUS AND OUTLOOK
The U.S. industrial real estate sector is comprised primarily of single-story properties located in or near major cities.
Industrial properties typically house activities such as warehousing, distribution, storage and a number of other similar
uses. Leases entered into with industrial tenants are frequently ‘‘triple-net’’, meaning that tenants are responsible for
paying the majority of the costs associated with operating a property, including real estate taxes, insurance, common area
maintenance and capital repairs. Management believes that tenant responsibility for such costs results in greater cash flow
predictability and stability for the REIT relative to other segments of the U.S. real estate market.
The REIT is focused on owning, developing, and operating a portfolio of institutional-quality properties located in U.S.
markets, primarily in the distribution sub-segment of the U.S. industrial market. Management believes that tenant demand
for space in the distribution sub-segment is less volatile than demand in the overall industrial market as goods distributed
through distribution facilities are frequently non-discretionary products characterized by relatively inelastic consumer
demand. Inelasticity in consumer demand for these products gives rise to stability in tenants’ operations which, in turn,
results in more stable occupancies and rental incomes. In addition, the re-tenanting costs associated with distribution
properties are often lower than the costs associated with properties within the overall industrial real estate market due to
the generic nature of distribution properties, reducing the costs associated with leasing vacant and renewal space.
Management also believes that its primary focus on the distribution sub-segment provides: (i) exposure to the dynamic
and growing U.S. economy; (ii) the opportunity to invest in a real estate segment with compelling relative fundamentals;
and (iii) the opportunity to earn competitive risk-adjusted returns.
Geographically, the REIT’s existing portfolio is primarily concentrated in major logistics and distribution markets of the U.S.,
providing the REIT’s tenants with a predictable one or two-day drive to the majority of the population of the continental
U.S.
Over the long-term, management believes that global demand for U.S. distribution space will continue to increase, driven
by the following key trends:
• Positive Impact of the e-Commerce Industry. The primary industries leading the demand for distribution space are e-
commerce, food-and-beverage and traditional retailers. According to industry sources, strong consumer spending and
growing e-commerce sales have continued to drive demand from logistics, distribution and related third-party service
providers for state-of-the-art distribution space. As distribution for e-commerce continue to revolutionize the retail
sector, retailers utilizing multiple channels to sell their merchandise continue to focus growth within online operations
rather than more traditional stores, resulting in continued demand for distribution space.
• Global Supply Chain Trends. A physical manufacturing/distribution presence in the U.S. continues to be important for
most large companies as a result of increasing labour costs and instability in foreign markets, trade routes and seaports.
This macroeconomic and geopolitical landscape has forced companies to re-evaluate their supply chain networks, as
shipping continues to represent the largest single cost factor in the global supply chain. These critical supply chain
considerations make the U.S. increasingly more attractive from a manufacturing, distribution and sourcing perspective.
• World-Class U.S. Infrastructure. The U.S. has a world-class supply chain infrastructure across all transportation sectors.
Rail, seaports, highways and airports all provide for a robust distribution and logistics landscape, an important factor in
attracting and retaining industrial tenants. Increasing shipping volumes experienced by U.S. seaports continue to create
the need to distribute goods directly to inland ports and expand the utilization of intermodal hubs to alleviate
distribution costs, creating additional opportunities in the U.S. industrial real estate market.
As a result of these trends, the U.S. industrial real estate market, and specifically the distribution sub-segment of the
market, continues to experience meaningful domestic and foreign capital investments. Low interest rates, positive
economic indicators, and increasing demand for well-located, high quality and functional properties have created
increasingly competitive investment opportunities for the REIT, particularly for recently constructed industrial properties.
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To achieve its objectives, the REIT has executed a number of strategies aimed at enhancing Unitholder value through both
organic and external growth. The REIT believes Unitholders will continue to benefit from management’s significant
experience acquiring, developing, managing and disposing of industrial properties. Management maintains an extensive
network of relationships with brokers, tenants and institutional and private owners of industrial real estate in its key target
geographic markets and leverages these relationships to enhance tenant retention and source strategic acquisitions and
development of new industrial properties for the REIT.
Organic growth comes from (A) capitalizing on increasing demand for industrial space and through a number of initiatives
aimed at optimizing the performance, value and long-term cash flow of the REIT’s investment property portfolio, including:
(i) increasing rental rates; (ii) maintaining high occupancy levels; (iii) capitalizing on expansion opportunities; (iv) leveraging
continuity of management and strong tenant relationships; (v) continuing to implement active leasing programs; and (vi)
maintaining cost management and property maintenance programs and (B) management and performance fees generated
from third-party assets under management.
External growth comes from a disciplined approach to targeting the acquisition and development of state-of-the-art
industrial properties in major U.S. distribution markets. The objective of the REIT’s external growth initiatives is to continue
expanding the REIT’s portfolio in order to enhance geographic and tenant diversity, improve the sustainability of cash flow,
and mitigate risks associated with concentrated exposure to any one geographic region or tenant.
When evaluating acquisition and development opportunities, the REIT considers the following criteria:
•
•
•
•
•
•
•
Location of the property in relation to the following:
o Major transportation infrastructure,
o Population centers with available and affordable labour, and
o Whether it is located in a strategic expansion market.
Design specifications and amenities that are consistent with best-in-class, modern and functional industrial
buildings.
How the acquisition price compares with replacement cost in the local market.
Creditworthiness of in-place tenants and whether in-place rents are below current market rents.
Availability of economic incentives for tenants and/or landlords from municipalities, counties, or states.
Degree to which the property performance will be accretive to AFFO per Unit and ACFO over either the short-
term or long-term.
Properties are also specifically evaluated as to physical characteristics including: ceiling clear height, truck court
depth, property dimensions, functionality of traffic flow for both trucks and automobiles, number of docking
doors and what type of docking equipment is being utilized, number of trailer and automobile parking stalls,
infrastructure relating to fire and life safety equipment, as well as power, lighting, and floor thickness.
The criteria outlined above are designed to provide the REIT with the opportunity to acquire and develop properties in
strategic markets that will generate stable and growing cash flows and to meet the needs of tenants in the distribution
subsector of the U.S. industrial real estate market. In addition, in the event of property vacancy, such properties provide
the REIT with the ability to accommodate a multitude of uses and industries, thereby quickly and efficiently filling vacant
space.
19
ASSETS
Investment properties
The REIT owns and operates an institutional-quality portfolio of primarily industrial investment properties located in the
U.S., with a particular focus on warehouse and distribution industrial real estate. As at December 31, 2019, the REIT owned
a portfolio of 74 investment properties comprised of 73 industrial properties and one office property totaling 22,870,482
square feet of GLA with an occupancy rate across the portfolio of 99.0%.
The majority of the REIT’s industrial investment properties were constructed relatively recently, with a weighted average
age of approximately 15 years. As a result, management believes the REIT’s investment properties will, on average, require
less maintenance capital expenditures and be more attractive to prospective tenants than comparable older investment
properties. Furthermore, the REIT’s industrial investment properties are highly functional, with a weighted average ceiling
clear height of approximately 31 feet. High ceiling clear heights are an important feature to many industrial tenants, as
this provides tenants with additional vertical space that can house additional racking and equipment, allowing the tenant
to maximize storage space.
As at December 31, 2019, the fair value of investment properties was $1,573,077 ($1,117,672 as at December 31, 2018),
implying a weighted average terminal capitalization rate of 6.16% (6.46% as at December 31, 2018).
State
Georgia
Minnesota
Illinois
Kentucky
Tennessee
Indiana
Ohio
Pennsylvania
Wisconsin
Florida
California
Oregon
Texas
Kansas
Mississippi
Michigan
Nevada
Total
Fair Value
$222,400
187,400
181,600
139,500
135,277
109,200
97,100
83,200
75,100
75,100
63,600
62,300
45,400
44,400
26,500
18,600
6,400
1,573,077
$
$
% of
Total
14.1%
11.9%
11.5%
8.9%
8.6%
6.9%
6.2%
5.3%
4.8%
4.8%
4.0%
4.0%
2.9%
2.8%
1.7%
1.2%
0.4%
100.0%
Fair Value by Geographic Location
KS MS MI NV
GA
TX
OR
CA
WI
FL
PA
OH
IN
MN
IL
KY
TN
20
Future lease expirations are shown in the graph below as at December 31, 2019:
Lease Expiration (% of GLA) by Year
40.0%
30.0%
20.0%
10.0%
0.0%
2.6%
33.4%
19.3%
15.0%
11.7%
11.0%
7.0%
2020
2021
2022
2023
2024
2025
2026+
Leases expiring
8
32
29
17
18
9
40
The lease activity in the table above is based on the existing lease terms in-place as at December 31, 2019. Any early
termination options, extension options or other terms that may impact the expiration or terms of the lease are not reflected
in the above table unless they were formally exercised or otherwise agreed upon in writing as at December 31, 2019.
Occupancy roll-forward
The following table summarizes the change in occupancy during the three months and year ended December 31, 2019:
Three months ended
December 31, 2019
Year ended
December 31, 2019
(‘000s sq. ft.)
Occupancy
(‘000s sq. ft.)
Occupancy
Occupancy at beginning of period
New leases
Renewals
Expirations
Terminations
Expansions
Acquisitions
Dispositions
Occupancy as at December 31, 2019
22,648.1
33.2
355.3
(505.6)
-
105.0
-
-
22,636.0
99.5%
99.0%
18,710.7
251.7
3,757.0
(4,033.4)
(11.2)
105.0
4,167.3
(311.1)
22,636.0
99.3%
99.0%
Per the preceding table, the REIT’s renewal rate for leased square feet expiring during the three months and year ended
December 31, 2019 was 70.3% and 93.1%, respectively.
Renewals commencing in the three months ended December 31, 2019 had a weighted average cash re-leasing spread (see
“Non-IFRS Measures” section of this MD&A) and straight-line rent re-leasing spread (see “Non-IFRS Measures” section of
this MD&A) of 2.1% and 8.0%, respectively. Renewals commencing in the year ended December 31, 2019 had a weighted
average cash re-leasing spread and straight-line rent re-leasing spread of 2.6% and 9.6%, respectively.
21
During the three months and year ended December 31, 2019, the REIT renewed 490.2 and 1,587.5 square feet, respectively,
with commencement dates after December 31, 2019. Renewals signed during the three months ended December 31, 2019
had a weighted average cash re-leasing spread and straight-line rent re-leasing spread of 13.7% and 12.5%, respectively.
Renewals signed during the year ended December 31, 2019 had a weighted average cash re-leasing spread and straight-line
rent re-leasing spread of 10.5% and 15.7%, respectively.
During the three months and year ended December 31, 2019, the REIT signed no leases and one lease totaling 48.2 square
feet, respectively, for previously vacant space. The lease is expected to commence in the first half of 2020.
The REIT’s investment properties are geographically diversified within the U.S. as follows as at December 31, 2019:
State
Georgia
Tennessee
Illinois
Kentucky
Indiana
Minnesota
Ohio
Wisconsin
Florida
Pennsylvania
Kansas
Oregon
Mississippi
Texas
California
Michigan
Nevada
Number of Investment
Properties
9
7
9
5
4
10
5
8
6
1
3
1
1
1
2
1
1
Number of
Tenants
15
11
13
5
7
48
7
17
10
2
4
2
2
6
2
2
1
Owned GLA
(‘000s sq. ft.)
% of Owned
GLA
% of NOI
by State (1)(2)
3,696.2
2,832.0
2,809.9
2,131.3
2,068.1
1,895.2
1,817.3
1,074.7
1,016.5
935.5
621.0
492.6
411.6
410.8
311.5
248.0
98.3
16.2%
12.4%
12.3%
9.3%
9.0%
8.3%
7.9%
4.7%
4.4%
4.1%
2.7%
2.2%
1.8%
1.8%
1.4%
1.1%
0.4%
13.3%
9.7%
11.5%
8.7%
6.7%
14.8%
6.4%
5.7%
4.1%
4.6%
2.5%
3.1%
1.8%
2.5%
2.6%
1.5%
0.5%
Total
154
(1) NOI is a key measure of performance used by real estate operating companies, however, NOI is not defined by IFRS, does not have standard
meaning and may not be comparable with other industries or issuers. This data should be read in conjunction with the “Non-IFRS Measures”
section of this MD&A.
(2) For the three months ended December 31, 2019.
22,870.5
100.0%
74
100.0%
22
The following charts of the REIT’s portfolio are based on NOI for the three months ended December 31, 2019 and tenant
and building GLA as at December 31, 2019:
% GLA by Tenancy
% NOI by Tenancy
Multi-
tenant,
39.9%
Single-
tenant,
60.1%
Multi-
tenant,
46.2%
Single-
tenant,
53.8%
GLA by Tenant Size
< 25k SF
2%
>750k SF
20%
25k -
100k SF
14%
500k -
750k SF
25%
100k -
250k SF
22%
250k -
500k SF
17%
GLA by Building Size
<100k SF,
3.9%
>750k SF,
30.9%
100k -
300k SF,
27.3%
300k -750k SF,
37.9%
The following table highlights the REIT’s top ten tenants by annualized contractual base rent as at December 31, 2019:
Top 10 Tenants
General Mills Operations, LLC
Continental Tire the Americas
Unilever Home & Personal Care
Amazon.com
Keystone Automotive (1)
Zulily LLC
FullBeauty Brands, Inc.
Honeywell International Inc.
Radial, Inc.
CEVA Logistics U.S. Inc.
Total
% of Total Annualized
Base Rent
4.0%
3.8%
3.8%
3.5%
3.2%
2.8%
2.3%
2.2%
2.1%
2.1%
29.8%
GLA Occupied
(‘000s sq. ft.)
1,512,552
740,880
1,262,648
936,000
754,768
737,471
741,092
754,000
543,512
648,750
8,631,673
% of Total
Portfolio GLA
6.6%
3.2%
5.5%
4.1%
3.3%
3.2%
3.2%
3.3%
2.4%
2.8%
37.6%
(1) Comprised of two leases with Keystone Automotive Operations, Inc. and Keystone Automotive Industries, Inc.; both wholly-owned subsidiaries of LKQ
Corporation.
23
SELECTED ANNUAL INFORMATION
The following table provides selected financial information for the years ended December 31:
(all figures in ‘000s, except per Unit amounts)
2019
2018
2017
Investment properties revenue
Net income and comprehensive income
Total assets
Non-current liabilities
Distributions per Unit (1)
Distributions declared (1) (2)
REIT Units outstanding
Class B Units outstanding
$ 115,129 $ 92,454 $ 81,786
$ 98,946 $ 50,646 $ 52,506
$ 1,622,892 $ 1,156,755 $ 1,019,943
$ 635,807 $ 523,123 $ 438,951
$ 0.76 $ 0.76 $ 0.76
$ 46,025 $ 37,079 $ 34,010
44,546
3,612
64,377
1,721
46,935
1,978
(1) Excludes all options, DTUs, and DPUs outstanding under the REIT’s deferred compensation plans (see Part II: Equity).
(2) Includes cash distributions on Units and DPUs.
24
Equity Accounted Joint Venture
As at December 31, 2019, the REIT maintains an investment in a joint venture accounted for under the equity method. The
Venture was established to develop or acquire and reposition and own industrial investment properties. The REIT does not
independently control the Venture, and the REIT’s proportionate share, a non-IFRS measure (see “Non-IFRS Measures”
section of this MD&A), of the financial position and results of operations of its investment in Venture does not necessarily
represent the REIT’s legal claim to such items.
The following table reconciles the REIT’s consolidated statement of financial position on an IFRS basis to a proportionate
share basis as at the dates indicated:
(‘000s)
Assets
Non- current assets:
Investment properties
Intangible assets and goodwill
Investment in equity
accounted joint venture
Other non-current assets
Right-of-use asset
Current assets:
Amounts receivable
Prepaid expenses
Restricted cash
Cash and cash equivalents
Total Assets
Liabilities
Non-current liabilities:
Bank indebtedness
Mortgages payable
Class B Units
Other liabilities
Current liabilities:
Mortgages payable
Amounts payable and
accrued liabilities
Total liabilities
Total unitholders’ equity
Total liabilities and unitholders’
As at December 31, 2019
As at December 31, 2018
IFRS Basis
Reconciliation
Proportionate
share basis
IFRS Basis
Reconciliation
Proportionate
share basis
$ 1,573,077
19,154
$ 6,400
-
$ 1,579,477
19,154
3,745
189
1,317
1,597,482
3,708
2,031
1,225
18,446
25,410
(3,745)
20
-
2,675
1
3
25
31
60
-
209
1,317
1,600,157
3,709
2,034
1,250
18,477
25,470
1,117,672
22,721
-
88
3,336
1,143,817
2,573
1,271
849
8,245
12,938
-
-
-
(50)
-
(50)
-
-
-
-
-
1,117,672
22,721
38
3,336
1,143,767
2,573
1,271
849
8,245
12,938
$ 1,622,892
$ 2,735
$ 1,625,627
1,156,755
(50)
1,156,705
$ 372,137
224,301
23,731
15,638
635,807
$ 2,732 $ 374,869
224,301
-
23,731
-
15,661
23
638,562
2,755
$ 174,284
312,097
25,422
11,320
523,123
$ -
-
-
-
-
$ 174,284
312,097
25,422
11,320
523,123
87,723
43,024
130,747
766,554
856,338
-
32
32
2,787
(52)
87,723
32,072
43,056
130,779
769,341
856,286
27,127
59,199
582,322
574,433
-
-
-
-
(50)
32,072
27,127
59,199
582,322
574,383
equity
$ 1,622,892
2,735
1,625,627
1,156,755
(50)
1,156,705
As at December 31, 2019 and December 31, 2018, the REIT’s debt-to-gross book value (see “Non-IFRS Measures” section of
this MD&A) under the proportionate share basis was 43.7% and 46.5%, respectively, compared to the REIT’s debt-to-gross
book value of 43.6% and 46.5%, respectively.
25
FINANCIAL AND OPERATIONAL HIGHLIGHTS
Summary of Quarterly Results
The following is a summary of selected consolidated financial information for each of the eight most recently completed
quarters:
(all figures in ‘000s, except per Unit amounts, number of investment properties and GLA)
As at and for the quarter ended
Q4 2019
Q3 2019
Q2 2019
Q1 2019
Q4 2018
Q3 2018
Q2 2018 Q1 2018
Operating Results:
Investment properties revenue
NOI (1)
Net income and comprehensive income
Net income and comprehensive income
per Unit (basic) (2)
Net income and comprehensive income
per Unit (diluted) (3)
FFO (1)
FFO per Unit (diluted) (1) (3)
AFFO (1)
AFFO per Unit (diluted) (1) (3)
Cash flows from operations
ACFO (1)
Book value per Unit (1)
Distributions:
Distributions per Unit (2) (4)
Distributions declared (2) (4)
ACFO payout ratio (1) (4)
Weighted average number of Units
(basic) (2)
Weighted average number of Units
(diluted) (3)
$ 31,882 $ 29,335 $ 28,714
$ 25,198
$ 24,494 $ 23,078 $ 22,344
$ 22,538
23,145
27,327
21,788
21,342
21,164
40,670
18,141
9,607
17,641
15,262
17,182
14,972
16,591
12,654
16,402
7,758
0.429
0.362
0.690
0.182
0.312
0.308
0.263
0.161
0.417
14,176
0.216
11,069
0.169
18,308
12,943
13.31
0.190
12,640
97.7%
0.351
14,807
0.243
11,980
0.197
20,246
12,577
13.09
0.190
11,353
90.3%
0.670
12,961
0.213
9,759
0.161
18,236
11,471
12.88
0.190
11,344
98.9%
0.176
9,614
0.176
6,698
0.123
0.301
10,966
0.216
9,023
0.178
14,796
14,817
9,486
12.40
0.190
10,688
112.7%
9,984
12.26
0.190
9,417
94.3%
0.299
11,379
0.227
9,902
0.198
7,820
10,862
12.14
0.190
9,372
86.3%
0.258
10,939
0.223
9,396
0.191
16,801
9,809
12.05
0.190
9,145
93.2%
0.158
11,128
0.227
9,481
0.193
15,498
10,037
11.89
0.190
9,145
91.1%
63,650
59,014
58,977
52,803
48,891
48,648
48,158
48,158
65,474
60,875
60,729
54,589
50,688
50,092
49,066
49,021
(1) NOI, FFO, AFFO, ACFO, FFO per Unit (diluted), AFFO per Unit (diluted), book value per Unit and ACFO payout ratio are key measures of performance used by
real estate operating companies, however, they are not defined by IFRS, do not have standard meanings and may not be comparable with other industries or
issuers. This data should be read in conjunction with the “Non-IFRS Measures” section of this MD&A.
(2) Excludes all options, DTUs, and DPUs outstanding under the REIT’s deferred compensation plans (see Part II: Equity).
(3) Includes all options, DTUs, and DPUs outstanding under the REIT’s deferred compensation plans (see Part II: Equity).
(4) Includes distributions on Units and DPUs.
Q4 2019 vs. Q3 2019
Compared to the previous quarter, FFO and AFFO for the three months ended December 31, 2019 were lower by $631 and $911,
respectively. The decreases were due to lower management fee revenue, partially offset by increases in NOI.
Quarterly Summary
The REIT’s quarterly results for the eight quarters presented were positively impacted by acquisitions of investment properties
throughout 2018 and 2019. Results on a per Unit basis were negatively impacted by (i) higher general and administrative expenses
due to internalization of the management on July 31, 2018 and severance costs, (ii) the February 2019 Offering, and (iii) the October
2019 Offering. Net income and comprehensive income is consistently impacted by fair value adjustments to investment properties,
deferred compensation and Class B Units, which are not necessarily indicative of the operating results of the REIT.
26
Operational Highlights
As at
Operational Information:
Number of investment properties
GLA
Occupancy
Average remaining lease term (years)
Fair value of investment properties
Ratios:
Weighted average effective interest rate (1)
Weighted average effective interest rate on fixed rate debt (2)
Weighted average effective interest rate on variable rate debt (3)
Variable interest rate debt as percentage of total debt (3) (4)
Debt-to-gross book value (5)
Interest coverage ratio (5)
Fixed charge coverage ratio (5)
Debt to Adjusted EBITDA (5)
December 31, 2019
December 31, 2018
74
57
22,870,482
18,850,627
99.0%
4.9
99.3%
4.7
$
1,573,077 $
1,117,672
3.8%
3.9%
3.4%
24.7%
43.6%
3.1x
2.7x
8.2x
3.9%
3.8%
4.1%
9.8%
46.5%
3.5x
2.9x
7.6x
(1) Includes mortgages payable, Term Loan I, Term Loan II, Term Loan III, the unsecured revolving credit facility, derivative instruments, mark-to-market
adjustments and financing costs.
(2) Includes mortgages payable, Term Loan I, and Term Loan II.
(3) Includes amounts outstanding under the unsecured revolving credit facility and Term Loan III.
(4) Excludes variable rate debt which is effectively fixed using an interest rate swap. Refer to the Part II: Liquidity and Capital Resources.
(5) Debt-to-gross book value, interest coverage ratio, fixed charge coverage ratio and debt to Adjusted EBITDA are key measures of performance used
by real estate operating companies, however, they are not defined by IFRS, do not have standard meanings and may not be comparable with other
industries or issuers. This data should be read in conjunction with the “Non-IFRS Measures” section of this MD&A.
27
PART II
RESULTS OF OPERATIONS
The following tables compare results for the three months and years ended December 31, 2019 and 2018. The principal
reasons for the variances between the financial results presented in such year-over-year periods is due to the acquisitions
during 2019 and 2018 and internalization of management on July 31, 2018.
Consolidated Statement of Net Income and Comprehensive Income
(all figures in ‘000s, except per Unit
amounts)
Three months ended
December 31,
Year ended
December 31,
2019
2018
Variance
2019
2018
Variance
Investment properties revenue
$
31,882 $
24,494 $
7,388 $
115,129 $
92,454 $
22,675
Management fee revenue
501
32,383
1,703
26,197
(1,202)
6,186
3,587
118,716
2,790
95,244
797
23,472
Other (income) and expenses
Investment properties operating
expenses
Fair value adjustment to investment
properties – IFRIC 21
General and administrative
Transaction costs related to
Internalization
Amortization/depreciation expense
Fair value adjustment to investment
properties
Income from equity accounted
venture
Finance costs
Net income and comprehensive
income before income taxes
Deferred income tax recovery
Net income and comprehensive
income
Net income and comprehensive
income per Unit (basic)
Net income and comprehensive
income per Unit (diluted)
3,924
4,813
3,262
-
1,707
2,949
3,904
3,648
43
737
975
29,104
24,127
909
(386)
(43)
970
1,787
15,463
-
3,597
511
10,571
8,560
1,565
4,977
1,276
4,892
(8,560)
2,032
(11,713)
(8,035)
(3,678)
(63,213)
(24,280)
(38,933)
(1,053)
4,686
26,757
570
-
8,295
14,656
606
(1,053)
(3,609)
12,101
(36)
(1,053)
35,197
97,834
1,112
-
24,150
50,040
606
(1,053)
11,047
47,794
506
27,327 $
15,262 $
12,065 $
98,946 $
50,646 $
48,300
0.429 $
0.312 $
0.117 $
1.663 $
1.045 $
0.618
0.417 $
0.301 $
0.116 $
1.614 $
1.019 $
0.595
$
$
$
The following table compares results of NOI, a non-IFRS measure (see “Non-IFRS Measures” section of this MD&A) for the
following periods:
Three months ended
December 31,
Year ended
December 31,
(all figures in ‘000s)
2019
2018
Variance
2019
2018
Variance
Investment properties revenue
$
31,882 $
24,494 $
7,388 $
115,129 $
92,454 $
22,675
Investment properties operating
expenses
Fair value adjustment to
investment properties – IFRIC 21
3,924
4,813
2,949
3,904
975
909
29,104
24,127
1,787
511
4,977
1,276
NOI
$
23,145 $
17,641 $
5,504 $
84,238 $
67,816 $
16,422
28
Investment properties revenue
Investment properties revenue includes contractual base rent to be received from operating leases recognized on a
straight-line basis over the term of its respective lease, recoveries of operating expenses, including property taxes,
common area maintenance, lease termination fees and other incidental income. Investment properties revenue was
higher by $7,388 for the three months ended December 31, 2019 as compared to the same period in 2018 for the following
reasons:
Variance Explanation
Increase due to acquisitions
Increase in base rent, inclusive of straight-line rent
Decrease due to disposition
Increase in amortization of tenant incentives
Total variance
Three months ended
December 31, 2019
7,044
989
(485)
(160)
7,388
$
$
Investment properties revenue was higher by $22,675 for the year ended December 31, 2019 as compared to the same
period in 2018 for the following reasons:
Variance Explanation
Increase due to acquisitions
Higher straight-line rent, net of lower base rents due to free rent
Decrease due to disposition
Increase in amortization of tenant incentives
Total variance
Year ended
December 31, 2019
21,190
3,326
(1,428)
(413)
22,675
$
$
Management fee revenue
Management fee revenue consists of asset and property management service fees to manage, develop and operate
industrial real estate investment properties on behalf of and in partnership with third-party investors. Management fee
revenue was (lower) higher by $(1,202) and $797 for the three months and year ended December 31, 2019, respectively,
as compared to the same period in 2018. The differences are mainly due to timing of when promote fees were earned in
each year.
Investment properties operating expenses
Investment properties operating expenses consist primarily of property common area and maintenance expenses, real
estate taxes (including adjustments for property taxes accounted for under IFRIC 21), insurance, property management
fees and other costs associated with the management and maintenance of the investment properties. Investment
properties expenses were higher by $975 for the three months ended December 31, 2019 as compared to the same period
in 2018 for the following reasons:
Variance Explanation
Increase due to acquisitions
Increase in operating expenses; mainly real estate taxes, utilities, and general repairs
Adjustments for property taxes accounted for under IFRIC 21
Decrease due to disposition
Total variance
$
$
Three months ended
December 31, 2019
1,763
219
(909)
(98)
975
29
Investment properties expenses were higher by $4,977 for the year ended December 31, 2019 as compared to the same
period in 2018 for the following reasons:
Variance Explanation
Increase due to acquisitions
Increase in operating expenses; mainly real estate taxes, utilities, and general repairs
Adjustments for property taxes accounted for under IFRIC 21
Decrease due to disposition
Total variance
$
$
Year ended
December 31, 2019
6,119
404
(1,276)
(270)
4,977
NOI
NOI, a non-IFRS measure (see “Non-IFRS Measures” section of this MD&A), was higher by $5,504 for the three months
ended December 31, 2019 as compared to the same period in 2018 for the following reasons:
Variance Explanation
Increase due to acquisitions
Increase in base rent, inclusive of straight-line rent
Decrease due to disposition
Increase in operating expenses; mainly real estate taxes, utilities, and general repairs
Change in amortization of tenant incentives
Total variance
$
$
Three months ended
December 31, 2019
5,281
989
(387)
(219)
(160)
5,504
NOI was higher by $16,422 for the year ended December 31, 2019 as compared to the same period in 2018 for the
following reasons:
Variance Explanation
Increase due to acquisitions
Increase in base rent, inclusive of straight-line rent
Decrease due to disposition
Change in amortization of tenant incentives
Increase in operating expenses; mainly real estate taxes, utilities, and general repairs
Total variance
$
$
Year ended
December 31, 2019
15,071
3,326
(1,158)
(413)
(404)
16,422
General and administrative expense
General and administrative expenses consist of salaries and benefits (post internalization of management on July 31,
2018), asset management fee expense (pre-internalization of management prior to July 31, 2018), professional fees,
deferred compensation expense, trustee fees, and other expenses. General and administrative expenses were lower by
$386 for the three months ended December 31, 2019 as compared to the same period in 2018 for the following reasons:
Variance Explanation
Deferred compensation expense, of which $277 is due to fair value adjustments under
the DUIP and the Plan (see Part II: Equity)
Salaries and benefits
Other
Total variance
Three months ended
December 31, 2019
$
$
(224)
(15)
625
386
30
General and administrative expenses were higher by $4,892 for the year ended December 31, 2019 as compared to the
same period in 2018 for the following reasons:
Salaries and benefits
Deferred compensation expense, of which $1,144 is due to fair value adjustments under
$
Variance Explanation
the DUIP and the Plan (see Part II: Equity)
Restructuring costs
Reduction in asset management fee expense
Other
Total variance
$
Year ended
December 31, 2019
3,534
2,089
1,503
(1,376)
(858)
4,892
Fair value adjustment to investment properties
The REIT has selected the fair value method of accounting to account for real estate classified as investment properties.
As a result, subsequent to initial recognition, investment properties are carried at fair value, with gains and losses arising
from changes in fair value recognized in the consolidated statements of net income and comprehensive income during
the year in which they arise. For the three months and year ended December 31, 2019, the REIT recognized a fair value
increases to investment properties of $11,713 and $63,213, respectively. For the three months and year ended December
31, 2018, the REIT recognized a fair value increase to investment properties of $8,035 and $24,280, respectively. For the
years ended December 31, 2019 and 2018, the fair value increases were caused by capitalization rate compression,
increasing market rents in certain markets, and leasing activity, partially offset by the amortization of capitalized tenant
incentives, the write-off of acquisition related transaction costs, and amortization of straight-line rent. Please refer to the
“Investment Properties” section of this MD&A for further discussion on the REIT’s fair value of investment properties.
Finance Costs
Finance costs include interest expense on mortgages payable, bank indebtedness and derivative instrument, distributions
on Class B Units and DPUs (see Part II: Equity for further details), the gain or loss on the change in fair value of financial
assets and liabilities designated as fair value through profit and loss, including Class B Units and the derivative instrument,
and amortization associated with the mark-to-market adjustments and financing costs incurred in connection with
obtaining long-term financings. Finance costs decreased $3,609 for the three months ended December 31, 2019 as
compared to the same period in 2018 for the following reasons:
Variance Explanation
Fair value adjustment to derivative instrument
Decrease in mortgage interest expense
Fair value adjustment to Class B Units
Decrease in distributions on Class B Units, net of increase in DPUs
Increase in bank indebtedness interest expense
Change in amortization of financing costs and mark-to-market adjustments on fixed
Interest rate mortgage payable
Increase in lease liability interest expense
Total variance
Three months ended
December 31, 2019
5,373
314
124
34
(2,193)
(34)
(9)
3,609
$
$
31
Finance costs increased $11,047 for the year ended December 31, 2019 as compared to the same period in 2018 for the
following reasons:
Variance Explanation
Increase in bank indebtedness interest expense
Fair value adjustment to derivative instrument
Fair value adjustment to Class B Units
Increase in lease liability interest expense
Decrease in mortgage interest expense
Decrease in distributions on Class B Units, net of increase in DPUs
Change in amortization of financing costs and mark-to-market adjustments on fixed
Interest rate mortgage payable
Total variance
Year ended
December 31, 2019
7,789
3,777
1,175
9
(1,000)
(651)
(52)
11,047
$
$
32
Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO)
The reconciliation of net income and comprehensive income to FFO and AFFO for the three months and year ended
December 31, 2019 and 2018 are presented below:
(all figures in ‘000s, except per Unit
amounts)
Net income and comprehensive
Three months ended
December 31,
Year ended
December 31,
2019
2018
Variance
2019
2018
Variance
income
$
27,327 $
15,262 $
12,065 $
98,946 $
50,646 $
48,300
Add/(Deduct)
Fair value adjustment to investment
properties
Fair value adjustment to Class B Units
Fair value adjustment to deferred
compensation
Fair value adjustment to derivative
(11,713)
(619)
(8,035)
(495)
228
(49)
instrument
(2,203)
3,170
(5,373)
4,813
3,904
909
(3,678)
(63,213)
(24,280)
(38,933)
(124)
277
1,852
1,981
6,547
1,787
677
837
2,770
511
1,175
1,144
3,777
1,276
Fair value adjustment to investment
properties – IFRIC 21
Fair value adjustments to investment
properties held in equity
accounted joint venture
Property taxes accounted for under
IFRIC 21
Transaction costs related to
internalization
Amortization of tenant incentives
Amortization of intangibles
Deferred income tax recovery
Distributions on Class B Units and
DPUs treated as interest expense
ROU asset expense, net of lease
payments
FFO
(1,057)
-
(1,057)
(1,057)
-
(1,057)
(4,813)
(3,904)
(909)
(1,787)
(511)
(1,276)
-
593
1,677
(570)
474
39
43
431
737
(606)
508
-
(43)
162
940
36
(34)
39
-
2,017
3,567
(1,112)
1,991
39
8,560
1,602
1,565
(606)
2,642
-
(8,560)
415
2,002
(506)
(651)
39
$
14,176 $
10,966 $
3,210 $
51,558 $
44,413 $
7,145
Leasing cost reserve (1)
Capital expenditure reserve (2)
Amortization of straight-line rent
AFFO
FFO per Unit (diluted)
AFFO per Unit (diluted)
$
$
$
(1,309)
(500)
(1,298)
(1,089)
(326)
(528)
(220)
(174)
(770)
(4,879)
(1,700)
(5,473)
(4,319)
(1,189)
(1,102)
(560)
(511)
(4,371)
11,069 $
9,023 $
2,046 $
39,506 $
37,803 $
1,703
0.216 $
0.169 $
0.216 $
0.178 $
0.000 $
(0.009) $
0.853 $
0.654 $
0.893 $
0.761 $
(0.040)
(0.107)
(1)
(2)
The leasing cost reserve is a weighted average rate of approximately $0.23 and $0.24 per square foot per annum as at December 31, 2019
and 2018, respectively, based on a five-year forward-looking average of expected leasing commissions and tenant improvements on the
portfolio.
The capital expenditure reserve is a weighted average rate of approximately $0.09 and $0.06 per square foot per annum as at December
31, 2019 and 2018, respectively, based on the five-year forward-looking average of expected capital expenditures on the portfolio.
33
FFO Variances
For the three months ended December 31, 2019, FFO was higher by $3,210 as compared to the same period in 2018 for
the following reasons:
Variance Explanation
Variance due to acquisitions
Increase in base rent, inclusive of straight-line rent
Decrease in general and administrative expense, net of fair value adjustment to deferred
compensation of $277
Decrease in mortgage interest expense
Increase in bank indebtedness interest expense
Decrease in management fee revenue
Variance due to disposition
Increase in operating expenses; mainly real estate taxes, utilities, and general repairs
Change in amortization of financing costs and mark-to-market adjustments on fixed
interest rate mortgage payable
Other
Total variance
Three months ended
December 31, 2019
5,258
989
$
688
314
(2,193)
(1,202)
(387)
(219)
(34)
(4)
3,210
$
For the year ended December 31, 2019 FFO was higher by $7,145 as compared to the same period in 2018 for the following
reasons:
Variance Explanation
Variance due to acquisitions
Increase in base rent, inclusive of straight-line rent
Decrease in mortgage interest expense
Increase in management fee revenue
Change in amortization of financing costs and mark-to-market adjustments on fixed
interest rate mortgage payable
Increase in bank indebtedness interest expense
Increase in general and administrative expense, net of fair value adjustment to deferred
compensation of ($1,144) and severance costs
Severance costs
Variance due to disposition
Increase in operating expenses; mainly real estate taxes, utilities, and general repairs
Other
Total variance
$
$
Year ended
December 31, 2019
15,034
3,326
1,000
797
52
(7,789)
(2,206)
(1,503)
(1,158)
(404)
(4)
7,145
AFFO Variances
For the three months ended December 31, 2019, AFFO was higher by $2,046 as compared to the same period in 2018 for
the following reasons:
Variance Explanation
FFO variances
Variance due to disposition
Variance due to acquisitions, inclusive of non-cash straight-line rent
Change in reserves
Increase in non-cash straight-line rent
Total variance
Three months ended
December 31, 2019
3,210
23
(1,045)
(117)
(25)
2,046
$
$
34
For the year ended December 31, 2019, AFFO was higher by $1,703 as compared to the same period in 2018 for the
following reasons:
Variance Explanation
FFO variances
Variance due to disposition
Increase in non-cash straight-line rent
Variance due to acquisitions, inclusive of non-cash straight-line rent
Change in reserves
Total variance
Year ended
December 31, 2019
7,145
50
(2,745)
(2,514)
(233)
1,703
$
FFO and AFFO per Unit (diluted)
The weighted average number of Units used to calculate FFO and AFFO per Unit (diluted) include: (i) the weighted average
number of all outstanding REIT Units and Class B Units, (ii) in-the-money options outstanding under the Plan assuming a
cashless exercise of those options, and (iii) units granted under the DUIP (see Part II: equity); which amounted to
65,474,471 and 50,688,343 Units for the three months ended December 31, 2019 and 2018, respectively. The weighted
average number of Units used to calculate FFO and AFFO per Unit (diluted) amounted to 60,427,931 and 49,707,048 Units
for the year ended December 31, 2019 and 2018, respectively. The increase in the weighted average number of Units
outstanding is mainly due to the February 2019 Offering and October 2019 Offering (see Part II: Equity) and the issuance
of deferred compensation and Class B Units as partial consideration for the internalization of management on July 31,
2018.
For the three months and year ended December 31, 2019, FFO per Unit (diluted) was higher (lower) by $0.000 and ($0.040),
respectively, as compared to the three months and year ended December 31, 2018. For the three months and year ended
December 31, 2019, AFFO per Unit (diluted) was lower by $0.009 and $0.107, respectively, as compared to the three
months and year ended December 31, 2018. The decreases are mainly due to severance costs, higher general and
administrative expense due to the internalization of management and a 29.1% and 21.6% increase in the weighted average
number of Units (diluted) outstanding for the three months and year ended December 31, 2019, respectively. The
decreases are partially offset by the acquisitions completed in 2018 and 2019, and increased management fee revenue
earned. In addition, AFFO also decreased due to increased free rent provided to certain tenants for the three months and
year ended December 31, 2019 totaling $298 and $3,156, or $0.005 and $0.052 per Unit (diluted), respectively.
Distribution Policy
The REIT’s Declaration of Trust provides the Board of Trustees with the authority to determine the percentage amount of
the REIT’s income to be distributed. Amounts retained in excess of the declared distributions are primarily used to fund
leasing costs and capital expenditure requirements. Fluctuations in working capital that are deemed to be timing
differences are disregarded in determining distributions. The REIT also normalizes the impact of leasing costs, which
fluctuate with lease maturities, renewal terms and the type of investment property being leased, and excludes the impact
of transaction costs expensed on business combinations.
The REIT’s ACFO payout ratio for the three months ended December 31, 2019 and 2018 was 97.7% and 94.3%, respectively.
The REIT’s ACFO payout ratio for the year ended December 31, 2019 and 2018 was 99.0% and 91.1%, respectively. The
increased ACFO payout ratio for the three months and year ended December 31, 2019 was mainly due to the timing of
acquisitions of investment properties in relation to the timing of the issuance of REIT Units and the free rent provided to
certain tenants, partially offset by management fee revenue earned in 2019.
35
Same properties NOI
The same properties disclosed in the following table for the three months and year ended December 31, 2019 and 2018
are investment properties having consistent leasable area in both periods.
(‘000s)
Three months ended
December 31,
2019
2018
Variance
$
%
Year ended
December 31,
2019
2018
Variance
$
%
Net operating income (1)
$
23,145
$
17,641
$
5,504
31.2%
$
84,238
$
67,816
$
16,422
24.2%
Amortization of straight-line rent
Amortization of leasing costs
Tenant incentives - free rent
Acquisitions’ NOI
Dispositions’ NOI
Other reconciling items (2)
Same properties NOI (1)
Average occupancy (same
properties)
(528)
592
47
(5,548)
-
(23)
(503)
431
366
(268)
(386)
(125)
$
17,685
$
17,156
$
(25)
161
(319)
(5,280)
386
102
529
(3,739)
2,015
2,630
(16,578)
(422)
(124)
(993)
1,602
462
(1,507)
(1,580)
(181)
(2,746)
413
2,168
(15,071)
1,158
57
3.1%
$
68,020
$
65,619
$
2,401
3.7%
99.2%
98.8%
0.4%
99.3%
98.2%
1.1%
(1) NOI and same properties NOI are key measures of performance used by real estate operating companies, however, they are not defined by IFRS,
do not have standard meanings and may not be comparable with other industries or issuers. This data should be read in conjunction with the “Non-
IFRS Measures” section of this MD&A.
Includes lease termination and other income.
(2)
Same properties NOI for the three months ended December 31, 2019 increased by $529, or 3.1%, when compared to the
same quarter in 2018. Same properties NOI for the year ended December 31, 2019 increased by $2,401, or 3.7%, when
compared to the same period in 2018. The increases in same properties NOI were mainly due to increases in contractual
base rent, higher recoveries of operating expenses, and an increase in average occupancy in 2019 compared to 2018.
LIQUIDITY AND CAPITAL RESOURCES
The REIT’s primary sources of capital are cash generated from operations and management fee revenue, its Credit Facility,
mortgages payable financing and refinancing and issuances of equity and debt through public or private placement. The
REIT’s primary uses of capital include the payment of distributions, costs of attracting and retaining tenants, recurring
investment property maintenance, major investment property improvements, principal repayments, interest payments
and investment property acquisitions and development projects. The REIT expects to meet all of its ongoing obligations
with current cash generated from operations, draws on its Credit Facility and, as growth requires and when appropriate,
new equity or debt issuances. The Declaration of Trust provides that the REIT cannot incur or assume any indebtedness
that would cause total indebtedness levels to exceed 60% of gross book value (or 65% of gross book value including any
convertible debentures). Management of the REIT targets a maximum indebtedness level of approximately 50% of gross
book value. As at December 31, 2019 and December 31, 2018, the REIT’s debt-to-gross book value ratio was 43.6% and
46.5%, respectively (total outstanding debt of $687,013 and $520,085 as at December 31, 2019 and December 31, 2018,
respectively, divided by a gross book value of $1,573,077 and $1,117,672 as at December 31, 2019 and December 31, 2018,
respectively). The REIT’s debt to Adjusted EBITDA ratio was 8.2 times and 7.4 times as at December 31, 2019 and 2018,
respectively. The REIT has no convertible debentures outstanding.
The REIT uses cash flows from operations and debt level indicators to assess its ability to meet its financing obligations.
For the year ended December 31, 2019, the REIT’s interest coverage ratio was 3.1 times (excluding the impact of property
taxes accounted for under IFRIC 21), and its fixed charge coverage ratio was 2.7 times (excluding the impact of property
taxes accounted for under IFRIC 21), demonstrating an ability to more than adequately cover the REIT’s financing
obligations. The REIT’s weighted average effective interest rate on all indebtedness as at December 31, 2019 and 2018 was
3.8% and 3.9%, respectively.
36
The following table details the changes in cash and cash equivalents during the periods presented:
(‘000s)
Cash provided by/(used in):
Operating activities
Financing activities
Investing activities
Increase (decrease) in cash and cash equivalents during the period
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Year ended
December 31,
2019
2018
71,586 $
318,167
(379,552)
10,201
8,245
18,446 $
55,505
38,007
(91,904)
1,608
6,637
8,245
$
$
As at December 31, 2019, the REIT had $18,446 in cash and cash equivalents and availability under the Credit Facility of
$106,767, for total liquidity of $125,213.
Cash flows from operating activities for the years ended December 31, 2019 and 2018 of $71,586 and $55,505,
respectively, was primarily related to the operation of investment properties.
37
In accordance with National Policy 41-201 - Income Trusts and Other Indirect Offerings, the REIT provides the following
additional disclosure relating to cash distributions:
(‘000s)
Cash flows provided by operating activities
Less: Interest paid (excluding distributions on Class B
Units and DPUs classified as finance costs incurred)
Distributions paid (1)
Excess (Shortfall) of cash flows provided by
operating activities over distributions paid
Cash flows provided by operating activities
Add/(Deduct):
Change in non-cash working capital (2)
Interest paid (3)
Leasing cost reserve and capital expenditure reserve
Business combination
Amortization of mark-to-market adjustments
Amortization of financing costs
ROU expense less lease payments
ACFO (4)
Distributions declared (1)
ACFO payout ratio (3)
$
$
$
$
Three months ended
December 31,
Year ended
December 31,
2019
18,308 $
2018
14,817 $
2019
71,586 $
2018
55,505
$
(7,016)
11,292
(12,192)
(5,022)
9,795
(9,415)
(24,207)
47,379
(17,625)
37,880
(44,933)
(36,987)
(900) $
380 $
2,446 $
893
18,308 $
14,817 $
71,586 $
55,505
3,602
(7,016)
(1,811)
-
105
(284)
39
12,943 $
12,640 $
97.7%
1,704
(5,022)
(1,414)
43
104
(249)
-
9,984 $
9,417 $
94.3%
6,226
(24,207)
(6,581)
-
419
(1,005)
39
46,477 $
46,025 $
99.0%
396
(17,625)
(5,508)
8,560
479
(1,117)
-
40,690
37,079
91.1%
(1) Includes cash distributions on REIT Units, Class B Units and DPUs.
(2) Includes working capital changes that, in management’s view and based on the REALPAC February 2019 whitepaper, are not indicative of sustainable
cash flow available for distribution. Examples include but are not limited to, prepaid realty taxes and insurance, change in amounts payable and accrued
liabilities related to additions to investment properties, timing differences of investment property base rent, investment property operating expense and
reimbursements and equity award redemptions.
(3) Includes mortgages payable, Credit Facility, derivative instrument, and Secured Revolving Facility interest included in finance costs.
(4) Management considers ACFO to be a key measure of the REIT's performance. As an alternative measure of cash flows from operations, ACFO (defined
on page 3) represents a measure of cash generated from operating activities less transaction costs associated with a business combination, non-cash
activities including backing out the amortization of the mark-to-market and deferred financing costs adjustments, and deducting a reserve for normalized
maintenance capital expenditures, tenant inducements and leasing commissions. Management believes ACFO is considered indicative of the REIT's ability
to pay distributions to Unitholders. However, ACFO is not defined by IFRS, does not have standardized meanings, and may not be comparable to similarly
titled measures presented by other industries or issuers. This data should be read in conjunction with the “Non-IFRS Measures” section of this MD&A.
While cash flows provided by operating activities are generally sufficient to cover distribution requirements, the timing of
expenses and fluctuations in non-cash working capital may result in a temporary shortfall. In these cases, some portion of
distributions may come from the REIT’s capital, or financing sources other than cash flows provided by operating activities.
For the three months ended December 31, 2019, the REIT incurred a shortfall from distributions in excess of cash flows
from operations. The shortfall was primarily due to: (i) timing of non-cash working capital and (ii) a timing difference
between the REIT’s October 2019 Offering and the deployment of those funds. The REIT funded the cash shortfall with
cash on hand. The shortfall did not have any impact on the REIT’s existing debt agreements. The REIT anticipates
maintaining our existing per unit distributions for the foreseeable future.
Cash flows provided by financing activities for the years ended December 31, 2019 and 2018 of $318,167 and $38,007,
respectively, was primarily related to net proceeds from the February 2019 Offering, October 2019 Offering, and proceeds
from the Credit Facility, partially offset by principal payments on mortgages payable, distributions to Unitholders, and
interest expense paid.
38
Cash flows used in investing activities for the years ended December 31, 2019 and 2018 of $379,552 and $91,904,
respectively, was primarily related to the acquisition of investment properties, additions to investment properties, and the
REIT’s investment in the Venture in 2019.
Debt Financing
The REIT’s debt consists of the following:
(‘000s)
Mortgages payable
Bank indebtedness
Term Loans
Unsecured revolving credit facility
Total debt
December 31,
2019
December 31,
2018
312,024 $
344,169
273,296
98,841
684,161 $
74,326
99,958
518,453
$
$
Future principal payments on mortgages payable, Term Loans, and the unsecured revolving credit facility are as follows as
at December 31, 2019:
Future Principal Payments
200,000
150,000
100,000
50,000
)
s
d
n
a
s
u
o
h
t
n
i
$
(
-
2020
2021
2022
2023
2024
2025
Mortgages payable
Term Loans
Unsecured revolving credit facility
39
Mortgages Payable
The REIT’s debt strategy includes obtaining secured mortgage financing with a term to maturity that is appropriate in
relation to the lease maturity profile of its investment properties portfolio.
Mortgages payable consist of the following:
(‘000s)
Mortgages payable
Mark-to-market adjustments, net
Financing costs, net
Carrying value
Less current portion
Non-current mortgages payable
December 31,
2019
December 31,
2018
312,013 $
710
(699)
312,024
(87,723)
224,301 $
344,085
1,129
(1,045)
344,169
(32,072)
312,097
$
$
As at December 31, 2019, mortgages payable bore interest at various rates ranging from 2.87% to 5.80%, and have a
weighted average effective interest rate of 3.8% with maturity dates ranging from 2020-2024. The weighted average term
to maturity on mortgages payable was 2.3 and 3.0 years as at December 31, 2019 and 2018, respectively.
On April 25, 2019, the REIT repaid a mortgage payable bearing a fixed interest rate of 3.41% with a remaining principal
balance of $28,325, with funds from the unsecured revolving credit facility. The property, previously encumbered by the
mortgage payable, was added to the unencumbered asset pool.
The weighted average maturing effective interest rates, scheduled mortgage repayments, principal mortgage maturities,
and scheduled interest payments are as follows as at December 31, 2019:
Weighted Average
Maturing Effective
Interest Rates
Scheduled
Mortgage
Repayments
Principal
Mortgage
Maturities
Total Principal
Repayments
Scheduled Interest
Payments1
3.1%
4.6%
3.8%
4.0%
3.7%
$ 4,173 $ 83,550 $ 87,723 $ 10,137
8,239
5,249
2,747
1,158
$ 27,530
(‘000s)
2020
2021
2022
2023
2024
Totals
Mark-to-market adjustment, net
Financing costs, net
Total carrying value of mortgages payable
1 Includes interest from a variable rate mortgage at the rate as at December 31, 2019, which is economically fixed using an interest rate swap.
73,676
26,426
83,185
41,003
$ 12,839 $ 299,174 $ 312,013
710
(699)
$ 312,024
69,721
23,534
82,082
40,287
3,955
2,892
1,103
716
Total Debt Service
Repayments
$ 97,860
81,915
31,675
85,932
42,161
$ 339,543
The REIT intends to meet its ongoing principal mortgage maturities and scheduled mortgage repayments with funding from
operating cash flows, draws on the Credit Facility, issuing equity, refinancing its maturing mortgages payables or the sale
of investment properties.
Subsequent to December 31, 2019, the REIT completed the following:
On March 2, 2020, the REIT repaid a mortgage payable bearing a fixed interest rate of 2.87% with a remaining principal
balance of $51,750, with funds from Term Loan III. The properties, previously encumbered by the mortgage payable, were
added to the REIT’s unencumbered asset pool, thereby increasing the availability on the Credit Facility.
40
Credit Facility
On June 26, 2018, the REIT entered into the Credit Facility, being a $300,000 unsecured credit facility, comprised of the
unsecured revolving credit facility and an unsecured delayed draw term loan with availability to borrow up to $175,000 and
$125,000, respectively (subject to requisite unencumbered assets). The unsecured revolving credit facility originally
matured on June 26, 2022, with the option for two six-month extensions. The delayed draw term loan had an initial draw
availability period of one year and a maturity date of June 26, 2023. On June 26, 2018, the REIT drew $75,000 on the
unsecured delayed draw term loan (the “Term Loan I”) and $13,000 on the unsecured revolving credit facility, using the
proceeds to pay closing costs and repay the existing senior secured revolving credit facility balance of $86,000 in full.
On March 26, 2019, the REIT amended and restated the Credit Facility, thereby increasing the availability from $300,000 to
$450,000 (subject to requisite unencumbered assets). The increase was comprised of the Term Loan II of $80,000 and an
increase to the unsecured revolving facility of $70,000. The amended and restated Credit Facility also extended the maturity
date of the unsecured revolving facility to March 26, 2023, with the REIT’s option for two six-month extensions. The Term
Loan II has a draw availability period of one year and a maturity date of March 26, 2024.
On April 5, 2019, the REIT used proceeds of $50,000, $80,000, and $78,000 from Term Loan I, Term Loan II, and the
unsecured revolving credit facility, respectively, to fund the acquisition of the Infill Logistics Portfolio. Concurrently, the
investment properties acquired were added to the unencumbered asset pool thereby increasing the availability on the
Credit Facility.
On September 26, 2019, the REIT amended and restated the Credit Facility, thereby increasing availability from $450,000
to $575,000 (subject to requisite unencumbered assets). The increase was comprised of Term Loan III of $125,000. Term
Loan III has a draw availability period of one year and maturity date of January 15, 2025. The amended and restated Credit
Facility also contains an accordion feature which increases the REIT’s availability to $875,000 (subject to requisite
unencumbered assets and lender approval). On September 26, 2019, the REIT drew $70,000 on the Term Loan III, using
the proceeds to repay the unsecured revolving facility.
For the year ended December 31, 2019, the REIT drew net funds from the unsecured revolving credit facility of ($1,000).
Availability on the Credit Facility was $481,767 as at December 31, 2019, of which the REIT had drawn $375,000, leaving
remaining availability of $106,767.
The unsecured revolving credit facility, Term Loan I, Term Loan II and Term Loan III’s interest rates are based on either
LIBOR or base rate, plus an applicable margin based on leverage. The base rate is equal to the greater of: (a) the "prime
rate" plus 1.0%, (b) 0.5% above the federal funds effective rate, or (c) 30-day LIBOR plus the applicable margin. As at
December 31, 2019, the unhedged interest rate on the unsecured revolving credit facility, Term Loan I, Term Loan II, and
Term Loan III are as follows:
Unsecured revolving credit facility
Term Loan I
Term Loan II
Term Loan III
December 31,
2019
December 31,
2018
3.45%
3.38%
3.34%
3.40%
3.86%
3.79%
-
-
Financing costs related to the Credit Facility of $3,768 are being amortized using the effective interest rate method over
the respective terms ending on March 26, 2023, June 26, 2023, March 26, 2024, and January 15, 2025.
Variable interest rate debt (excluding debt with derivative instruments utilized to economically fix the interest rate) as a
percentage of total debt was 24.7% and 9.8% as at December 31, 2019 and December 31, 2018, respectively.
41
Derivative Instrument
On August 28, 2018, the REIT entered into an agreement to economically fix the interest rate for the $75,000 Term Loan I
using an interest rate swap at LIBOR of 2.78% plus an applicable margin based on leverage. The interest rate swap
eliminates the risk of fluctuating cash flow with the variable interest rate on Term Loan I.
On October 1, 2018, the REIT entered into an agreement to economically fix the interest rate for a $30,000 variable rate
mortgage using an interest rate swap at 4.33%. The interest rate swap eliminates the risk of fluctuating cash flow with the
variable interest rate on the variable rate mortgage.
On December 31, 2018, the REIT entered into an agreement to economically fix the interest rate for a $50,000 of Term
Loan I using an interest rate swap at LIBOR of 2.82% plus an applicable margin based on leverage. The interest rate swap
eliminates the risk of fluctuating cash flow with the variable interest rate on Term Loan I.
On April 5, 2019, the REIT entered into an agreement to economically fix the interest rate for the balance of Term Loan II
totaling $80,000 using an interest rate swap at LIBOR of 2.26% plus an applicable margin base on leverage. The interest
rate swap eliminates the risk of fluctuating cash flow with the variable interest rate on Term Loan II.
Subsequent to December 31, 2019, the REIT completed the following:
On February 3, 2020, the REIT entered into an agreement to economically fix the interest for the $125,000 Term Loan III
using an interest rate swap at LIBOR of 1.31% plus an applicable margin based on leverage. The interest rate swap
eliminates the risk of fluctuating cash flow with the variable interest rate on Term Loan III.
On February 29, 2020, the REIT entered into a forward agreement to economically fix the interest for $470,000 of term
loans using an average interest rate swap at LIBOR of 0.93% plus an applicable margin based on leverage. The REIT is
expected to draw the $470 million from increased capacity on the three delayed draw term loans under the Credit Facility
and use the proceeds to partially fund the Acquisition.
The following table summarizes the details of the derivative instrument outstanding:
Transaction Date
August 28, 2018
October 1, 2018
December 31, 2018
April 5, 2019
Type
Swap
Swap
Swap
Swap
Principal
Amount
$ 75,000
30,000
50,000
80,000
Interest
Rate Maturity Date
June 26, 2023
4.38%
4.33% August 31, 2023
4.42% December 31, 2023
3.86% March 26, 2024
$ 235,000
4.21%
Financial
Instrument
Classification
FVTPL
FVTPL
FVTPL
FVTPL
Fair Value
December 31,
2019
$ (3,199)
(2,317)
(2,193)
(1,608)
December 31,
2018
$ (1,145)
(786)
(839)
-
$ (9,317)
$ (2,770)
The fair value of the derivative instrument is estimated using a discounted cash flow model using observable yield curves
and applicable credit spreads. Total fair value (income) expense recognized during the three months and year ended
December 31, 2019, which is reported under finance costs, was ($2,203) and $6,547, respectively. For the three months
and year ended December 31, 2018, the total fair value expense was $3,170 and $2,770, respectively.
For additional disclosures on how the REIT manages interest rate risk through the use of derivative instruments see the
REIT’s audited consolidated financial statements and accompanying notes for the years ended December 31, 2019 and
2018 and the “Risk Factors” section of this MD&A.
42
Commitments and Contingencies
Leasing Cost Reserve
On a quarterly basis, leasing costs (inclusive of leasing commissions, tenant allowances, or improvements) fluctuate, at
times significantly. The REIT uses management’s best estimate of leasing costs on expected lease maturities within the
portfolio to calculate the leasing cost reserve used in the REIT’s AFFO and ACFO calculation (see “Funds from Operations
(FFO) and Adjusted Funds from Operations (AFFO)” and “Liquidity and Capital Resources” sections of this MD&A).
Management currently estimates leasing costs to be approximately $0.23 per square foot per annum of the portfolio GLA
based on a forward-looking five-year period. The leasing cost reserve per square foot will change from time to time as the
REIT purchases and disposes of investment properties and as the forward-looking five-year period is updated.
The following table shows actual leasing costs as compared to reserved leasing costs since the REIT’s initial public offering
(“IPO”):
Leasing Costs
(‘000s)
Reserved
Actual
Excess/(deficit)
Period from IPO to
December 31, 2017
15,661
14,533
Year ended
December 31, 2018
4,319
7,514
Year ended
December 31, 2019
4,879
9,991
1,128
(3,195)
(5,112)
$
$
$
Since IPO
24,859
32,038
(7,179)
During the year ended December 31, 2019, the REIT renewed approximately 1.6 million square feet of GLA with lease
expirations in 2020 and beyond. The increase in releasing activity resulted in the REIT incurring higher leasing costs in 2019
versus in the year the leases renew. The REIT believes the current estimate of $0.23 per square foot per annum to be
indicative of future leasing costs.
Maintenance Capital Expenditure Reserve
The majority of the REIT’s capital expenditures are incurred to sustain existing GLA and occupancy levels and are considered
operational in nature. The REIT’s policy is to engage third party consultants to provide building condition assessment
reports (“BCA Reports”) on each property acquired, for the purpose of assessing and documenting the existing condition
of each investment property and major property operating components and systems. In addition, the REIT does its own
internal analysis of expected capital expenditures using a forward-looking five-year period. The REIT then uses the
information from the BCA Reports and its internal analysis to calculate a five-year weighted average maintenance capital
expenditure per square foot, which is used in the REIT’s AFFO and ACFO calculation (see “Funds from Operations (FFO) and
Adjusted Funds from Operations (AFFO)” and “Liquidity and Capital Resources” sections of this MD&A). Management
currently estimates recurring operational maintenance capital expenditures to be approximately $0.09 per square foot per
annum of the portfolio GLA based on a forward-looking five-year period. The maintenance capital expenditure reserve per
square foot will change from time to time as the REIT purchases and disposes of investment properties and as the forward-
looking five-year period is updated. Due to capital expenditures fluctuating from period to period, at times significantly,
the REIT believe the use of a reserve better reflect average annual capital expenditure spending levels for the calculation
of AFFO and ACFO.
The following table shows actual maintenance capital expenditures as compared to reserved maintenance capital
expenditures since IPO:
Maintenance Capital Expenditures
(‘000s)
Reserved
Actual
Excess/(deficit)
Period from IPO to
December 31, 2017
4,386
2,561
Year ended
December 31, 2018
1,189
1,635
Year ended
December 31, 2019
1,700
5,017
Since IPO
7,275
9,213
1,825
(446)
(3,317)
(1,938)
$
$
$
43
During the year ended December 31, 2019, the REIT incurred capital expenditures relating to the replacement of several
roofs within the portfolio. Approximately $2,930 was related to the roof replacement at the investment property located
at 6766 Pontius Road. The REIT believes the current estimate of $0.09 per square foot per annum is indicative of future
capital expenditure requirements.
The REIT also incurs capital expenditures, that are not included in the reserves above, comprised of expenditures that are
deemed revenue-enhancing and expenditures that are recoverable from tenants as described below.
Expenditures deemed revenue-enhancing are characterized by expansions that increase GLA, improvements that drive an
increase to current and future lease revenues, or repositioning of a property that may lead to higher rental rates. For the
year ended December 31, 2019, the REIT incurred $7,314 of revenue-enhancing capital expenditures primarily related to
an expansion at its investment property located at 2401 Midpoint Drive.
Certain expenditures are recoverable from tenants pursuant to the terms of their leases either in the year such expenditures
are incurred or, in the case of a major capital expenditure item, on a straight-line basis over the expected useful life together
with an imputed rate of interest. Recoverable capital expenditures may include items such as parking lot resurfacing and
roof replacement.
EQUITY
The REIT’s Declaration of Trust authorizes the issuance of an unlimited number of REIT Units. REIT Units are ordinary units
of the REIT, each of which represents a Unitholders’ proportionate undivided beneficial interest and voting rights in the
REIT.
Class B Units, which are economically equivalent to REIT Units, are entitled to distributions per unit, from the Partnership,
in an amount equal to the distributions per unit declared in respect of the REIT Units, and are redeemable by the holder
thereof for cash or REIT Units (on a one-for-one basis, subject to customary anti-dilution adjustments), as determined by
the general partner of the Partnership in its sole discretion. Class B Units are puttable and, therefore, meet the definition
of a financial liability under IAS 32, Financial Instruments – Presentation, and are accordingly classified as non-current
liabilities in the consolidated statements of financial position.
On February 25, 2019, the REIT issued 10,000,000 REIT Units at a price of $13.50 per REIT Unit to a syndicate of underwriters
on a bought deal basis for net cash proceeds to the REIT of approximately $128,948 (inclusive of underwriters’ fees and
issuance costs of $6,052).
On October 29, 2019, the REIT issued 6,160,000 REIT Units at a price of $13.80 per REIT Unit to a syndicate of underwriters
on a bought deal basis for gross cash proceeds to the REIT of approximately $80,883 (inclusive of underwriters’ fees and
issuance costs of $4,125). On November 27, 2019, the REIT issued an additional 924,000 REIT Units at a price of $13.80 per
REIT Unit pursuant to the exercise in full of the over-allotment granted by the REIT to the underwriters of the October 2019
Offering for net cash proceeds to the REIT of approximately $12,241 (inclusive of underwriters’ fees of $510).
The REIT issued 100,517 REIT Units for the redemption of DTUs and exercise of options during the year ended December
31, 2019.
As at December 31, 2019, ownership of the REIT was as follows (excluding options, DPUs, and DTUs outstanding under the
REIT’s equity plans):
Public float
AIMCo
Employees and Trustees of the REIT
TOTAL
REIT Units
53,130,947
11,204,502
41,389
64,376,838
Class B Units
825,122
-
895,737
1,720,859
Total Units
53,956,069
11,204,502
937,126
66,097,697
% of Total
81.6%
17.0%
1.4%
100.0%
44
As at December 31, 2019, ownership of the REIT on a fully diluted basis was as follows (including options, DPUs, and DTUs
outstanding under the REIT’s equity plans):
REIT Units(¹)
% of Total
79.5%
Public float
16.5%
AIMCo
4.0%
Employees and Trustees of the REIT
100.0%
TOTAL
(¹) Assumes a cashless exercise of all in-the-money stock options and conversion of all vested and unvested DTUs granted
for equivalent REIT units.
(²) Assumes conversion of all vested and unvested DPUs granted for equivalent Class B Units.
Class B Units(²)
904,861
-
1,587,646
2,492,507
Total Units
54,035,808
11,204,502
2,689,894
67,930,204
53,130,947
11,204,502
1,102,248
65,437,697
Subsequent to December 31, 2019, the REIT completed the following:
On February 27, 2020, the REIT issued 18,850,500 Subscription Receipts. Each Subscription Receipt entitles the holder
thereof to receive one REIT Unit upon completion of the Acquisition by the REIT without payment of any additional
consideration or any further action on the part of the holder of the Subscription Receipt.
As at March 11, 2020, ownership of the REIT was as follows (excluding options, DPUs, and DTUs outstanding under the
REIT’s equity plans):
Public float
AIMCo
Employees and
Trustees of the REIT
TOTAL
REIT Units
53,133,605
11,204,502
41,389
64,379,496
Class B Units
822,464
-
Subscription
Receipts
16,272,500
2,578,000
Total Units
70,228,569
13,782,502
% of Total
82.7%
16.2%
895,737
1,718,201
-
18,850,500
937,126
84,948,197
1.1%
100.0%
As at March 11, 2020, ownership of the REIT on a fully diluted basis was as follows (including options, DPUs, and DTUs
outstanding under the REIT’s equity plans):
Subscription
Receipts
REIT Units(¹)
53,133,605
11,204,502
Class B Units(²)
902,203
-
Public float
AIMCo
Employees and
Trustees of the REIT
TOTAL
(¹) Assumes a cashless exercise of all in-the-money stock options and conversion of all vested and unvested DTUs granted
for equivalent REIT units.
(²) Assumes conversion of all vested and unvested DPUs granted for equivalent Class B Units.
-
18,850,500
1,096,455
65,434,562
2,684,101
86,774,911
16,272,500
2,578,000
1,587,646
2,489,849
3.1%
100.0%
Total Units
70,308,308
13,782,502
% of Total
81.0%
15.9%
Deferred Unit Incentive Plan
DTUs
On April 26, 2013, the REIT authorized a deferred unit incentive plan (“DUIP”), as amended and restated on May 13, 2016,
that provides for the granting of DTUs to trustees, officers, employees, consultants and service providers, as well as
employees of such service providers. DTUs are defined as notional units with a fair value based on the REIT Units’ closing
price per the TSX. The maximum number of REIT Units reserved for issuance under the DUIP is 5% of the total number of
REIT Units issued and outstanding from time to time. Vested DTUs may be redeemed in whole or in part for REIT Units
issued from treasury or cash. Whenever cash distributions are paid to REIT unitholders, additional DTUs are credited to the
participant's outstanding DTU balance based on the 5-day volume-weighted average price on the grant date. These
45
additional REIT Units vest on the same schedule as their corresponding DTUs and the corresponding expense is recorded
as adjustments based on the fair value of the REIT Units and are reported within general and administrative expenses in
the statements of net income and comprehensive income.
The REIT has granted or approved DTUs with the following vesting periods:
Vesting Type
Basic DTUs
Performance DTUs
Trustee Fee DTUs
Trustee Match DTUs
Vesting Period
Varies between one to five years
100% following three-year performance period
Immediately
three years; 33% per year on the anniversary date
Target Payout
n/a
0% - 150%
n/a
n/a
Dividends
Accrue monthly
Accrue monthly
Accrue monthly
Accrue monthly
Performance DTUs entitle certain officers and employees to receive the value of the Performance DTUs at the end of the
applicable performance period, based upon the REIT achieving certain performance conditions. The target payout will be
based on the REIT’s relative total shareholder return performance compared to a predetermined peer group.
All members of the Board of Trustees have elected to receive their annual retainers and meeting fees for the current fiscal
year and since inception in the form of DTUs. Annually, the REIT matches 50% of all annual trustee compensation received
in DTUs.
A summary of DTUs granted under the DUIP is set forth below:
Basic DTUs Performance DTUs
Trustee DTUs (¹)
Total DTUs
Total as at December 31, 2017
Granted
Distributions
Redeemed
Total as at December 31, 2018
Granted
Distributions
Redeemed
576,838
131,140
36,188
(44,000)
700,166
2,568
34,539
(168,320)
-
52,555
1,031
-
53,586
76,862
5,577
-
158,539
48,864
10,016
-
217,419
31,471
13,217
-
Total as at December 31, 2019
(¹) Includes Trustee fee and Trustee match DTUs.
568,953
136,025
262,107
735,377
232,559
47,235
(44,000)
971,171
110,901
53,333
(168,320)
967,085
Additional Trustee DTUs of $166 had been earned and recorded as deferred compensation liability as at December 31,
2019, but are not yet granted.
A summary of the vested DTUs granted and the total fair value of DTUs, inclusive of vested and unvested DTUs, is set forth
below:
Vested DTUs
December 31, 2018
December 31, 2019
Total Fair Value
December 31, 2018
December 31, 2019
Basic DTUs Performance DTUs
Trustee DTUs (¹)
Total DTUs
251,200
292,219
-
-
184,673
241,176
435,873
533,395
$ 8,997
$ 7,936
$ 707
$ 1,207
$ 2,794
$ 3,656
$ 12,498
$ 12,799
(¹) Includes Trustee fee and Trustee match DTUs.
46
Under IFRS, liabilities related to deferred compensation under the DUIP are measured at fair value as at the grant date and
are remeasured at each reporting date. Total compensation expense related to DTUs for the three months and year ended
December 31, 2019 was $665 and $3,532, respectively. Total compensation expense recognized for the three months and
year ended December 31, 2018 and was $658 and $3,155, respectively. These amounts include adjustments based on the
fair value of the DTUs and are reported within general and administrative expenses as at December 31, 2019 and 2018.
Total compensation expense related to DTUs for the three months and year ended December 31, 2019 include $0 and
$207 of accelerated expense related to severance costs, respectively.
DPUs
On July 31, 2018, the REIT authorized a subplan under the DUIP (as defined herein) that provides for the granting of DPUs
to trustees, officers, and employees of the REIT. DPUs are defined as exchangeable units granted by the Partnership that
are economically equivalent to a REIT Unit and are exchangeable, at the holder’s option, to Class B Units or cash. Whenever
cash distributions are paid to Unitholders, holders of DPU also receive a cash distribution for every outstanding DPU. DPUs
vest based on various vesting periods (three to five years), as defined in each specific award.
On July 31, 2018, in connection with the internalization of management, the REIT granted 695,542 DPUs to officers and
employees of the REIT which vest 50% upon each of the fourth and fifth anniversaries of the award date. The awards are
also subject to an additional lock-up period of three years after vesting.
The following table shows the change in the number of DPUs outstanding for the periods presented:
Total as at December 31, 2017
Granted
Total as at December 31, 2018
Granted
Total as at December 31, 2019
Total DPUs
-
695,542
695,542
76,106
771,648
For the three months and year ended December 31, 2019, distributions declared on DPUs, which are included in finance
costs were $147 and $567, respectively. For the three months and year ended December 31, 2018, distributions declared
on DPUs, which are included in finance costs were $132 and $220, respectively. Total distributions payable on DPUs as at
December 31, 2019 and December 31, 2018 were $49 and $44, respectively. As at December 31, 2019 and 2018, 79,739
and -0- DPUs have vested, respectively.
Under IFRS, liabilities related to deferred compensation under the DUIP are measured at fair value as at the grant date and
are remeasured at each reporting date. The fair value changes are recorded within general and administrative expense in
the statements of net income and comprehensive income. The fair value of all outstanding DPUs as at December 31, 2019
and December 31, 2018 was $10,739 and $8,932, respectively. Total compensation expense related to DPUs for the three
months and year ended December 31, 2019 was $567 and $3,231, respectively. Total compensation expense related to
DPUs for the three months and year ended December 31, 2018 was $500 and $842, respectively. The amount includes
adjustments based on the fair value of the DPUs and is reported within general and administrative expenses as at
December 31, 2019 and 2018. Total compensation expense related to DPUs for the three months and year ended
December 31, 2019 include $0 and $846 of accelerated expense related to severance costs, respectively.
Unit Option Plan
On April 26, 2013, the REIT authorized a unit option plan, as amended and restated on May 13, 2016, (the “Plan”), under
the terms of which options to purchase REIT Units may, from time to time, be granted to trustees, officers, employees and
consultants, exercisable for a maximum period of 10 years from the date of grant. The maximum number of REIT Units
reserved for issuance under the Plan combined is 10% of the total number of REIT Units issued and outstanding from time
47
to time. The maximum number of REIT Units reserved for issuance under the Plan and DUIP combined is 10% of the total
number of REIT Units issued and outstanding from time to time. These options vest as to one-third on the first anniversary
of the grant date, and one-third on each of the second and third anniversaries. The Plan expired on May 13, 2019 and can
no longer issue new options.
A summary of options granted under the Plan is set forth below:
Outstanding and Exercisable, December 31, 2017
Exercised in 2018
Outstanding and Exercisable, December 31, 2018
Exercised in 2019
Outstanding and Exercisable, December 31, 2019
Number of options
Weighted average
exercise price
420,000
(10,000)
410,000
(80,000)
330,000
$ 10.02
10.14
$ 10.02
10.14
$ 9.99
The total fair value of options granted as at December 31, 2019, December 31, 2018 and as at the grant date was $982,
$862 and $327, respectively. The aggregate intrinsic value of exercisable options as at December 31, 2019 and December
31, 2018 was $1,307 and $1,160, respectively. The weighted average remaining contractual life for outstanding options and
for exercisable options as at December 31, 2019 was 3.8 years.
Under IFRS, liabilities related to deferred compensation under the Plan are measured at fair value as at the grant date and
are remeasured at each reporting date. The fair value changes are recorded within general and administrative expense in
the statements of net income and comprehensive income. Total compensation expense related to the option plan for the
three months and year ended December 31, 2019 was $24 and $405, respectively. Total compensation (income) expense
recognized for the three months and year ended December 31, 2018 and was $(107) and $94, respectively
As at December 31, 2019, fair value adjustments were determined using the Black-Scholes option pricing model with the
following assumptions:
Average expected option term
Risk-free interest rate
Expected volatility
Dividend yield
1.9 years
1.58%
14.41%
5.45%
PART III
DISCLOSURE AND INTERNAL CONTROLS
Disclosure Controls and Procedures
The REIT’s Chief Executive Officer and Chief Financial Officer have designed, or caused to be designed under their
supervision, the REIT’s disclosure controls and procedures as defined in National Instrument 52-109 – Certification of
Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”). As required by NI 52-109, the REIT’s Chief Executive Officer
and Chief Financial Officer have evaluated, or caused to be evaluated under their direct supervision, the effectiveness of
the REIT’s disclosure controls and procedures, and concluded that they are effective as at December 31, 2019.
Internal Controls over Financial Reporting
The REIT’s Chief Executive Officer and Chief Financial Officer have designed, or caused to be designed under their
supervision, the REIT’s internal controls over financial reporting. As required by NI 52-109, and using the criteria established
by the Committee of Sponsoring Organization of the Treadway Commission (“COSO 2013”), the Chief Executive Officer and
Chief Financial Officer have evaluated, or caused to be evaluated under their direct supervision, the effectiveness of the
REIT’s internal controls over financial reporting and concluded that they are effective and that there were no material
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weaknesses that have been identified as at December 31, 2019.
Changes in Disclosure and Internal Controls
No significant changes were made in the REIT’s internal controls over financial reporting during the three months ended
December 31, 2019 that have materially affected, or are reasonably likely to materially affect, the REIT’s disclosure controls
and procedures or internal controls over financial reporting.
Inherent Limitation
Disclosure controls and procedures and internal controls over financial reporting cannot provide absolute assurance of
achieving financial reporting objectives because of their inherent limitations. Disclosure controls and procedures and
internal controls over financial reporting are processes that involve human diligence and compliance and is subject to
lapses in judgment and breakdowns resulting from human errors. Disclosure controls and procedures and internal controls
over financial reporting also can be circumvented by collusions or improper management override. Because of such
limitations, there is risk that material misstatements may not be prevented or detected on a timely basis by disclosure
controls and procedures and internal controls over financial reporting. However, these inherent limitations are known
features of the disclosure and financial reporting process. Therefore, it is possible to design into the process safeguards to
reduce, though not eliminate, this risk.
PART IV
RISK FACTORS
The REIT faces a variety of significant and diverse risks, many of which are inherent in the business conducted by the REIT,
the Partnership and the tenants of the REIT’s properties. Described below are certain risks that could materially affect the
REIT and the value of the Units. Other risks and uncertainties that the REIT does not presently consider to be material, or
of which the REIT is not presently aware, may become important factors that affect the REIT’s future financial condition
and results of operations. The occurrence of any of the risks discussed below could materially and adversely affect the
business, prospects, financial condition, results of operations, cash flow, and the ability of the REIT to make cash
distributions to Unitholders or value of the Units.
Risk Factors Related to the Real Estate Industry
Real Property Ownership and Tenant Risks
The REIT owns properties and is expected in the future to acquire interests in and develop other real property. All real
property investments are subject to elements of risk. By specializing in a particular type of real estate, the REIT is exposed
to adverse effects on that segment of the real estate market and does not benefit from a diversification of its portfolio by
property type.
There is no assurance that the operations of the REIT will be profitable or that cash from operations will be available to
make distributions to Unitholders. Real estate, like many other types of long-term investments, experiences significant
fluctuation in value and, as a result, specific market conditions may result in occasional or permanent reductions in the
value of the REIT’s portfolio. The marketability and value of the portfolio will depend on many factors, including, without
limitation: (i) changes in general economic conditions (such as the availability, terms and cost of mortgage financings and
other types of credit); (ii) local economic conditions (such as business layoffs, industry slowdowns, changing demographics
and other factors); (iii) local real estate conditions (such as an oversupply of properties or a reduction in demand for real
estate in the area); (iv) changes in occupancy rates; (v) the attractiveness of properties to potential tenants or purchasers;
(vi) competition with other landlords with similar available space; (vii) the ability of the REIT to provide adequate
maintenance at competitive costs; (viii) changes in exchange rates; (ix) the promulgation and enforcement of governmental
regulations relating to land-use and zoning restrictions, environmental protection and occupational safety; (x) the financial
condition of borrowers and of tenants, buyers and sellers of property; (xi) changes in real estate tax rates and other
operating expenses; (xii) the imposition of rent controls; (xiii) energy and supply shortages; (xiv) various uninsured or
uninsurable risks; and (xv) natural disasters. There can be no assurance of profitable operations because the costs of
operating the portfolio, including debt service, may exceed gross rental income therefrom, particularly since certain
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expenses related to real estate, such as property taxes, utility costs, maintenance costs and insurance, tend to increase
even if there is a decrease in the REIT’s income from such investments.
The REIT’s properties generate income through rent payments made by tenants. Upon the expiry of any lease, there can
be no assurance that the lease will be renewed or the tenant replaced for a number of reasons. Furthermore, the terms of
any subsequent lease may be less favourable than the existing lease and renewed rent may be lower than prevailing market
rent. The REIT’s cash flow and financial position would be materially adversely affected if its tenants were to become
unable to meet their obligations under their leases or if a significant amount of available space in the REIT’s properties was
not able to be leased on economically favourable lease terms. In the event of default by a tenant, the REIT may experience
delays or limitations in enforcing its rights as lessor and incur substantial costs in protecting its investment. In addition,
restrictive covenants may narrow the field of potential tenants at a property and could contribute to difficulties in leasing
space to new tenants. Furthermore, at any time, a tenant may seek the protection of bankruptcy, insolvency or similar
laws which could result in the rejection and termination of the lease by the tenant and, thereby, cause a reduction in the
REIT’s cash flow, financial condition and results of operations and its ability to make distributions to Unitholders.
Additionally, due to changing trends in the design of the types of properties owned by the REIT, it is possible that the REIT’s
properties will in the future be less desirable than newer properties developed by competitors. This, in turn, would affect
the ability of the REIT to renew its leases with existing tenants and, in the event that such leases are not renewed, to rent
unleased suites.
Competition
The real estate business is competitive. The REIT competes with other investors, managers and owners of properties in
seeking tenants and for the purchase and development of desirable properties. Some of the industrial properties of the
REIT’s competitors are newer, better located or better capitalized than the REIT’s properties. Certain of these competitors
may have greater financial and other resources and greater operating flexibility than the REIT. Those entities may be able
to accept more risk than the REIT can prudently manage and may have the ability or inclination to acquire properties at a
higher price or on terms less favourable than those the REIT may be prepared to accept. The existence of competing
managers and owners could have a material adverse effect on the REIT’s ability to lease space and on the rents the REIT is
able to charge, and could materially adversely affect revenues and the REIT’s ability to meet its obligations. In addition,
such competition could have an adverse effect on property values in the markets in which the investments are located.
Competition generally reduces the number of suitable investment opportunities available to the REIT and increases the
bargaining power of property owners seeking to sell. Furthermore, the number of entities and the amount of funds
competing for suitable industrial properties may increase. This could result in increased demand for these assets and
therefore, increased prices paid for them, which may in turn adversely affect the REIT’s ability to make investments and
generate revenues.
Liquidity
Real property investments are relatively illiquid, with the degree of liquidity generally fluctuating in relation to demand for
and the perceived desirability of such investments. Such illiquidity will tend to limit the REIT’s ability to vary its portfolio of
properties promptly in response to changing economic, investment or other conditions. If the REIT were to be required to
liquidate its real property investment, the proceeds to the REIT might be significantly less than the aggregate carrying value
of the REIT’s properties, which could have an adverse effect on the REIT’s financial condition and results of operations and
decrease the amount of cash available for distribution. Illiquidity may result from the absence of an established market for
real property investments, as well as from legal or contractual restrictions on their resale. In addition, in recessionary times,
it may be difficult to dispose of certain types of real estate. The costs of holding real estate are considerable and during an
economic recession the REIT may be faced with ongoing expenditures with a declining prospect of incoming receipts. In
such circumstances, it may be necessary for the REIT to dispose of properties at lower prices in order to generate sufficient
cash for operations and making distributions.
Environmental Matters
Environmental legislation and regulations have become increasingly important in recent years. As a current or previous
owner of interests in real property in the U.S., the REIT is subject to various U.S. federal, state and municipal laws relating
to environmental matters. Such laws provide that the REIT could be, or become, liable for environmental harm, damage
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or costs, including with respect to the release of hazardous, toxic or other regulated substances into the environment
and/or affecting persons, and the removal or other remediation of hazardous, toxic or other regulated substances that
may be present at or under the REIT’s properties or at third-party sites, at which wastes were sent for disposal, including
lead-based paints, mould, asbestos, polychlorinated biphenyls, petroleum-based fuels, mercury, volatile organic
compounds, underground storage tanks, pesticides and other miscellaneous materials. Further, liability may be incurred
by the REIT with respect to the release of such substances from or to the REIT’s properties. These laws often impose liability
regardless of whether the property owner knew of, or was responsible for, the presence of such substances. These laws
also govern the maintenance and removal of asbestos containing materials in the event of damage, demolition or
renovation of a property and also govern emissions of and exposure to asbestos fibres in the air. Certain of the REIT’s
properties might contain asbestos containing materials. The costs of investigation, removal and remediation of such
substances or properties, if any, may be substantial and could adversely affect the REIT’s financial condition and results of
operations but is not estimable. There may be contamination on the REIT’s properties of which management is not aware.
The presence of contamination or the failure to remediate contamination may adversely affect the REIT’s ability to sell
such property, realize the full value of such property or borrow using such property as collateral security, and could
potentially result in claims against the REIT by public or private parties.
The REIT’s properties may contain soil or groundwater contamination, hazardous substances and/or other residual
pollution and environmental risks. Buildings and their fixtures might contain asbestos, mould or other hazardous
substances above the allowable or recommended thresholds, or other environmental risks could be associated with the
buildings. The REIT will bear the risk of cost-intensive assessment, remediation or removal of such soil or groundwater
contamination, hazardous substances or other residual pollution. The discovery of any such contamination or residual
pollution on the sites and/or in the buildings, particularly in connection with the lease or sale of properties or borrowing
using the real estate as security, could trigger claims for rent reductions or termination of leases for cause, for damages
and other breach of warranty claims against the REIT. The remediation of any contamination and the related additional
measures the REIT would have to undertake could have a materially adverse effect on the REIT and could involve
considerable additional costs. The REIT will also be exposed to the risk that recourse against the polluter or the previous
owners of the REIT’s properties might not be possible. Moreover, the existence or even the mere suspicion of the existence
of soil or groundwater contamination, hazardous materials or other residual pollution can materially adversely affect the
value of a property and the REIT’s ability to lease or sell such a property.
The REIT’s operating policy is to obtain a Phase I ESA Report of each real property to be acquired by it and, if the Phase I
ESA Report recommends that a further environmental site assessment be conducted, the REIT will have conducted such
further environmental site assessments, in each case by an independent and experienced environmental consultant. As a
condition to any acquisition of real property, such assessments will be satisfactory to the Board of Trustees. Although such
environmental site assessments would provide the REIT with some level of assurance about the condition of property, the
REIT may become subject to liability for undetected contamination or other environmental conditions at the REIT’s
properties, which could negatively impact the REIT’s financial condition and results of operations and decrease the amount
of cash available for distribution.
The REIT intends to make the necessary capital and operating expenditures to comply with environmental laws and address
any material environmental issues and such costs relating to environmental matters that may have a material adverse
effect on the REIT’s business, financial condition or results of operation and decrease the amount of cash available for
distribution. Furthermore, environmental laws can change and the REIT may become subject to even more stringent
environmental laws in the future, with increased enforcement of laws by the government. Compliance with more stringent
environmental laws, which may be more rigorously enforced, the identification of currently unknown environmental issues
or an increase in the costs required to address a currently known condition may have an adverse effect on the REIT’s
financial condition and results of operations and decrease the amount of cash available for distribution to Unitholders.
Changes in Applicable Laws, Regulations and Political Conditions
The REIT is subject to laws and regulations governing the ownership and leasing of real property, zoning, building standards,
landlord tenant relationships, employment standards, environmental matters, taxes and other matters. It is possible that
future changes in applicable federal, provincial, state, local or common laws or regulations or changes in their enforcement
or regulatory interpretation could result in changes in the legal requirements affecting the REIT (including with retroactive
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effect). Any changes in the laws to which the REIT is subject could materially adversely affect the REIT’s rights and title to
the Properties. In addition, political conditions in Canada and the U.S. are also subject to change. Any changes in investment
policies, shifts in political attitudes or political instability in Canada or the U.S. may adversely affect the REIT’s investments.
It is not possible to predict whether there will be any future shift in political conditions that will impact the REIT or any
further changes in the regulatory regimes to which the REIT is subject, nor is it possible to predict the effect of any such
changes on the REIT’s investments.
Lower revenue growth or significant unanticipated expenditures may result from the REIT’s need to comply with changes
in applicable laws or the enactment of new laws, including: (i) laws imposing environmental remedial requirements and
the potential liability for environmental conditions existing on properties or the restrictions on discharges or other
conditions; (ii) rent control or rent stabilization laws or other landlord/tenant laws; or (iii) other governmental rules and
regulations or enforcement policies affecting the development, use and operation of the REIT’s properties, including
changes to building codes and fire and life-safety codes.
Capital Expenditures and Fixed Costs
As a matter of conducting business in the ordinary course, 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 sufficient income to pay such expenses. This
may include expenditures to fulfill mandatory requirements for energy efficiency. In order to retain desirable rentable
space and to generate adequate revenue over the long-term, the REIT must maintain or, in some cases, improve each
property’s condition to meet market demand. Maintaining a rental property in accordance with market standards can
entail significant costs, which the REIT may not be able to pass on to its tenants. Numerous factors, including the age of
the relevant building structure, the material and substances used at the time of construction or currently unknown building
code violations could result in substantial unbudgeted costs for refurbishment or modernization. The timing and amount
of capital expenditures required by the REIT will indirectly affect the amount of cash available for distribution to
Unitholders. Distributions may be reduced, or even eliminated, at times when the REIT deems it necessary to make
significant capital or other expenditures.
If the actual costs of maintaining or upgrading a property exceed the REIT’s estimates, or if hidden defects are discovered
during maintenance or upgrading which are not covered by insurance or contractual warranties, or if the REIT is not
permitted to raise rents due to legal constraints, the REIT will incur additional and unexpected costs. If competing industrial
properties are built in the area where one of the REIT’s properties is located or similar industrial properties located in the
vicinity of one of the REIT’s properties are substantially refurbished, the NOI derived from and the value of such property
could be reduced. Any failure by the REIT to undertake appropriate maintenance and refurbishment work in response to
the factors described above could materially adversely affect the rental income that the REIT earns from its properties and
could have a material adverse effect on the REIT’s cash flow, financial condition and results of operations and its ability to
make distributions to Unitholders.
Current Economic Environment
The REIT’s operating results may be affected by weakness in the national economy and local economies where the REIT’s
properties are located. Specific impacts may include (i) increased levels of tenant defaults under leases; (ii) non-renewals
under lease or re-leasing which may require concessions, tenant improvement expenditures or reduced rental rates; and
(iii) adverse capital and credit market conditions for REIT capital needs; and (iv) the REIT’s tenants may be unable to meet
their rental payments and other obligations due to the REIT. In addition, fluctuation in interest rates or other financial
market volatility may restrict the availability of financing for future prospective purchasers of the REIT’s investments and
could significantly reduce the value of such investments. The value of our investments may not appreciate or may decline
in value significantly below the amount we pay for these investments. The length and severity of any economic slowdown
or downturn cannot be predicted. The REIT’s operations could be negatively affected to the extent that an economic
slowdown or downturn is prolonged or becomes more severe.
Natural Disasters
Certain of the REIT’s properties are located in locations where buildings are susceptible to sustaining damage from natural
disasters. While the REIT has insurance to cover a substantial portion of the cost of such events, the REIT’s insurance
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includes deductible amounts and certain items may not be covered by insurance. Future natural disasters may significantly
affect the REIT’s operations and its properties and, more specifically, may cause the REIT to experience reduced rental
revenue (including from increased vacancy), incur clean-up costs or otherwise incur costs in connection with such events.
Any of these events may have a material adverse effect on the REIT’s business, cash flow, financial condition, results of
operations and ability to make distributions to Unitholders.
Public Health Crises
Public health crises, pandemics and epidemics, including the novel coronavirus (COVID-19), could adversely impact the
REIT’s and its tenants’ businesses, and thereby the ability of tenants to meet their payment obligations, by disrupting
supply chains and transactional activities and negatively impacting local, national or global economies. Contagion in one
of the REIT’s properties or a market in which the REIT operates could negatively impact the REIT’s business, results of
operations or reputation or the attractiveness of that market.
Risks Relating to the REIT and its Business
Tenant Defaults, Bankruptcies or Insolvencies
The bankruptcy or insolvency of the REIT’s tenants may adversely affect the income produced by the REIT’s properties. If
a tenant defaults on its lease obligations, the REIT may experience delays in enforcing its rights as landlord and may incur
substantial costs, including litigation and related expenses, in protecting its investment and re-leasing its property. If a
tenant files for bankruptcy, the REIT generally cannot evict the tenant solely because of such bankruptcy. A court may
authorize a bankrupt tenant to reject and terminate its lease. In such a case, any claim against the tenant for unpaid future
rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the
lease, and it is unlikely that a bankrupt tenant would pay in full amounts it owes under the lease. This shortfall could
adversely affect the REIT’s cash flow and results of operations.
If a tenant experiences a downturn in its business or other types of financial distress, it may be unable to make timely
rental payments. Under some circumstances, the REIT may agree to partially or wholly terminate the lease in advance of
the termination date in consideration for a lease termination fee that is less than the agreed rental amount. Additionally,
without regard to the manner in which a lease termination occurs, the REIT is likely to incur additional costs in the form of
tenant improvements and leasing commissions in its efforts to lease the space to a new tenant, as well as possibly lower
rental rates reflective of declines in market rents. The REIT cannot assure an investor that it will have adequate sources of
funding available for such purposes.
Tenant Concentration
The REIT derives approximately 29.8% of its annualized in-place base rental revenue from its ten largest tenants.
Consequently, revenues are dependent on the ability of those tenants to meet rent obligations and the REIT’s ability to
collect rent from them. General Mills Operations, LLC is the REIT’s largest tenant by GLA and percentage of annualized base
rent occupying 6.6% of total portfolio GLA and accounting for 4.0% of the total portfolio’s annualized base rent. Unilever
Home & Personal Care is the second largest tenant by GLA, occupying 5.5% of total portfolio GLA and accounting for 3.8%
of the total portfolio’s annualized base rent. Amazon.com is the REIT’s third largest tenant by GLA, occupying 4.1% of total
portfolio GLA and accounting for 3.5% of the total portfolio’s annualized base rent. Keystone Automotive is the REIT’s
fourth largest tenant by GLA, occupying 3.3% of total portfolio GLA and accounting for 3.2% of the total portfolio’s
annualized base rent. Early termination options are held by 6 tenants of the properties with each including specified one-
time termination fees payable to the REIT. In total, early termination options represent 4.4% of the total GLA or 5.5% of
the 2019 annualized base rent of the properties, with option expirations at various times from 2022 through 2026. If such
tenants default on or cease to satisfy their payment obligations, or if tenants exercise their early termination options, there
could be an adverse impact on the REIT’s financial condition and results of operations and decrease the amount of cash
available for distribution.
Occupancy by Tenants
Although certain, but not all, leases contain a provision requiring tenants to maintain continuous occupancy of leased
premises, there can be no assurance that such tenants will continue to occupy such premises. Certain tenants have a right
to terminate their leases upon payment of a penalty, but others are not required to pay any penalty associated with an
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early termination. There can be no assurance that tenants will continue their activities and continue occupancy of the
premises. Any cessation of occupancy by tenants may have an adverse effect on the REIT and could adversely impact the
REIT’s financial condition and results of operations and decrease the amount of cash available for distribution to
Unitholders.
Approximately 60.1% of GLA of the REIT’s portfolio of properties is comprised of single-tenant properties. The largest five
such tenants represent approximately 16.4% of contractual base rent of the portfolio as at December 31, 2019.
In the event that such tenants were to terminate their tenancies or become insolvent, the REIT’s financial results could be
materially adversely affected. Until the REIT is in a position to acquire more assets and further diversify its tenant base, the
REIT will take certain steps to mitigate any credit risk by closely monitoring its tenants’ compliance with the terms of their
respective leases and to report any issues as soon as they are identified.
Access to Capital
The real estate industry is highly capital intensive. The REIT will require access to capital to maintain the REIT’s properties,
as well as to fund its growth strategy and certain capital expenditures from time to time. Although the Credit Facility is
available to the REIT, there can be no assurances that the REIT will otherwise have access to sufficient capital or access to
capital on terms favourable to the REIT for future property acquisitions, financing or refinancing of properties, funding
operating expenses or other purposes. Further, in certain circumstances, the REIT may not be able to borrow funds due to
the limitations set forth in the Declaration of Trust.
In recent years, domestic and international financial markets have experienced unusual volatility and uncertainty. Although
this condition occurred initially within the “subprime” single-family mortgage lending sector of the credit market, liquidity
has tightened in overall financial markets, including the investment grade debt and equity capital markets. Consequently,
there is greater uncertainty regarding the REIT’s ability to access the credit market in order to attract financing on
reasonable terms. Investment returns on the REIT’s assets and its ability to make acquisitions could be adversely affected
by the REIT’s inability to secure financing on reasonable terms, if at all.
Financing and Interest Rate Risk
The REIT’s outstanding indebtedness as at December 31, 2019 was $687,013, excluding mark-to-market adjustments and
financing costs. Although a portion of the cash flow generated by the REIT’s properties are devoted to servicing such debt,
there can be no assurance that the REIT will continue to generate sufficient cash flow from operations to meet required
interest and principal payments. If the REIT is unable to meet interest or principal payments, it could be required to seek
renegotiation of such payments or obtain additional equity, debt or other financing. The failure of the REIT to make or
renegotiate interest or principal payments or obtain additional equity, debt or other financing could adversely impact the
REIT’s financial condition, liquidity and results of operations and decrease the amount of cash available for distribution to
Unitholders. If the REIT defaults under a mortgage loan, it may lose the properties securing such loan.
The REIT is subject to the risks associated with debt financing, including the risk that the mortgages and banking facilities
secured by the REIT’s properties will not be able to be refinanced or that the terms of such refinancing will not be as
favourable as the terms of existing indebtedness, which may reduce FFO, AFFO and ACFO.
Approximately 24.7% of the REIT’s total principal indebtedness is variable rate debt which has not been hedged as at
December 31, 2019. Such variable rate debt will result in fluctuations in the REIT’s cost of borrowing as interest rates
change. To the extent that interest rates rise, the REIT’s operating results and financial condition could be adversely
affected and decrease the amount of cash available for distribution.
The REIT’s credit facilities also contain covenants that require it to maintain certain financial ratios on a consolidated basis.
If the REIT does not maintain such ratios, its ability to make distributions will be limited.
As at December 31, 2019, existing mortgages secured by the REIT’s properties mature between March 2020 and October
2024. As at December 31, 2019, the REIT’s unsecured debt matures between March 2023 and January 2025. To the extent
that the REIT incurs variable rate indebtedness, such indebtedness will result in fluctuations in the REIT’s cost of borrowing
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as interest rates change. To the extent that interest rates rise, the REIT’s operating results and financial condition could be
adversely affected and decrease the amount of cash available for distribution.
Operational Risk
Operational risk is the risk that a direct or indirect loss may result from an inadequate or failed technology, from a human
process or from external events. The impact of this loss may be financial loss, loss of reputation or legal and regulatory
proceedings. Management endeavours to minimize losses in this area by ensuring that effective infrastructure and controls
exist. These controls are constantly reviewed and if deemed necessary improvements are implemented.
Potential Acquisition, Investment and Disposition Opportunities and Joint Venture Arrangements
The REIT evaluates business and growth opportunities and continues to consider a number of acquisition, investment and
disposition opportunities and joint venture arrangements to achieve its business and growth strategies. In the normal
course, the REIT may have outstanding non-binding letters of intent and/or conditional agreements or may otherwise be
engaged in discussions with respect to potential acquisitions and financing of new assets, the refinancing of existing assets,
potential dispositions, establishment of new joint venture arrangements, the viability and status of its joint venture
arrangements, and changes to its capital structure, each of which, individually or in the aggregate, may or may not be
material if they were to progress. However, there can be no assurance that any of these discussions will result in a definitive
agreement and, if they do, what the terms or timing of any acquisition, investment or disposition would be or that such
acquisition, investment or disposition will be completed by the REIT. Similarly, there can be no assurance that the REIT will
enter into new joint venture arrangements or continue any such existing joint venture arrangements. If the REIT is unable
to manage its growth effectively, it could adversely impact the REIT’s financial position and results of operations and
decrease the amount of cash available for distribution. There can be no assurance as to the pace of growth through
property acquisitions or that the REIT will be able to acquire assets on an accretive basis and, as such, there can be no
assurance that distributions to Unitholders will increase in the future.
Acquired properties may be subject to unknown, unexpected or undisclosed liabilities which could have a material adverse
impact on the operations and financial results of the REIT. Representations and warranties given by third parties to the
REIT may not adequately protect against these liabilities and any recourse against third parties may be limited by the
financial capacity of such third parties. Furthermore, it is not always possible to obtain from the seller the records and
documents that are required in order to fully verify that the buildings to be acquired are constructed in accordance, and
that their use complies with, planning laws and building code requirements. Accordingly, in the course of acquiring a
property, specific risks might not be or might not have been recognized or correctly evaluated. These circumstances could
lead to additional costs and could have a material adverse effect on proceeds from sales and rental income of the relevant
properties.
The REIT’s ability to acquire properties on satisfactory terms and successfully integrate and operate them is subject to the
following additional risks: (i) the REIT may be unable to acquire desired properties because of competition from other real
estate investors with more capital, including other real estate operating companies, real estate investment trusts and
investment funds; (ii) the REIT may acquire properties that are not accretive to results upon acquisition, and the REIT may
not successfully manage and lease those properties to meet its expectations; (iii) competition from other potential
acquirers may significantly increase the purchase price of a desired property; (iv) the REIT may be unable to generate
sufficient cash from operations, or obtain the necessary debt or equity financing to consummate an acquisition or, if
obtainable, financing may not be on satisfactory terms; (v) the REIT may need to spend more than budgeted amounts to
make necessary improvements or renovations to acquired properties; (vi) agreements for the acquisition of properties are
typically subject to customary conditions to closing, including satisfactory completion of due diligence investigations, and
the REIT may spend significant time and money on potential acquisitions that the REIT does not consummate; (vii) the
process of acquiring or pursuing the acquisition of a new property may divert the attention of the REIT’s senior
management team from existing business operations; (viii) the REIT may be unable to quickly and efficiently integrate new
acquisitions, particularly acquisitions of portfolios of properties, into existing operations; (ix) market conditions may result
in higher than expected vacancy rates and lower than expected rental rates; and (x) the REIT may acquire properties
without any recourse, or with only limited recourse, for liabilities, whether known or unknown, such as clean-up of
environmental contamination, claims by tenants, vendors or other persons against the former owners of the properties
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and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the
properties.
If the REIT cannot complete property acquisitions on favourable terms, or operate acquired properties to meet the REIT’s
goals or expectations, the REIT’s business, financial condition, results of operations and cash flow, the per Unit trading
price and the REIT’s ability to satisfy debt service obligations and to make distributions to the Unitholders could be
materially and adversely affected. If the REIT does complete such transactions, the REIT cannot assure that they will
ultimately strengthen its competitive position or that they will not be viewed negatively by customers, securities analysts
or investors. Such transactions may also involve significant commitments of the REIT’s financial and other resources. Any
such activity may not be successful in generating revenue, income or other returns to the REIT, and the resources
committed to such activities will not be available to the REIT for other purposes.
Uncertain Global Economic and Political Environment
Concerns over global economic conditions and geopolitical issues, inflation and the availability and cost of credit have
contributed to increased global economic and political uncertainty. “Brexit” and tensions between the U.S. and other
countries have contributed to such uncertainty. Changes in policies by the U.S. or other governments could negatively
affect the REIT’s operating results due to changes in duties, tariffs or taxes, or limitations on currency or fund transfers, as
well as government-imposed restrictions on producing certain products in, or shipping them to, specific countries. Financial
market instability may result in lower returns on the REIT’s financial investments, and lower values on some of its assets.
Alternately, inflation may lead to higher costs for labor and materials and/or increase the REIT’s costs of borrowing and
raising capital. Uncertainty surrounding the global economic environment and geopolitical outlook may impact current and
future demand for the REIT’s properties and the financial condition of its tenants. If any of the foregoing impacts the
financial condition of the REIT’s tenants, they may delay payments to the REIT or request extended payment terms, which
could have an adverse effect on the REIT’s financial condition and working capital. The REIT cannot predict the precise
nature, extent, or duration of these economic or political conditions or if they will have any impact on its financial results.
A deterioration in the economic environment may accelerate the effect of the various risk factors described in this MD&A
and could result in other unforeseen events that may adversely impact the REIT’s business and financial condition.
Limits on Activities
In order to maintain its status as a “mutual fund trust” under the Income Tax Act (Canada) (“Tax Act”), the REIT cannot
carry on most active business activities and is limited in the types of investments it can make. The Declaration of Trust
contains restrictions to this effect.
Reliance on the Partnership
The REIT is dependent for a certain portion of NOI on the business of the Partnership. The cash distributions to Unitholders
are dependent on the ability of the Partnership to pay distributions in respect of the units of the Partnership. The ability
of the Partnership to pay distributions or make other payments or advances to the REIT may be subject to contractual
restrictions contained in any instruments governing the indebtedness of the Partnership. The ability of the Partnership to
pay distributions or make other payments or advances is also dependent on the ability of its subsidiaries to pay
distributions or make other payments or advances to the Partnership.
Cybersecurity Risk
Cybersecurity has become an increasingly problematic issue for issuers and businesses. 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. A cyber-incident is considered to be any adverse event that threatens
the confidentiality, integrity or availability of the REIT’s information resources. More specifically, a cyber-incident is an
intentional attack or an unintentional event that can include gaining unauthorized access to information systems to disrupt
operations, corrupt data or steal confidential or personal information, whether through cyber-attacks or cyber intrusions
over the Internet, malware, computer viruses, attachments to e-mails, spoofed e-mails, persons inside or persons with
access to systems inside the REIT and other significant disruptions of the IT networks and related systems. The risk of a
security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign
governments and cyber terrorists, has increased as the number, intensity and sophistication of attempted attacks and
intrusions from around the world have significantly increased. As the REIT’s reliance on technology has increased, so have
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the risks posed to its systems. The REIT’s networks and related systems are essential to the operation of the business and
the ability to perform day-to-day operations.
There can be no assurance that the REIT’s security efforts and measures will be effective or that attempted security
breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems
and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and
generally are not recognized until launched against a target, and in some cases are designed to not be detected and, in fact,
may not be detected. Accordingly, the REIT may be unable to anticipate these techniques or to implement adequate security
barriers or other preventative measures, and thus it is impossible to entirely mitigate this risk.
A security breach or other significant disruption involving the REIT’s IT networks and related systems could disrupt the
proper functioning of the networks and systems; result in misstated financial reports, violations of loan covenants and/or
missed reporting deadlines; result in the loss, theft or misappropriation of our property; result in our inability to properly
monitor our compliance with the rules and regulations regarding the qualification as a REIT; result in the unauthorized
access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise
valuable information of the REIT’s or others, which others could use to compete against the REIT or for disruptive,
destructive or otherwise harmful purposes and outcomes; require significant management attention and resources to
remedy any damages that result; subject the REIT to claims for breach of contract, damages, credits, penalties or
termination of leases or other agreements; or damage our reputation among our tenants and investors generally.
General Litigation Risks
In the normal course of the REIT’s operations, whether directly or indirectly, it may become involved in, named as a party
to or the subject of, various legal proceedings, including regulatory proceedings, tax proceedings and legal actions relation
to personal injuries, property damage, property taxes, land rights, the environment and contract disputes. The outcome
with respect to outstanding, pending or future proceedings cannot be predicted with certainty and may be determined in
a manner adverse to the REIT and as a result, could have a material adverse effect of the REIT’s assets, liabilities, business,
financial condition and results of operations. Even if the REIT prevails in any such legal proceedings, the proceedings could
be costly and time-consuming and may divert the attention of management and key personnel from the REIT’s business
operations, which could have a material adverse effect on the REIT’s business, cash flow, financial condition and results of
operations and ability to make distributions to Unitholders. This risk may be heightened for the REIT as compared to other
Canadian real estate investment trusts without properties located in the U.S. because the legal climate in the U.S., in
comparison to that in Canada, tend to give rise to a greater number of claims and larger damages awards.
Reliance on Key Personnel
The management and governance of the REIT depends on the services of certain key personnel, including certain executive
officers and the Board of Trustees. The loss of the services of any key personnel and the inability of the REIT to attract and
retain qualified and experienced personnel could have an adverse effect on the REIT, jeopardize the REIT’s ability to
manage or invest in the Venture, and adversely impact the REIT’s financial condition and results of operations and decrease
the amount of cash available for distribution.
Risks Relating to the Nature of the REIT’s Business
As outlined above, investing in real estate exposes the REIT to a high degree of risk. The ultimate performance of the REIT’s
portfolio is subject to the varying degrees of risk generally incident to the ownership and management of interests in, or
related to, real property. The ultimate value of the REIT’s portfolio depends upon the REIT’s ability to identify, acquire,
develop and dispose of properties in a profitable manner. Revenues may be adversely affected by changes in national or
international economic conditions; changes in local market conditions due to changes in general or local economic
conditions and neighbourhood characteristics; the financial condition of tenants, buyers and sellers of properties;
competition from prospective buyers for, and sellers of, other similar properties; changes in interest rates and in the
availability, cost and terms of financing; the impact of present or future environmental legislation and compliance with
environmental laws; changes in tax rates and other operating expenses; adverse changes in governmental rules and fiscal
policies; civil unrest; acts of God, including earthquakes, hurricanes and other natural disasters; acts of war; acts of
terrorism (any of which may result in uninsured losses); adverse changes in zoning laws; and other factors that are beyond
the control of the REIT. The REIT’s operating results will also be dependent upon the availability of, as well as the REIT’s
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ability to identify, consummate, manage and realize, attractive real estate investment opportunities. It may take
considerable time for the REIT to identify and consummate appropriate investments. No assurance can be given that the
REIT will be successful in identifying and consummating investments which satisfy the REIT’s rate of return objective or
that such investments, once consummated, will perform as expected.
Market Risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market prices. Market risk consists of interest rate risk, currency risk and other market price risk. There is interest rate risk
associated with the REIT’s properties’ fixed rate mortgages payable and hedged variable interest rate indebtedness due to
the expected requirement to refinance such indebtedness in the year of maturity, as well as interest rate risk on unhedged
variable interest rate indebtedness. In order to manage exposure to interest rate risk, management endeavours to manage
maturities of indebtedness, and match the nature of the indebtedness with the cash flow characteristics of the underlying
asset. In some cases, interest rate swaps are entered into to alter the properties’ exposure to the impact of changing
interest rates. To the extent interest rates increase, the REIT’s financial condition and cash flow could be adversely affected.
Currently, the REIT’s properties have no exposure to currency or other market price risk.
Restrictive Covenants in Existing Loan Agreements
The REIT and the Partnership are subject to certain restrictions pursuant to the restrictive covenants of their outstanding
indebtedness, which may affect distribution and operating policies and the ability to incur additional debt. Loan documents
evidencing this existing indebtedness contain, and loan documents entered into in the future will likely contain, certain
operating covenants that limit the ability to further mortgage the property or discontinue insurance coverage. In addition,
these agreements contain, and future agreements likely will contain, financial covenants, including certain coverage ratios
and limitations on the ability to incur secured and unsecured debt, make distributions, sell all or substantially all assets,
and engage in mergers and consolidations and certain acquisitions. Covenants under existing indebtedness do, and under
any future indebtedness likely will, restrict the ability to pursue certain business initiatives or certain acquisition
transactions. In addition, failure to meet any of these covenants, including the financial coverage ratios, could cause an
event of default under or accelerate some or all of the REIT’s indebtedness, which would have a material adverse effect on
the REIT.
Availability of Off-market Deal Flow
A key component of the REIT’s growth strategy is to acquire additional industrial real estate before it is widely marketed
by real estate brokers, or “off-market.” Properties that are acquired off-market are typically more attractive to the REIT as
a purchaser because of the absence of a formal marketing process, which could lead to higher prices. If the REIT cannot
obtain off-market deal flow in the future, its ability to locate and acquire additional properties at attractive prices could be
materially and adversely affected.
Litigation at the Property Level
The acquisition, ownership and disposition of real property carries certain specific litigation risks. Litigation may be
commenced with respect to a property acquired by the REIT or its subsidiaries in relation to activities that took place prior
to the REIT’s acquisition of such property. In addition, at the time of disposition of an individual property, a potential buyer
may claim that it should have been afforded the opportunity to purchase the asset or alternatively that such buyer should
be awarded due diligence expenses incurred or damages for misrepresentation relating to disclosures made, if such buyer
is passed over in favour of another as part of the REIT’s efforts to maximize sale proceeds. Similarly, successful buyers may
later sue the REIT under various damage theories, including those sounding in tort, for losses associated with latent defects
or other problems not uncovered in due diligence.
Asset Class Diversification
The REIT’s investments are not widely diversified by asset class. Substantially all of the REIT’s investments are in industrial
real estate. A lack of asset class diversification increases risk because industrial real estate is subject to its own set of risks,
such as vacancies, rising operating costs and changes in mortgage rates.
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Control Over Investments
In certain situations, the REIT may, directly or indirectly, invest in a joint venture arrangement, thereby acquiring a non-
controlling interest in certain investments. Although the REIT may not have control over these investments and therefore,
may have a limited ability to protect its position therein, such joint venture arrangements will contain terms and conditions
which, in the opinion of the independent trustees, are commercially reasonable, including without limitation such terms
and conditions relating to restrictions on the transfer, acquisition and sale of the REIT’s and any joint venturer’s interest in
the joint venture arrangement, provisions to provide liquidity to the REIT, provisions to limit the liability of the REIT and its
Unitholders to third parties and provisions to provide for the participation of the REIT in the management of the joint
venture arrangements. Nevertheless, such investments may involve risks not present in investments where a third party is
not involved, including the possibility that a co-venturer may have financial difficulties resulting in a negative impact on
such investment, may have economic or business interests or goals which are inconsistent with those of the REIT (including
relating to the sale of properties held in the joint venture or the timing of the termination and liquidation of such joint
venture) or may be in a position to take action contrary to the REIT’s investment objectives. The REIT also may, in certain
circumstances, be liable for the actions of its third-party co-venturers.
Property Redevelopment and Renovations
Property redevelopment or major renovation work are subject to a number of risks, including: (i) the potential that the
REIT may fail to recover expenses already incurred if it abandons redevelopment opportunities after commencing to
explore them; (ii) the potential that the REIT may expend funds on and devote management time to projects which it does
not complete; (iii) construction or redevelopment costs of a project may exceed original estimates, possibly making the
project less profitable than originally estimated, or unprofitable; (iv) the time required to complete the construction or
redevelopment of a project or to lease up the completed project may be greater than originally anticipated, thereby
adversely affecting the REIT’s cash flow and liquidity; (v) the cost and timely completion of construction (including risks
beyond the REIT’s control, such as weather, labour conditions or material shortages); (vi) contractor and subcontractor
disputes, strikes, labour disputes or supply disruptions; (vii) the failure to achieve expected occupancy and/or rent levels
within the projected time frame, if at all; (viii) delays with respect to obtaining, or the inability to obtain, necessary zoning,
occupancy, land use and other governmental permits, and changes in zoning and land use laws; (ix) occupancy rates and
rents of a completed project may not be sufficient to make the project profitable; (x) the REIT’s ability to dispose of
properties redeveloped with the intent to sell could be impacted by the ability of prospective buyers to obtain financing
given the current state of the credit markets; and (xi) the availability and pricing of financing to fund the REIT’s development
activities on favourable terms or at all.
The above risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could
prevent the initiation of redevelopment activities or the completion of redevelopment activities once undertaken. In
addition, redevelopment projects entail risks that investments may not perform in accordance with expectations and can
carry an increased risk of litigation (and its attendant risks) with contractors, subcontractors, suppliers, partners and others.
Any of these risks could have an adverse effect on the REIT’s financial condition, results of operations, cash flow, per Unit
trading price of the Units, distributions to Unitholders and ability to satisfy the REIT’s principal and interest obligations.
Also, the REIT may be required to execute guarantees in connection with construction financing for redevelopments which
would subject the REIT to recourse for construction completion risks and repayment of the construction indebtedness.
New Markets
If the opportunity arises, the REIT may explore acquisitions of properties in new markets. Each of the risks applicable to
the REIT’s ability to acquire and successfully integrate and operate properties in its current markets is also applicable to its
ability to acquire and successfully integrate and operate properties in new markets. In addition to these risks, the REIT may
not possess the same level of familiarity with the dynamics and market conditions of any new markets, which could
adversely affect its ability to expand into or operate in those markets. The REIT may be unable to achieve a desired return
on its investments in new markets. If the REIT is unsuccessful in expanding into new markets, it could adversely affect its
business, financial condition, results of operations and cash flow, the per Unit trading price and ability to satisfy debt
service obligations and to make distributions to Unitholders.
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Property Development
The REIT may, from time to time, engage in development and redevelopment activities with respect to certain properties.
If it does so, it will be subject to certain risks, including, without limitation: (i) the availability and pricing of financing on
satisfactory terms or at all; (ii) the availability and timely receipt of zoning and other regulatory approvals; (iii) the cost and
timely completion of construction (including unanticipated risks beyond the REIT’s control, such as weather or labour
conditions, material shortages and construction overruns); and (iv) the ability to achieve an acceptable level of occupancy
upon completion.
Change in Property Taxes
The REIT is required to pay state and local taxes on its properties. The real property taxes on the REIT’s properties may
increase as property tax rates change or as the properties are assessed or reassessed by taxing authorities. In addition,
certain of the REIT’s properties currently benefit from tax abatement arrangements pursuant to which tax rates are
effectively lowered for specified periods of time. The REIT’s properties currently subject to these tax abatement
arrangements are: 1871 Willow Springs Church Road (tax abatement expires in 2021); 1490 Chase Avenue (tax abatement
expires in 2021); 6766 Pontius Road (tax abatement expires in 2022); 3051 Creekside Parkway (tax abatement expires in
2022); 1500 Chase Avenue (tax abatement expires in 2023); 2000 Arthur Avenue (tax abatement expires in 2023); 5405
Hickory Hill Road (tax abatement expires 2024); 2825 Reeves Road (tax abatement expires in 2028); 7437 Polk Lane (tax
abatement expires in 2029); 2440 Midpoint Drive (tax abatement expires in 2029) and 3360 Southwest Boulevard (tax
abatement expires in 2030). Upon expiry of these tax abatement arrangements, property taxes will be assessed at usual
rates. Property taxes are typically passed through to the tenant; however, the amount of property taxes, if any, the REIT
pays directly may in the future differ substantially from what has been paid in the past. If the property taxes paid directly
by the REIT increase, the REIT’s ability to pay expected distributions to the Unitholders could be materially and adversely
affected.
Potential Conflicts of Interest
The Board of Trustees will, from time to time, in their individual capacities, deal with parties with whom the REIT may be
dealing, or may be seeking investments similar to those desired by the REIT. The interest of these persons could conflict
with those of the REIT. The Declaration of Trust contains conflict of interest provisions requiring the Board of Trustees to
disclose their interests in certain contracts and transactions and to refrain from voting on those matters. In addition, certain
decisions regarding matters that may give rise to a conflict of interest must be made by a majority of the independent
trustees only.
Direct and Indirect Ownership of Units by AIMCo
AIMCo, as at March 11, 2020, owns an approximate 16.2% interest in the REIT through its ownership of Units (assuming all
Class B Units are redeemed for REIT Units but otherwise on a non-diluted basis). AIMCo, as a result of their voting interest
in the REIT, may be able to exert significant influence over matters that are to be determined by votes of the Unitholders
of the REIT.
Accordingly, the Units may be less liquid and trade at a relative discount compared to such Units in circumstances where
AIMCo does not have the ability to influence or determine matters affecting the REIT.
Subject to compliance with applicable securities laws, AIMCo may sell some or all of its Units, in the future. No prediction
can be made as to the effect, if any, such future sale or transfer of Units could have on the market price of the Units
prevailing from time to time. However, the future sale of a substantial number of Units by AIMCo, or the perception that
such sale could occur, could adversely affect prevailing market prices for the Units.
Any Uninsured Losses or High Insurance Premiums will Reduce Net Income and the Amount of Cash Distributions to
Unitholders
The REIT will attempt to obtain adequate insurance to cover significant areas of risk to it as an entity and to its properties.
However, there are types of losses at the property level, generally catastrophic in nature, such as losses due to wars, acts
of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are uninsurable or not
economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. The REIT may
not have adequate coverage for such losses. If any of the REIT’s properties incurs a casualty loss that is not fully insured,
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the value of the REIT’s assets will be reduced by any such uninsured loss. In addition, other than any working capital reserve
or other reserves the REIT may establish, it has no source of funding to repair or reconstruct any uninsured damaged
property. Further, to the extent the REIT must pay unexpectedly large amounts for insurance, it could suffer reduced
earnings that would result in lower distributions to Unitholders.
Degree of Leverage
The REIT’s degree of leverage could have important consequences to Unitholders. For example, the degree of leverage
could affect the REIT’s ability to obtain additional financing in the future for working capital, capital expenditures,
acquisitions, development or other general trust purposes, making the REIT more vulnerable to a downturn in business or
the economy in general. Under the Declaration of Trust, the maximum the REIT can leverage is 60% of gross book value (or
65% of gross book value including convertible debentures).
Joint Ventures
From time to time, the REIT may be a participant in joint ventures. A joint venture involves certain additional risks,
including: (i) the possibility that co-venturers may at any time have economic or business interests or goals that will be
inconsistent with the REIT’s or take actions contrary to the REIT’s instructions or requests or to the REIT’s policies or
objectives with respect to the investment; (ii) the co-venturer may hold a majority interest or otherwise under the terms
of the joint venture have control over all of the day to day and fundamental decisions relating to an investment, including
the ability to impose contribution requirements on its co-venturers; (iii) the risk that such co-venturers could experience
financial difficulties or seek the protection of bankruptcy, insolvency or other laws, which could result in additional financial
demands to maintain and operate such investments or repay the co-venturers’ share of debt guaranteed by the REIT or
for which the REIT will be liable and/or result in the REIT suffering or incurring delays, expenses and other problems
associated with obtaining court approval of joint venture decisions; (iv) the risk that such co-venturers may, through their
activities on behalf of or in the name of the ventures, expose or subject the REIT to liability; (v) the need to obtain co-
venturers’ consents with respect to certain major decisions or inability to have any decision making authority, including
the decision to distribute cash generated from such investment or to sell an investment, and (vi) the risk that co-venturers
may disagree over the interpretation of the terms of the joint venture agreement.
In addition, the sale or transfer of interests in joint ventures may be subject to certain requirements, such as rights of first
refusal, rights of first offer or drag-along rights, and joint venture agreements may provide for buy-sell or similar
arrangements. Such rights may inhibit the REIT’s ability to sell an interest in an investment or a joint venture within the
time frame or otherwise on the basis the REIT desires. Additionally, drag-along rights may be triggered at a time when the
REIT may not want to sell its interest in an investment, but the REIT may be forced to do so at a time when it would not
otherwise be in the REIT’s best interest.
Limitations on Sale
The REIT may be required to expend funds to correct defects or to make improvements before a property can be sold. No
assurance can be given that the REIT will have funds available to correct such defects or to make such improvements. In
acquiring a property, the REIT may agree to lock-out provisions that materially restrict it from selling that property for a
period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that
property. These lock-out provisions would restrict the REIT’s ability to sell a property. These factors and any others that
would impede the REIT’s ability to respond to adverse changes in the performance of the REIT’s properties could
significantly affect the REIT’s financial condition and operating results and decrease the amount of cash available for
distribution.
Investments in Debt Instruments
The REIT may hold direct or indirect investments in mortgages and mortgage bonds (including participating or convertible
mortgages). Adverse changes to the financial condition of a mortgagor with respect to a mortgage held directly or indirectly
by the REIT could have an adverse impact on the REIT’s ability to collect principal and interest payments from such
mortgagor and therefore, cause a reduction in the REIT’s ability to make distributions to Unitholders and in the value of
that investment.
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Based upon applicable laws governing the REIT’s investment in debt instruments and the loans underlying the REIT’s debt
securities, the REIT’s investments in debt may also be adversely affected by: (i) the operation of applicable laws regarding
the ability to foreclose mortgage loans or to exercise other creditors’ rights provided in the underlying loan documents; (ii)
lender liability with respect to the negotiation, administration, collection or foreclosure of mortgage loans; (iii) penalties
for violations of applicable usury limitations; and (iv) the impact of bankruptcy or insolvency laws.
Further, the REIT will not know whether the values of its properties securing the mortgage loans will remain at the levels
existing on the dates of origination of those mortgage loans. If the values of the underlying properties fall, the risk to the
REIT will increase because of the lower value of the security associated with such loans.
Land Leases
To the extent that the properties in which the REIT has or will have an interest are located on leased land, the land leases
may be subject to periodic rate resets which may fluctuate and may result in significant rental rate adjustments which
could adversely impact the REIT’s financial condition and operating results and decrease the amount of cash available for
distribution.
Specific Lease Considerations
Some of the leases in the REIT’s properties are leased on a base year or semi-gross basis or otherwise have caps on
operating costs and/or tax recoveries. As a result, the REIT will bear the economic cost of increases in certain of the
operating costs and/or property taxes in such cases to the extent it is not able to fully recover increases in operating costs
and property taxes from these tenants which increases would likely adversely impact the REIT’s financial condition and
results of operations and decrease the amount of cash available for distribution to Unitholders.
Less Marketable Properties
Less marketable properties may be more difficult to value due to the unavailability of reliable market quotations. The sale
of less marketable properties may require more time and result in lower prices, due to higher brokerage charges or dealer
discounts and other selling expenses, than the sale of more marketable properties. In addition, the marketability of the
portfolio will be dependent on numerous other factors, including interest rates, competition from other industrial
properties and general economic conditions. There can be no assurance that the REIT will be able to sell one or more of its
properties in the portfolio at the time that it may be in the best interests of the REIT to sell.
Lease Renewals and Rental Increases
The expiry of leases for the REIT’s properties will occur from time to time over the short and long-term. No assurance can
be provided that the REIT will be able to renew any or all of the leases upon their expiration or that rental rate increases
will occur or be achieved upon any such renewals. The failure to renew leases or achieve rental rate increases may
adversely impact the REIT’s financial condition and results of operations and decrease the amount of cash available for
distribution.
International Financial Reporting Standards
There are ongoing projects conducted by the IASB, and joint projects with the Financial Accounting Standards Board in the
U.S. that are expected to result in new pronouncements that continue to evolve, which could adversely impact the manner
in which the REIT reports its financial position and operating results.
Laws Benefitting Disabled Persons
Laws benefiting disabled persons may result in unanticipated expenses being incurred by the REIT. Under the Americans
with Disabilities Act of 1990, including changes made by the ADA Amendments Act of 2008, all places intended to be used
by the public are required to meet certain federal requirements related to access and use by disabled persons. For those
projects receiving federal funds, the Rehabilitation Act of 1973 also has requirements regarding disabled access. These and
other federal, state and local laws may require modifications to the REIT’s properties, or affect renovations of the REIT’s
properties. Non-compliance with these laws could result in the imposition of fines or an award of damages to private
litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital
expenditures. Although the REIT believes that the REIT’s properties are substantially in compliance with the present
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requirements, the REIT may incur unanticipated expenses to comply with these and other federal, state and local laws in
connection with the ongoing operation or redevelopment of the REIT’s properties.
Restrictions on Activities
Several of the REIT’s constating documents and material contracts (including, without limitation, the Declaration of Trust,
the Partnership Agreement dated April 26, 2013 (“Partnership Agreement”) and the operating agreement for WPT
Industrial, Inc. (“U.S. Holdco”)) contain restrictions that limit the activities of the REIT and its subsidiaries to ensure the
REIT complies with certain provisions of the Tax Act and the United States Internal Revenue Code of 1986, as amended (the
“Code”). Due to these restrictions, the REIT conducts certain of its business activities and anticipates that it will continue
to conduct certain of its business activities in one or more taxable REIT subsidiary (“TRS”) entities. Notwithstanding the
REIT’s use of TRS entities, compliance with these restrictions may limit the flexibility of the REIT in terms of the nature and
scope of its investments and activities and thereby may adversely affect the REIT’s economic performance, including its
ability to grow.
Geographic Concentration
The REIT’s properties are located in the U.S., in the states of California, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky,
Michigan, Minnesota, Mississippi, Nevada, Ohio, Oregon, Pennsylvania, Tennessee, Texas, and Wisconsin. Approximately
14.8%, 13.3%, and 11.5% of the REIT’s NOI for the three months ended December 31, 2019 is derived from properties
located in Minnesota, Georgia, and Illinois, respectively. As a result, the REIT’s performance is sensitive to economic
condition and regulatory changes in Minnesota, Georgia, and Illinois. Adverse changes in the economic condition or
regulatory environment of Minnesota, Georgia, and Illinois may have a material adverse effect on the REIT’s business, cash
flow, financial condition and results of operations and ability to make distributions to Unitholders.
Past Performance is not a Predictor of Future Results
The performance of the REIT is dependent on future events and is, therefore, inherently uncertain. The past performance
of Welsh Property Trust, LLC (“Welsh”), WPT Capital, the REIT and each of their affiliates cannot be relied upon to predict
future events due to a variety of factors, including, without limitation, varying business strategies, different local and
national economic circumstances, different supply and demand characteristics, varying degrees of competition and varying
circumstances pertaining to the real estate markets.
Expedited Transactions
Investment analyses by the REIT may frequently be required to be undertaken on an expedited basis to take advantage of
investment opportunities. In such cases, the information available to the REIT at the time of making an investment
recommendation may be limited, and the REIT not have access to detailed information regarding the investment property,
such as physical characteristics, environmental matters, zoning regulations or other local conditions that may affect an
investment property. In addition, the REIT expects to rely upon independent consultants in connection with its evaluation
of proposed investment properties and no assurance can be given as to the accuracy or completeness of the information
provided by such independent consultants or to the REIT’s right of recourse against them in the event errors or omissions
occur.
Tax-Related Risks
Canadian Tax Risks
(a)
Residency of the REIT for Canadian and U.S. Tax Purposes — The REIT is resident in Canada for purposes of the
Tax Act and is treated as a domestic corporation in the U.S. under the Code. As a result, the REIT is generally
taxable on its worldwide income in both Canada and the U.S. However, in both jurisdictions, the REIT generally
will not be subject to tax on the portion of its income that it distributes to Unitholders (subject to certain
limitations and exceptions). The status of the REIT as taxable in both Canada and the U.S. is not likely to give
rise to any material adverse consequences in the future as it is not anticipated that the REIT will be subject to
material federal income tax in either Canada or the U.S. Nevertheless, the REIT’s status as taxable on its
worldwide income in both Canada and the U.S. could, in certain circumstances, have a material adverse effect
on the REIT and the Unitholders.
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(b)
(c)
(d)
Mutual Fund Trust Status — The REIT intends to continue to qualify as a “unit trust” and a “mutual fund trust”
for purposes of the Tax Act. There can be no assurance that Canadian federal income tax laws or the
administrative policies and practices of the Canada Revenue Agency (the “CRA”) respecting the treatment of
mutual fund trusts will not be changed in a manner that adversely affects the Unitholders. Should the REIT
cease to qualify as a mutual fund trust under the Tax Act, the income tax considerations associated with an
investment in REIT Units could be materially and adversely affected.
Application of the SIFT Rules — The “SIFT Rules” in the Tax Act are those rules applicable to a trust that is a
SIFT trust. The REIT will not be considered to be a SIFT trust in respect of a particular taxation year and,
accordingly, will not be subject to the SIFT Rules in that year, if it does not own any “non-portfolio property”
(as defined in the Tax Act) and does not carry on business in Canada in that year. The REIT has not owned and
does not currently intend to own any non-portfolio property, nor has it carried on or does it intend to carry
on a business in Canada.
In the event that the SIFT Rules were to apply to the REIT, the impact to a particular Unitholder will depend
on the status of such holder and, in part, on the amount of income distributed which would not be deductible
by the REIT in computing its income in a particular year and what portions of the REIT’s distributions constitute
“non-portfolio earnings”, other income and returns of capital. The likely effect of the SIFT Rules on the market
for REIT Units, and on the REIT’s ability to finance future acquisitions through the issue of Units or other
securities is uncertain. If the SIFT Rules were to apply to the REIT, they could adversely affect the marketability
of the REIT Units, the amount of cash available for distribution and the after-tax return to investors.
Foreign Tax Credits and Deductions — The after-tax return from an investment in REIT Units to a Unitholder
resident in Canada for the purposes of the Tax Act will depend in part on the Unitholder’s ability to recognize
for purposes of the Tax Act U.S. taxes paid by the Unitholder through foreign tax credits or foreign tax
deductions under the Tax Act. A Unitholder’s ability to recognize U.S. taxes through foreign tax credits or
foreign tax deductions may be affected where the Unitholder does not have sufficient taxes otherwise payable
under Part I of the Tax Act or sufficient U.S. source income in the taxation year the U.S. taxes are paid or where
the Unitholder has other U.S. sources of income or losses, has paid other U.S. taxes or, in certain
circumstances, has not filed a U.S. federal income tax return. Furthermore, the ability to effectively utilize
foreign tax credits or foreign tax deductions will be dependent upon the Canadian federal and provincial tax
rates and U.S. tax rates that will apply in future years to applicable sources of income. Unitholders are
therefore advised to consult their own tax advisors in regards to foreign tax credits and foreign tax deductions.
A Unitholder that is a registered retirement savings plan, a registered retirement income fund, a registered
disability savings plan, a registered education savings plan, a deferred profit sharing plan or a tax-free savings
account, each as defined in the Tax Act (an “Exempt Plan”) will not be entitled to a foreign tax credit or
deduction under the Tax Act in respect of any U.S. tax paid by the Exempt Plan (including any U.S. withholding
tax imposed on distributions paid to the Exempt Plan). Accordingly, any such U.S. tax will reduce such a
Unitholder’s after-tax return. Such Unitholders should consult with their own tax advisors in regards to U.S.
tax payable in respect of an investment in REIT Units. As discussed below under “U.S. Tax Risks”, if (i) a
Unitholder holds, or has held, actually or constructively, more than 10% of the outstanding REIT Units, as
determined for U.S. federal income tax purposes, or (ii) the TSX Publicly Traded Exception (as defined below)
or the U.S. Publicly Traded Exception (as defined below) are not satisfied, a Unitholder may be subject to
additional U.S. tax on a disposition of REIT Units and on certain distributions by the REIT. The proceeds
receivable on a disposition of a REIT Unit may not qualify as U.S. source income for purposes of the Tax Act
(including for Canadian foreign tax credit purposes), and beneficiaries of certain Unitholders that are trusts
may not be considered to have paid such tax for purposes of the Tax Act. Accordingly, Unitholders may not be
entitled to a foreign tax credit in respect of such U.S. tax for Canadian tax purposes.
(e)
FAPI — Any “foreign accrual property income”, as defined in the Tax Act (“FAPI”) earned by U.S. Holdco as a
controlled “foreign affiliate” of the REIT for purposes of the Tax Act , as well as U.S. Holdco’s allocable share
of any FAPI earned by controlled foreign affiliates of the Partnership (or any subsidiary partnerships thereof)
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must be included in computing the income of the REIT for the fiscal year of the REIT in which the taxation year
of U.S. Holdco ends, subject to a deduction for grossed-up “foreign accrual tax” as computed in accordance
with the Tax Act. It is not anticipated that the deduction for grossed-up “foreign accrual tax” will materially
offset FAPI realized by the REIT, and accordingly any FAPI realized generally will increase the allocation of
income by the REIT to Unitholders. In addition, as FAPI generally must be computed in accordance with Part I
of the Tax Act as though the controlled foreign affiliate were a resident of Canada (subject to the detailed
rules contained in the Tax Act), income or transactions may be taxed differently under foreign tax rules as
compared to the FAPI rules and, accordingly, may result in additional income being allocated to Unitholders.
For example, certain transactions that do not give rise to taxable income under the Code may still give rise to
FAPI for purposes of the Tax Act.
Non-Residents of Canada — The Tax Act may impose Canadian withholding or other taxes on distributions
made by the REIT to a Unitholder that is a “non-resident” of Canada within the meaning of the Tax Act or a
partnership that is not a “Canadian Partnership” within the meaning of the Tax Act (“Non-Residents”). Further,
because the REIT is both resident in Canada for purposes of the Tax Act and treated as a domestic corporation
in the U.S. under the Code, withholding taxes of both Canada and the U.S. will be relevant to Unitholders who
are both Non-Residents and non-U.S. holders and could, in certain circumstances, result in both Canadian and
U.S. withholding tax applying to certain distributions to certain investors and other consequences.
Foreign Currency — For purposes of the Tax Act, the REIT generally is required to compute its Canadian tax
results, including any FAPI earned, using Canadian currency. Where an amount that is relevant in computing
a the REIT’s Canadian tax results is expressed in a currency other than Canadian currency, such amount must
be converted to Canadian currency using the rate of exchange quoted by the Bank of Canada on the day such
amount first arose, or using such other rate of exchange as is acceptable to the CRA. As a result, the REIT may
realize gains and losses for tax purposes and FAPI by virtue of the fluctuation of the value of foreign currencies
relative to Canadian dollars.
Changes in Law — There can be no assurance that Canadian and U.S. federal income tax laws, the judicial
interpretation thereof, the terms of the Canada-U.S. Income Tax Convention (1980), as amended, or the
administrative policies and assessing practices of the CRA will not be changed in a manner that adversely
affects the REIT or Unitholders. Any such change could increase the amount of tax payable by the REIT or its
affiliates or could otherwise adversely affect Unitholders by reducing the amount available to pay distributions
or changing the tax treatment applicable to Unitholders in respect of such distributions.
(f)
(g)
(h)
U.S. Tax Risks
(a)
Operating Partnership — All of the operations and assets of the REIT are held through the Partnership. For so
long as the Partnership is treated as a partnership for U.S. federal income tax purposes, the REIT will be treated
as owning its proportionate share of the assets and income of the Partnership for the purposes of the REIT
asset and income tests. An entity that would otherwise be treated as a partnership for U.S. federal income tax
purposes may nonetheless be treated as a corporation for U.S. federal income tax purposes if it is a “publicly
traded partnership” and certain other requirements are met. A partnership would be treated as a publicly
traded partnership if its interests were traded on an established securities market or were readily tradable on
a secondary market or a substantial equivalent thereof, within the meaning of applicable U.S. Treasury
Regulations. The Partnership Agreement contains provisions intended to ensure that the Partnership is not
considered a “publicly traded partnership.” Accordingly, it is not anticipated that the Partnership will be
treated as a “publicly traded partnership” that is taxable as a corporation. However, if the Partnership were
classified as a “publicly traded partnership”, the Partnership may be treated as a corporation rather than as a
partnership for U.S. federal income tax purposes. In such case, the REIT would not be treated as owning its
proportionate share of the assets and income of the Partnership for the purposes of the REIT asset and income
test requirements (and, instead, would be treated as owning the stock of a corporation). This could cause the
REIT to fail to qualify as a real estate investment trust for U.S. federal income tax purposes. In addition, the
income of the Partnership would become subject to U.S. federal corporate income tax.
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(b)
(c)
The Partnership Agreement provides for the creation and issuance of Class B Units, which have been issued
to various parties. Under the terms of the Partnership Agreement, the Class B Units are, in all material
respects, economically equivalent to the Units on a per unit basis
Qualification as a Real Estate Investment Trust — The REIT intends to continue to operate in a manner that
will allow it to qualify as a real estate investment trust for U.S. federal income tax purposes. The REIT’s
qualification as a real estate investment trust depends on the REIT’s satisfaction of certain asset, income,
organizational, distribution, Unitholder ownership and other requirements on a continuing basis, the results
of which will not be monitored by the REIT’s U.S. counsel. Accordingly, given the complex nature of the rules
governing real estate investment trusts, the ongoing importance of factual determinations, including the
potential tax treatment of investments the REIT makes, and the possibility of future changes in the REIT’s
circumstances, no assurance can be given that the REIT’s actual results of operations for any particular taxable
year will satisfy such requirements. Moreover, no assurance can be given that legislation, new regulations,
administrative interpretations or court decisions will not change the tax laws with respect to qualification as
a real estate investment trust or the U.S. federal income tax consequences of that qualification.
If the REIT fails to qualify as a real estate investment trust in any calendar year, it would be required to pay
U.S. federal income tax (and any applicable state and local tax), including any applicable alternative minimum
tax (for taxable years beginning before January 1, 2018), on its taxable income at regular corporate rates, and
dividends paid to the Unitholders would not be deductible by the REIT in computing its taxable income and
would be taxable to the Unitholders under the rules generally applicable to corporate distributions. A loss of
real estate investment trust status would reduce the net earnings available for investment or distribution to
Unitholders because of the additional tax liability which in turn could have an adverse impact on the value of
the Units. Unless its failure to qualify as a real estate investment trust was subject to relief under U.S. federal
tax laws, the REIT could not re-elect to qualify as a real estate investment trust until the fifth calendar year
following the year in which it failed to qualify.
Annual Distribution Requirement — To qualify as a real estate investment trust for U.S. federal income tax
purposes, the REIT generally must distribute annually to its Unitholders a minimum of 90% of its net taxable
income, determined without regard to the dividends-paid deduction and excluding net capital gains. The REIT
will be subject to U.S. federal corporate income tax on any undistributed real estate investment trust taxable
income each year. Additionally, it will be subject to a 4% non-deductible excise tax on any amount by which
amounts “actually distributed” by the REIT in any calendar year are less than the sum of 85% of its ordinary
income, 95% of its capital gain net income and 100% of its undistributed income from previous years. The
amount that a REIT is treated as having “actually distributed” during the current taxable year is both the
amount distributed during the current year and the amount by which distributions during the immediately
prior year exceeded its taxable income and capital gain for that prior year. Payments the REIT makes to its
Unitholders under Unitholders’ rights of redemption will not be taken into account for purposes of these
distribution requirements. Compliance with the real estate investment trust distribution requirements may
hinder the REIT’s ability to grow, which could adversely affect the value of its Units. Furthermore, the REIT
may find it difficult or impossible to meet distribution requirements in certain circumstances. The requirement
to distribute most of its taxable income could cause the REIT to: (i) sell assets in adverse market conditions,
(ii) borrow on unfavourable terms, (iii) distribute amounts that would otherwise be used to make future
acquisitions or capital expenditures or (iv) make a taxable distribution of its Units as part of a distribution in
which Unitholders may elect to receive Units or cash, in order to comply with real estate investment trust
requirements. These alternatives could adversely affect the REIT’s economic performance.
(d)
Impact of Real Estate Investment Trust Compliance on Performance — To qualify as a real estate investment
trust for U.S. federal income tax purposes, the REIT must continually satisfy tests concerning, among other
things, the sources of its income, the nature and diversification of its assets, the amounts that it distributes to
the Unitholders and the ownership of the Units. The REIT may be required to make distributions to Unitholders
at disadvantageous times or when it does not have funds readily available for distribution, and may be unable
to pursue investments that would be otherwise advantageous to it in order to satisfy the source-of-income or
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asset-diversification requirements for qualifying as a real estate investment trust. Thus, compliance with the
real estate investment trust requirements may hinder the REIT’s ability to operate solely on the basis of
maximizing profits.
Additionally, the REIT must ensure that at the end of each calendar quarter, at least 75% of the value of its
assets consists of cash, cash items, government securities and real estate assets (as defined in the Code),
(including debt instruments of “publicly offered REITs” (i.e., real estate investment trusts which are required
to file annual and periodic reports with the U.S. Securities and Exchange Commission under the Securities
Exchange Act of 1934)). For this purpose, personal property leased in connection with real property will be
treated as a real estate asset to the extent that rents attributable to such personal property do not exceed
15% of the total rent from both the real and personal property leased. Not more than 25% of the value of the
REIT’s asset can be represented by securities (other than government securities and qualified real estate
assets). The REIT’s assets (other than government securities, qualified real estate assets and securities of
taxable REIT subsidiaries TRSs) generally cannot include more than 10% of the outstanding voting securities
of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In
addition, in general, no more than 5% of the value of the REIT’s assets (other than government securities,
qualified real estate assets and securities of TRSs) can consist of the securities of any one issuer, and no more
than 20% of the value of its total assets can be represented by securities of one or more TRSs. Finally, not
more than 25% of the value of a REIT’s total assets may be represented by debt instruments issued by publicly
offered REITs to the extent not secured by real property or interests in real property. If the REIT fails to comply
with these requirements at the end of any calendar quarter, it must correct the failure within 30 days after
the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing its real estate
investment trust qualification and suffering adverse tax consequences.
Ownership Limitations — In order for the REIT to qualify as a real estate investment trust for each taxable year
under the Code, no more than 50% in value of its outstanding Units may be owned, directly or indirectly, by
five or fewer individuals during the last half of any calendar year. “Individuals” for this purpose include natural
persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. In order to
assist the REIT in qualifying as a real estate investment trust, ownership of its Units by any person is generally
limited to 9.8% in value or number of Units, whichever is more restrictive, of any class or series of Units. These
ownership limitations could have the effect of discouraging a takeover or other transaction in which holders
of the Units might receive a premium for their Units over the then-prevailing market price or which holders
might believe to be otherwise in their best interests.
Other Taxes — Even if the REIT qualifies and maintains its status as a real estate investment trust, it may be
subject to U.S. federal and state income taxes. The REIT may not be able to make sufficient distributions to
avoid excise taxes applicable to real estate investment trusts. The REIT may also decide to retain income it
earns from the sale or other disposition of its real estate assets and pay income tax directly on such income.
In that event, the Unitholders would be treated as if they earned that income and paid the tax on it directly.
The REIT may also be subject to state and local taxes on its income, property or net worth, either directly, by
the Partnership or at the level of the entities through which it indirectly owns its assets. Any U.S. federal or
state taxes the REIT pays will reduce its cash available for distribution to the Unitholders.
In addition, in order to meet the real estate investment trust qualification requirements or to avert the
imposition of the prohibited transactions tax discussed below, the REIT may hold some of its assets or conduct
activities through TRSs. The REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn
income that would not be qualifying income if earned directly by the parent real estate investment trust. Both
the subsidiary and the real estate investment trust must jointly elect to treat the subsidiary as a TRS. Overall,
no more than 20% of the value of a real estate investment trust’s assets may consist of stock or securities of
one or more TRSs at the end of any calendar quarter. A U.S. TRS will pay U.S. federal, state and local income
tax at regular corporate rates on any income that it earns. If the REIT were to organize a TRS as a non-U.S.
corporation (or non-U.S. entity treated as a corporation for U.S. federal income tax purposes), the REIT may
(e)
(f)
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(g)
(h)
have income inclusions relating to the earnings of the non-U.S. TRS, the treatment of which under the REIT
gross income tests is not clear.
Several provisions of the Code regarding the arrangements between a real estate investment trust and its
TRSs ensure that a TRS will be subject to an appropriate level of U.S. federal income taxation. For example,
the REIT would be obligated to pay a 100% penalty tax on some payments that it receives from, or on certain
expenses deducted by, its TRS if the U.S. Internal Revenue Service (“IRS”) were to assert successfully that the
economic arrangements between the REIT and its TRS are not comparable to similar arrangement among
unrelated parties. Any income earned by the REIT’s TRS that is attributable to services provided to the REIT,
or on the REIT’s behalf to any of its tenants, that is less than the amounts that would have been charged based
upon arm’s length negotiations, will also be subject to a 100% penalty tax. In addition, an overall limit on
taxpayers’ net interest expense deduction (generally equal to 30% of adjusted taxable income, subject to
certain exception may limit the TRS to deduct interest, which could increase its taxable income. There can be
no assurance that we will be able to comply with the TRS limitations or to avoid application of the 100% excise
tax discussed above.
Prohibited Transactions Tax — The REIT’s ability to dispose of property is restricted to a substantial extent as
a result of its real estate investment trust status. Under applicable provisions of the Code regarding prohibited
transactions by real estate investment trusts, the REIT will be subject to a 100% tax on any gain realized on
the sale or other disposition of any property (other than foreclosure property) that it owns, directly or through
any subsidiary entity, including the Partnership, but excluding any TRS, that is deemed to be inventory or
property held primarily for sale to customers in the ordinary course of trade or business. The REIT intends to
avoid the 100% prohibited transaction tax by (1) conducting activities that may otherwise be considered
prohibited transactions through a TRS, (2) structuring certain dispositions of its properties to comply with
certain safe harbors available under the Code for properties held at least two years, or (3) otherwise
conducting operations in such a manner so that the sale or other disposition is not treated as a prohibited
transaction, including, but not limited to, conducting property sales utilizing 1031 exchanges. However, no
assurance can be given that any particular property will not be treated as inventory or property held primarily
for sale to customers in the ordinary course of a trade or business.
Subsidiary REITs — The REIT indirectly owns stock in several subsidiaries that have elected to be taxed as real
estate investment trusts for U.S. federal income tax purposes. The REIT’s subsidiary real estate investment
trusts are subject to the various real estate investment trust qualification requirements and other limitations
described herein that are applicable to the REIT. If any of the subsidiary real estate investment trusts were to
fail to qualify as a real estate investment trust, then (i) such subsidiary real estate investment trust would
become subject to U.S. federal, state and local income tax on its taxable income at regular corporate rates
and (ii) the REIT’s ownership of shares in such subsidiary real estate investment trust would cease to be a
qualifying asset for purposes of the asset tests applicable to real estate investment trusts. If any of the REIT’s
subsidiary real estate investment trusts were to fail to qualify as a real estate investment trust, it is possible
that the REIT would fail certain of the asset tests applicable to real estate investment trusts, in which event
the REIT would fail to qualify as a real estate investment trust unless it could avail itself of certain relief
provisions. The REIT has made “protective” TRS elections with respect to its subsidiary real estate investment
trusts, but there can be no assurance that such “protective” TRS elections will be effective to avoid the
resulting adverse consequences to the REIT. Moreover, even if a “protective” TRS election was to be effective
in the event of the failure of a subsidiary real estate investment trust to qualify as a real estate investment
trust, such subsidiary real estate investment trust would be subject to U.S. federal, state and local income tax
on its taxable income at regular corporate rates and the REIT could fail to satisfy the requirement that not
more than 20% of the value of the REIT’s total assets may be represented by the securities of one or more
TRSs. In this event, the REIT would fail to qualify as a real estate investment trust unless the REIT or such
subsidiary real estate investment trust could avail itself of certain relief provisions.
(i)
Changes in Law — The present U.S. federal income tax treatment of real estate investment trusts may be
modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which
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could affect the U.S. federal income tax treatment of an investment in the REIT. The U.S. federal income tax
rules relating to real estate investment trusts constantly are under review by persons involved in the legislative
process, the IRS and the U.S. Treasury Department, which results in frequent statutory changes and revisions
to regulations and interpretations. Revisions in U.S. federal tax laws and interpretations thereof could
adversely affect the REIT or cause it to change its investments and commitments and affect the tax
considerations of an investment in it.
In 2017, legislation commonly referred to as the Tax Cuts and Jobs Act was signed into law. The Tax Cuts and
Jobs Act made significant changes to the U.S. federal income tax rules for taxation of individuals and
corporations, generally effective for taxable years beginning after December 31, 2017. In addition to reducing
corporate and individual tax rates, the Tax Cuts and Jobs Act eliminated or restricted various deductions. Most
of the changes applicable to individuals are temporary and apply only to taxable years beginning after
December 31, 2017 and before January 1, 2026. The Tax Cuts and Jobs Act made numerous large and small
changes to the tax rules that do not affect the real estate investment trust qualification rules directly but may
otherwise affect the REIT or its Unitholders.
(j)
FIRPTA — A non-U.S. person disposing of a U.S. real property interest, including shares of a U.S. corporation
whose assets consist principally of U.S. real property interests, is generally subject to the Foreign Investment
in Real Property Tax Act of 1980, known as FIRPTA, a tax on the gain recognized on the disposition and required
to file a U.S. federal income tax return reporting this disposition. FIRPTA does not apply, however, to the
disposition of stock in a real estate investment trust if the shares are considered “regularly traded on an
established securities market” and the non-U.S. person does not hold, actually or constructively, more than
10% of the outstanding shares of the REIT at any time during the 5-year period ending on the date of
disposition or such shorter period that the shares were held. For purposes of this exception, the TSX is
considered an “established securities market” and, as long as 100 or fewer persons do not own 50% or more
of the Units, the Units should be treated as regularly traded on the TSX if (a) the Units are traded, other than
in de minimis quantities, on at least 15 days of the calendar quarter, (b) the aggregate number of Units traded
during such calendar quarter is at least 7.5% of the average number of Units outstanding during such calendar
quarter (reduced to 2.5% if there are 2,500 or more record Unitholders), and (c) the REIT attaches a statement
to its U.S. federal income tax return that provides information relating to it, the Units, and beneficial owners
of more than 5% of the Units. However, there can be no assurance that these requirements will be satisfied.
In addition, the Units would be considered “regularly traded on an established securities market” if the Units
are regularly quoted by more than one broker or dealer making a market in the Units through an interdealer
quotation system in the U.S. The Units are currently quoted on the OTCOX International (“OTCOX”). The REIT
intends for its Units to be traded through an interdealer quotation system in the U.S. in a manner that would
be considered “regularly traded on an established securities market” for purposes of this exception, but there
can be no assurance that this will be the case. Additionally, none of the Code, the applicable U.S. Treasury
regulations, administrative pronouncements or judicial decisions provide guidance as to the frequency or
duration with which the Units must be quoted during a calendar quarter to be “regularly quoted.” U.S. counsel
to the REIT believes that it is reasonable to interpret this exception to the effect that, so long as at least two
brokers or dealers quote the Units on the OTCOX during a calendar quarter, any gain from a sale at any time
during the quarter would not be subject to U.S. federal income tax for non-U.S. persons that own 10% or less
of all of the outstanding Units during the applicable testing period. Due to the lack of guidance from the IRS,
however, investors are cautioned that there can be no assurance the IRS would concur in this interpretation.
However, if neither of these exceptions is satisfied, the sale of Units by a non-U.S. person would be subject to
U.S. federal income tax at normal graduated rates with respect to gain recognized and the REIT would be
required to withhold at a rate of 15% on distributions in excess of the REIT’s current and accumulated earnings
and profits. In addition, a purchaser of Units would be required to withhold tax at the rate of 15% of the
amount realized from the sale and to report and to remit such tax to the IRS. Furthermore, under FIRPTA, if
any non-U.S. person holds, actually or constructively, more than 10% of the outstanding Units, the REIT will
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be required to withhold 21% (or less to the extent provided in applicable U.S. Treasury Regulations) of any
distribution to such Unitholder that could be designated by the REIT as a capital gain dividend. Any such
withheld amount is creditable against such Unitholder’s FIRPTA tax liability.
Qualified Shareholders. Subject to the exception discussed below, a qualified shareholder who holds the Units
directly or indirectly (through one or more partnerships) will not be subject to FIRPTA on distributions by the
REIT or dispositions of the Units. A qualified shareholder is a non-U.S. person that (i) either is eligible for the
benefits of a comprehensive income tax treaty which includes an exchange of information program and whose
principal class of interests is listed and regularly traded on one or more recognized stock exchanges (as defined
in such comprehensive income tax treaty), or is a foreign partnership that is created or organized under foreign
law as a limited partnership in a jurisdiction that has an agreement for the exchange of information with
respect to taxes with the United States and has a class of limited partnership units representing greater than
50% of the value of all the partnership units that is regularly traded on the NYSE or NASDAQ markets, (ii) is a
“qualified collective investment vehicle” (within the meaning of Section 897(k)(3)(B) of the Code), and (iii)
maintains records on the identity of each person who, at any time during the foreign person’s taxable year, is
the direct owner of 5% or more of the class of interests or units (as applicable) described in (i), above.
However, if neither of these exceptions is satisfied, the sale of Units by a non-U.S. person would be subject to
U.S. federal income tax at normal graduated rates with respect to gain recognized and the REIT would be
required to withhold at a rate of 15% on distributions in excess of the REIT’s current and accumulated earnings
and profits. In addition, a purchaser of Units would be required to withhold tax at the rate of 15% of the
amount realized from the sale and to report and to remit such tax to the IRS. Furthermore, under FIRPTA, if
any non-U.S. person holds, actually or constructively, more than 10% of the outstanding Units, the REIT will
be required to withhold 21% (or less to the extent provided in applicable U.S. Treasury Regulations) of any
distribution to such Unitholder that could be designated by the REIT as a capital gain dividend. Any such
withheld amount is creditable against such Unitholder’s FIRPTA tax liability.
Qualified Foreign Pension Funds. A “qualified foreign pension fund” (or an entity all of the interests of which
are held by a qualified foreign pension fund) that holds the Units directly or indirectly (through one or more
partnerships) will not be subject to FIRPTA on distributions by the REIT or dispositions of the Units. A qualified
foreign pension fund is any trust, corporation, or other organization or arrangement (i) which is created or
organized under the law of a country other than the United States, (ii) which is established to provide
retirement or pension benefits to participants or beneficiaries that are current or former employees (or
persons designated by such employees) of one or more employers in consideration for services rendered, (iii)
which does not have a single participant or beneficiary with a right to more than 5% of its assets or income,
(iv) which is subject to government regulation and provides annual information reporting about its
beneficiaries to the relevant tax authorities in the country in which it is established or operates, and (v) with
respect to which, under the laws of the country in which it is established or operates, (a) contributions to such
organization or arrangement that would otherwise be subject to tax under such laws are deductible or
excluded from the gross income of such entity or taxed at a reduced rate, or (b) taxation of any investment
income of such organization or arrangement is deferred or such income is taxed at a reduced rate.
In order for the REIT to comply with its withholding obligations under FIRPTA, the Units are subject to notice
requirements and transfer restrictions. Non-U.S. persons holding Units are required to provide the REIT with
such information as the REIT may request. Furthermore, any non-U.S. person that would be treated as having
acquired sufficient Units to be treated as owning more than 5% of the Units is required to notify the REIT by
the close of the business day prior to the date of the transfer that would cause the non-U.S. person to own
more than 5% of the Units. For the purpose of determining whether a non-U.S. person has acquired more
than 5% of the Units, rules of constructive ownership apply which can attribute ownership of Units (i) among
family members, (ii) to non-U.S. persons from entities that own Units, to the extent that such non-U.S.
persons own interests in such entities and (iii) to entities from non-U.S. persons that own interests in such
entities. Under these attribution rules, Units of related entities (including related investment funds) may be
aggregated to the extent of overlapping ownership. If any non-U.S. person that otherwise would be treated
70
as having acquired sufficient Units to be treated as owning more than 5% of the Units fails to comply with the
notice provisions described above, the excess Units (i.e., the excess of the number of Units they are treated
as owning over an amount equal to 5% of the outstanding Units) will be sold, with such non-U.S. persons
receiving the lesser of (i) its original purchase price for the excess Units and (ii) the sale price of the excess
Units (net of selling expenses). Any such non-U.S. person would also not have any economic entitlement to
any distribution by the REIT on an excess Unit, and, if any such distributions are received by the non-U.S.
person and are not repaid, the REIT is permitted to withhold from subsequent payments to the non-U.S.
person up to the amount of such forfeited distributions. Non-U.S. persons holding Units are strongly advised
to monitor their actual and constructive ownership of Units. Notwithstanding that a non-U.S. person may
comply with the notice requirements and transfer restrictions described above, the REIT is entitled to
withhold on distributions as otherwise required by law, and, to the extent that the REIT has not sufficiently
withheld on prior distributions, is entitled to withhold on subsequent distributions.
Risk Factors Related to the Units
Cash Distributions are Not Guaranteed
There can be no assurance regarding the amount of income to be generated by the REIT’s properties. The ability of the REIT
to make cash distributions, and the actual amount distributed, is entirely dependent on the operations and assets of the
REIT, and is subject to various factors including financial performance, obligations under applicable credit facilities,
fluctuations in working capital, the sustainability of income derived from the tenants of the REIT’s properties and any capital
expenditure requirements. Unlike fixed-income securities, there is no obligation of the REIT to distribute to Unitholders any
fixed amount, and reductions in, or suspensions of, cash distributions may occur that would reduce yield based on the price
of Units. The market value of the Units will deteriorate if the REIT is unable to meet its distribution targets in the future,
and that deterioration may be significant. In addition, the composition of cash distributions for tax purposes may change
over time and may affect the after-tax return for investors.
Market for Securities and Prices
The REIT is an unincorporated open-ended investment trust and its Units are listed on the TSX. There can be no assurance
that an active trading market in the Units will be sustained. A publicly traded real estate investment trust does not
necessarily trade at the values determined solely by reference to the underlying value of its real estate assets. Instead, the
Units may trade at a premium or a discount to such values. A number of factors may influence the market price of the
Units, including general market conditions, fluctuations in the markets for equity securities, short-term supply and demand
factors for real estate investment trusts and numerous other factors.
Potential Volatility of Unit Price
One of the factors that may influence the market price of the Units is the annual yield on the Units. An increase in market
interest rates may lead purchasers of Units to demand a higher annual yield, which accordingly could adversely affect the
market price of the Units. In addition, the market price of the Units may be affected by numerous factors, many of which
are beyond the control of the REIT, including: (i) changes in general market conditions; (ii) fluctuations in the markets for
equity securities; (iii) recommendations by securities research analysts; (iv) changes in the economic performance or market
valuations of other issuers that investors deem comparable to the REIT; (v) release or expiration of lock-up or other transfer
restrictions on outstanding Units; (vi) sales or perceived sales of additional Units; (vii) significant acquisitions or business
combinations, strategic partnerships, joint ventures or capital commitments by or involving the REIT or its competitors; and
(viii) news reports relating to trends, concerns, technological or competitive developments, regulatory changes and other
related issues in the REIT’s industry or target markets. Recommendations and other forward-looking information in respect
of the REIT prepared by securities research analysts do not reflect the views of and are not prepared or endorsed by, the
REIT. Actual results of the REIT may vary materially from the estimates or projections of securities research analysts and
the REIT disclaims any intention or obligation to update such estimates or projections.
Restrictions on Redemptions
It is anticipated that the redemption right attached to the Units will not be the primary mechanism by which holders of
Units liquidate their investment. The entitlement of Unitholders to receive cash upon the redemption of their Units is
subject to the following limitations: (i) the total amount payable by the REIT in respect of such Units and all other Units
tendered for redemption in the same calendar month must not exceed $50,000 (provided that such limitation may be
71
waived at the discretion of the Board of Trustees); (ii) on the date such Units are tendered for redemption, the outstanding
Units must be listed for trading on the TSX or traded or quoted on any other stock exchange or market which the Board of
Trustees consider, in their sole discretion, provides fair market value prices for the Units; (iii) the normal trading of Units is
not suspended or halted on any stock exchange on which the Units are listed (or, if not listed on a stock exchange, on any
market on which the Units are quoted for trading) on the redemption date for more than five trading days during the 10-
day trading period commencing immediately after the redemption date; and (iv) the redemption of the Units must not
result in the delisting of the Units from the principal stock exchange on which the Units are listed.
Redemption notes which may be distributed to holders of Units in connection with a redemption will not be listed on any
exchange, no market is expected to develop in redemption notes and such securities may be subject to an indefinite ‘‘hold
period’’ or other resale restrictions under applicable securities laws. Redemption notes so distributed may not be qualified
investments for exempt plans, depending upon the circumstances at the time.
Currency Exchange Rate Risk
The price for Units is denominated in U.S. dollars. The Canadian dollar is not maintained at a fixed exchange rate compared
to foreign currencies. Although investors are Canadian residents, an investment in Units is required to be made in U.S.
dollars. Further, the REIT’s portfolio generates cash flow in U.S. dollars and the distributions made on the Units are in U.S.
dollars. Consequently, income and expense or any ultimate gain on sale is earned or incurred in U.S. dollars. As a result of
fluctuations in the Canada/U.S. dollar exchange rate, the value of an investment in Units and the return on the original
investment, when expressed in Canadian dollars, may be greater or less than that determined only with reference to U.S.
dollars. Accordingly, investors are subject to currency exchange rate risk.
Appraisals
The REIT may, from time to time, engage appraisers to provide independent estimates of the fair market value range in
respect of the REIT’s properties. Caution should be exercised in the evaluation and use of appraisal results, which are
estimates of market value at a specific point in time. In general, appraisals represent only the analysis and opinion of
qualified experts as at the effective date of such appraisals and are not guarantees of present or future value. Furthermore,
a publicly traded real estate investment trust will not necessarily trade at values determined solely by reference to the
underlying value of its real estate assets. Accordingly, the Units may trade at a premium or a discount to values implied by
any appraisal(s) of the REIT’s properties.
Availability of Cash Flow
ACFO may exceed actual cash available to the REIT from time to time because of items such as principal repayments, timing
of equity issuances, leasing costs and capital expenditures in excess of stipulated reserves identified by the REIT in its
calculation of ACFO and redemptions of Units, if any. The REIT may be required to use part of its debt capacity or to reduce
distributions in order to accommodate such items. Credit facility terms may prohibit payments or distributions from the
REIT in default circumstances.
Structural Subordination of Units
In the event of bankruptcy, liquidation or reorganization of the Partnership or any of its Subsidiaries, holders of their
indebtedness and their trade creditors will generally be entitled to payment of their claims from the assets of the
Partnership and its subsidiaries before any assets are made available for distribution to the REIT or holders of Units.
Therefore, the Units are effectively subordinated to the debt and other obligations of the Partnership and its subsidiaries.
The Partnership and its subsidiaries generate all of the REIT’s cash available for distribution and hold substantially all of the
REIT’s assets.
The REIT’s Fiduciary Duties
The REIT, as the sole member of the general partner of the Partnership, has fiduciary duties to the Partnership and the
limited partners of the Partnership, the discharge of which may conflict with the interests of the Unitholders. The limited
partners of the Partnership have agreed that, in the event of a conflict between the duties owed by the Board of Trustees
to the REIT and the duties that the REIT owes, in its capacity as the sole member of the general partner of the Partnership,
72
to such limited partners, the Board of Trustees are under no obligation to give priority to the interests of such limited
partners.
Limited Control
Unitholders have limited control over changes in the REIT’s policies and operations, which increases the uncertainty and
risks of an investment in the REIT. The Board of Trustees determines major policies, including policies regarding financing,
growth, debt capitalization, REIT qualification and distributions. The Board of Trustees may amend or revise these and other
policies without a vote of Unitholders. Under the REIT’s organizational documents, Unitholders have a right to vote only on
limited matters. The Board of Trustees’ broad discretion in setting policies and Unitholders’ inability to exert control over
those policies increases the uncertainty and risks of an investment in the REIT. In addition, the Declaration of Trust requires
that the CEO of the REIT be nominated to serve as a trustee.
Dilution
The number of Units the REIT is authorized to issue is unlimited. Subject to the rules of any applicable stock exchange on
which the Units are listed and applicable securities laws, the REIT may, in its sole discretion, issue additional Units from
time to time (including pursuant to any employee incentive compensation plan that may be introduced in the future), and
the interests of the holders of Units may be diluted thereby.
Unitholder Liability
The Declaration of Trust provides that no Unitholder will be subject to any liability whatsoever to any person in connection
with the holding of a Unit. In addition, legislation has been enacted in the Province of Ontario and certain other provinces
and territories that is intended to provide Unitholders in those provinces and territories with limited liability. However,
there remains a risk, which is considered by the REIT to be remote in the circumstances, that a holder of Units could be held
personally liable for the obligations of the REIT to the extent that claims are not satisfied out of the assets of the REIT. It is
intended that the affairs of the REIT will be conducted to seek to minimize such risk wherever possible.
Nature of Investment
The Units represent a fractional interest in the REIT and do not represent a direct investment in the REIT’s assets and should
not be viewed by investors as direct securities of the REIT’s assets. A holder of a Unit of the REIT does not hold a share of a
body corporate. As holders of Units, the Unitholders will not have statutory rights normally associated with ownership of
shares of a corporation including, for example, the right to bring “oppression” or “derivative” actions. The rights of
Unitholders are based primarily on the Declaration of Trust. There is no statute governing the affairs of the REIT equivalent
to the Business Corporations Act (Ontario) or the Canada Business Corporations Act (the “CBCA”) which sets out the rights
and entitlements of shareholders of corporations in various circumstances. As well, the REIT may not be a recognized entity
under certain existing insolvency legislation such as the Bankruptcy and Insolvency Act (Canada) and the Companies
Creditors’ Arrangement Act (Canada), and thus the treatment of Unitholders upon an insolvency is uncertain.
Enforceability of Judgments
Each of WPT Capital, the external asset manager and property manager of the REIT, and Welsh, the former external asset
and property manager of the REIT, is an entity organized under the laws of a foreign jurisdiction and resides outside Canada.
All of the managers and officers of the Partnership are residents of countries other than Canada. Additionally, all of the
Partnership’s assets and the assets of these persons are located outside of Canada. As a result, it may be difficult for
Unitholders to initiate a lawsuit within Canada against these non-Canadian residents. In addition, it may not be possible for
Unitholders to collect from Welsh, WPT Capital or other non-Canadian residents’ judgments obtained in courts in Canada
predicated on the civil liability provisions of securities legislation of certain of the provinces and territories of Canada. It
may also be difficult for Unitholders to succeed in a lawsuit in the U.S., based solely on violations of Canadian securities
laws.
Financial Reporting and Other Public Company Requirements
The REIT is subject to reporting and other obligations under applicable Canadian securities laws and rules of any stock
exchange on which the Units are listed, including National Instrument 52-109 — Certification of Disclosure in Issuers’ Annual
and Interim Filings. These reporting and other obligations place significant demands on the REIT’s management,
73
administrative, operational and accounting resources. In order to meet such requirements, the REIT has established
systems, implemented financial and management controls, reporting systems and procedures and retained accounting and
finance personnel. If the REIT is unable to accomplish any such necessary objectives in a timely and effective fashion, its
ability to comply with its financial reporting requirements and other rules that apply to reporting issuers could be impaired.
Moreover, any failure to maintain effective internal controls could cause the REIT to fail to meet its reporting obligations
or result in material misstatements in its financial statements. If the REIT cannot provide reliable financial reports or prevent
fraud, its reputation and operating results could be materially harmed which could also cause investors to lose confidence
in the REIT’s reported financial information, which could result in a lower trading price of Units.
Management does not expect that the REIT’s disclosure controls and procedures and internal controls over financial
reporting will prevent all error and all fraud. A control system, no matter how well designed and implemented, can provide
only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues within a company are detected. The inherent limitations include the realities that
judgments in decision making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls
can also be circumvented by individual acts of some persons, by collusion of two or more people or by management
override of the controls. Due to the inherent limitations in a cost effective control system, misstatements due to error or
fraud may occur and not be detected.
PART V
RELATED PARTY TRANSACTIONS
Transactions with Key Personnel
Compensation
The REIT’s key personnel are comprised of the Trustees, the Chief Executive Officer, the Chief Operating Officer and the
Chief Financial Officer. Compensation of key personnel for the years ended December 31, 2019 and 2018 was as follows:
Unit based compensation, including fair value adjustments
Salaries, incentives, and other employee benefits
2019
2018
$ 3,391 $ 2,376
2,349
1,113
$ 5,740 $ 3,489
Transactions with Key Personnel and AIMCo
The following were related party transactions with key personnel of the REIT and AIMCo:
Business Combination
On July 31, 2018, the REIT (through its wholly owned subsidiaries) internalized management and acquired 100% of the
membership interests of WPT Capital, through the issuance of separate share purchase agreements with AIMCo and the
principals of WPT Capital, collectively. Concurrently with the internalization transaction, certain employees of WPT Capital
became key personnel of the REIT or its subsidiaries.
Louisville Property Acquisition
On September 28, 2018, the REIT indirectly acquired from AIMCo and certain members of the REIT’s management team
(who were also former principals of WPT Capital), the Louisville Property for a purchase price of $17,860 (exclusive of closing
and transaction costs). Under the AIMCo Venture Management Agreement, the REIT exercised its right of first opportunity
to acquire the investment property. The acquisition was unanimously approved by the independent members of the REIT’s
74
Board of Trustees. Prior to and as a result of the acquisition, the REIT earned fees as the asset and property manager of the
property commencing on July 31, 2018. There are no fees receivable or payable at December 31, 2019.
Private Capital Portfolio
On August 28, 2019, the REIT indirectly acquired from AIMCo and certain members of the REIT’s management team (who
were also former principals of WPT Capital), the Private Capital Portfolio for a purchase price of $109,300 (exclusive of
closing and transaction costs). Under the AIMCo Venture Management Agreement, the REIT exercised its right of first
opportunity to acquire the investment property. The acquisition was unanimously approved by the independent members
of the REIT’s Board of Trustees. Prior to and as a result of the acquisition, the REIT earned fees as the asset and property
manager of the properties commencing on July 31, 2018. There are no fees receivable or payable at December 31, 2019.
February 2020 Private Offering
On February 20, 2020, concurrently with the February 2020 Public Offering, the REIT issued 2,578,000 Subscription Receipts
at a price of $14.35 per Subscription Receipt to AIMCo for cash proceeds to the REIT of approximately $37,000. Each
Subscription Receipt entitles the holder thereof to receive one REIT Unit upon completion of the Acquisition by the REIT
without payment of any additional consideration or any further action on the part of AIMCo.
WPT Capital
Prior to the Transaction on July 31, 2018, the REIT had related party transactions with WPT Capital, the former asset and
property manager.
The activity from each related party, except the transactions noted above, are set forth below for the periods presented as
follows:
Fees earned under asset management agreement
Acquisition fees
Asset management fees
Construction management fees
Out-of-pocket fees
Fees earned under property management agreement
PART VI
2019
2018
$ -
-
-
-
-
$ 287
1,375
83
163
1,335
SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES, AND ASSUMPTIONS
A summary of significant accounting policies, including significant judgments and critical accounting estimates made by
management of the REIT, is described in note 2 of the REIT’s audited consolidated financial statements for the year ended
December 31, 2019. Other than as noted below, there were no changes in significant accounting judgements, estimates
and assumptions during the year ended December 31, 2019.
Preparing the consolidated financial statements requires management to make judgments, estimates and assumptions in
the application of the policies outlined in the REIT’s audited consolidated financial statements. Management bases its
judgments and estimates on historical experience and other factors it believes to be reasonable under the circumstances.
However, uncertainty about these assumptions and estimates could result in outcomes that could require a material
adjustment to the carrying amount of the asset or the liability affected in the future.
75
Fair value of investment properties
The key valuation metrics for investment properties are set out below:
Weighted average terminal capitalization rate
Range of terminal capitalization rates
Weighted average discount rate
Range of discount rates
December 31, 2019
6.16%
5.00% - 8.50%
6.76%
5.64% - 8.80%
December 31, 2018
6.46%
5.25% - 9.00%
7.09%
6.00% - 9.19%
The fair value of investment properties is most sensitive to changes in the key valuation assumptions. Changes in the
terminal capitalization rates and discount rates would result in a change to the fair value of the REIT’s investment properties
as set out below for the year ended December 31, 2019:
Weighted average terminal capitalization rate:
25-basis points increase
25-basis points decrease
Weighted average discount rate:
25-basis points increase
25-basis points decrease
December 31, 2019
$
$
$
$
(37,883)
41,205
(29,595)
30,318
Changes in Accounting Policies
The REIT noted the following standards and amendments to existing standards issued by the IASB are expected to be
relevant to the REIT in preparing its consolidated financial statements starting in 2019:
(i)
IFRS 16, Leases
The REIT adopted the new requirements for IFRS 16, Leases, using the modified retrospective method effective
January 1, 2019. Under this method, the standard is applied retrospectively with the cumulative effect of
initially applying the standard recognized at the date of initial application. The new standard replaces the
existing lease guidance in IAS 17, Leases and related interpretations and requires lessees to bring most leases
onto the consolidated statement of financial position. Lessor accounting is substantially unchanged under IFRS
16 and leases with tenants are to be accounted for as operating leases in a consistent manner to the current
accounting treatment.
At transition, for leases classified as operating leases under IAS 17, lease liabilities were measured at the
present value of the remaining lease payments, discounted at the REIT’s incremental borrowing rate. The REIT
elected to measure its right-of-use assets at an amount equal to the lease liability, adjusted for any prepaid or
accrued lease payments, in addition to a number of practical expedients. As at January 1, 2019, the REIT
recognized lease liabilities of $3,336 recorded as a lease liability and right of-use assets of $3,336 recorded on
its consolidated statement of financial position. The nature and timing of the related expenses will change as
IFRS 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets
and interest expense on lease liabilities.
(ii)
IFRIC Interpretation 23, Uncertainty over Income Tax Treatments
The REIT adopted the new requirement for IFRS Interpretation Committee (“IFRIC”) Interpretation 23
Uncertainty over Income Tax Treatments (the “Interpretation”), effective January 1, 2019. The Interpretation
provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which
there is uncertainty over income tax treatments. The Interpretation requires: a) the REIT to contemplate
76
whether uncertain tax treatments should be considered separately, or together as a group, based on which
approach provides better predictions of the resolution; b) determine if it is probable that the tax authorities
will accept the uncertain tax treatment and c) if it is not probable that the uncertain tax treatment will be
accepted, measure the tax uncertainty based on the most likely amount or expected value, depending on
whichever method better predicts the resolution of the uncertainty.
77
Consolidated Financial Statements
(In U.S. dollars)
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
For the years ended December 31, 2019 and 2018
78
KPMG LLP
Bay Adelaide Centre
333 Bay Street, Suite 4600
Toronto ON M5H 2S5
Canada
Tel 416-777-8500
Fax 416-777-8818
INDEPENDENT AUDITORS' REPORT
To the Unitholders of WPT Industrial Real Estate Investment Trust:
Opinion
We have audited the consolidated financial statements of WPT Industrial Real Estate
Investment Trust (the Entity), which comprise:
the consolidated statements of financial position as at December 31, 2019 and
2018
the consolidated statements of net income and other comprehensive income for
the years then ended
the consolidated statements of changes in unitholders' equity for the years then
ended
the consolidated statements of cash flows for the years then ended
and notes to the consolidated financial statements, including a summary of
significant accounting policies
(Hereinafter referred to as the "financial statements").
In our opinion, the accompanying financial statements present fairly, in all material
respects, the consolidated financial position of the Entity as at December 31, 2019
and 2018 and its consolidated financial performance and its consolidated cash flows
for the years then ended in accordance with International Financial Reporting
Standards (IFRS).
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
"Auditors' Responsibilities for the Audit of the Financial Statements" section of
our auditors' report.
We are independent of the Entity in accordance with the ethical requirements that are
relevant to our audit of the financial statements in Canada and we have fulfilled our
other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
KPMG LLP, is a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
KPMG Canada provides services to KPMG LLP.
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Other Information
Management is responsible for the other information. Other information comprises:
the information included in Management's Discussion and Analysis filed with the
relevant Canadian Securities Commissions; and
the information, other than the financial statements and the auditors' report
thereon, included in a document likely to be entitled "2019 Annual Report".
Our opinion on the financial statements does not cover the other information and we
do not and will not express any form of assurance conclusion thereon.
In connection with our audit of the 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 financial statements or our knowledge
obtained in the audit and remain alert for indications that the other information appears
to be materially misstated.
We obtained the information included in Management's Discussion and Analysis filed
with the relevant Canadian Securities Commissions as at the date of this auditors'
report thereon. If, based on the work we have performed on this other information, we
conclude that there is a material misstatement of this other information, we are
required to report that fact in the auditors' report.
We have nothing to report in this regard.
The information, other than the financial statements and the auditors' report thereon,
included in a document likely to be entitled "2019 Annual Report" is expected to be
made available to us after the date of this auditors' report. If, based on the work we
will perform on this other information, we conclude that there is a material
misstatement of this other information, we are required to report that fact to those
charged with governance.
Responsibilities of Management and Those Charged with
Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial
statements in accordance with International Financial Reporting Standards (IFRS),
and for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether
due to fraud or error.
In preparing the financial statements, management is responsible for assessing the
Entity's ability to continue as a going concern, disclosing as applicable, matters related
to going concern and using the going concern basis of accounting unless
management either intends to liquidate the Entity or to cease operations, or has no
realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity's financial
reporting process.
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Auditors' Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud or
error, and to issue an auditors' 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 the 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 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 Entity'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 Entity's ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in our auditors' report
to the related disclosures in the 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 auditors' report. However, future events or
conditions may cause the Entity to cease to continue as a going concern.
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Page 4
Evaluate
the overall presentation, structure and content of
financial
statements, including the disclosures, and whether the financial statements
represent the underlying transactions and events in a manner that achieves fair
presentation.
the
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.
Provide those charged with governance with a statement that we have complied
with relevant ethical requirements regarding independence, and communicate
with them all relationships and other matters that may reasonably be thought to
bear on our independence, and where applicable, related safeguards.
Obtain sufficient appropriate audit evidence regarding the financial information of
the entities or business activities within the group Entity to express an opinion on
the financial statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for our audit
opinion.
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditors' report is Jason Gaiotto.
Toronto, Canada
March 11, 2020
82
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Consolidated Statements of Financial Position
(In thousands of U.S. dollars)
December 31, 2019 December 31, 2018
Assets
Non-current assets:
Investment properties (note 6)
Intangible assets and goodwill (note 8)
Investment in equity accounted joint venture (note 7)
Other non-current assets
Right-of-use assets (note 6)
$
Current assets:
Amounts receivable (note 9)
Prepaid expenses
Restricted cash
Cash
1,573,077 $
19,154
3,745
189
1,317
1,597,482
3,708
2,031
1,225
18,446
25,410
1,117,672
22,721
-
88
3,336
1,143,817
2,573
1,271
849
8,245
12,938
Total assets
$
1,622,892 $
1,156,755
Liabilities and Unitholders' Equity
Non-current liabilities:
Bank indebtedness (note 13)
Mortgages payable (note 13)
Class B Units (note 14)
Other liabilities (note 12)
Current liabilities:
Mortgages payable (note 13)
Amounts payable and accrued liabilities (note 10)
Total liabilities
Total unitholders' equity
Commitments and contingencies (note 25)
Subsequent events (note 30)
372,137
224,301
23,731
15,638
635,807
87,723
43,024
130,747
766,554
856,338
174,284
312,097
25,422
11,320
523,123
32,072
27,127
59,199
582,322
574,433
Total liabilities and unitholders' equity
$
1,622,892 $
1,156,755
See accompanying notes to consolidated financial statements.
83
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Consolidated Statements of Net Income and Comprehensive Income
(In thousands of U.S. dollars)
Investment properties revenue (note 18)
Management fee revenue (note 19)
$
Expenses (income):
Investment properties operating expenses
Fair value adjustment to investment properties (note 6)
Fair value adjustment to investment properties – IFRIC 21 (note 6)
Income from equity accounted investment (note 7)
General and administrative (note 20)
Transaction costs related to internalization (note 4)
Amortization and depreciation expense (notes 6, 8)
Fair value adjustment to Class B Units (notes 14, 22)
Fair value adjustment to derivative instruments (notes 13, 22)
Finance costs (note 22)
Net income and comprehensive income before income taxes
Deferred income tax recovery (note 11)
Year ended
December 31,
$
2019
115,129
3,587
118,716
29,104
(63,213)
1,787
(1,053)
15,463
-
3,597
1,852
6,547
26,798
97,834
1,112
2018
92,454
2,790
95,244
24,127
(24,280)
511
-
10,571
8,560
1,565
677
2,770
20,703
50,040
606
Net income and comprehensive income
$
98,946
$
50,646
See accompanying notes to consolidated financial statements.
84
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Consolidated Statements of Changes in Unitholders' Equity
(In thousands of U.S. dollars, except REIT Units)
# of REIT
Units
Trust
Equity
Distributions
Accumulated
Income
Unitholders’
Equity
Balance, December 31, 2017
(note 16)
Redemption of Class B Units for
REIT Units (note 16)
DTUs redeemed for REIT Units
(note 16)
REIT Units issued due to exercise
of stock options (note 16)
Net income and comprehensive
income
Distributions declared (note 16)
44,545,772
$ 470,204
$ (81,455)
$ 137,928
$ 526,677
2,361,672
31,197
25,859
329
1,505
-
-
20
-
-
-
-
-
-
-
-
31,197
329
20
-
(34,436)
50,646
-
50,646
(34,436)
Balance, December 31, 2018
46,934,808
$ 501,750
$ (115,891)
$ 188,574
$ 574,433
REIT Units issued, net of
issuance costs (note 16)
DTUs redeemed for REIT Units
(note 16)
Redemption of Class B Units for
REIT Units (note 16)
REIT Units issued due to exercise
of stock options (note 16)
Net income and comprehensive
income
Distributions declared (note 16)
Balance, December 31, 2019
(note 16)
17,084,000
222,072
89,920
257,513
10,597
-
-
1,234
3,543
145
-
-
-
-
-
-
-
-
-
-
222,072
1,234
3,543
145
-
(44,035)
98,946
-
98,946
(44,035)
64,376,838
$ 728,744
$
(159,926)
$ 287,520
$ 856,338
See accompanying notes to consolidated financial statements.
85
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
Cash flows from operating activities:
Net income
Finance costs (note 22)
Non-cash items:
Amortization of straight-line rent (note 6)
Property tax liability under IFRIC 21 (note 6)
Fair value adjustment to investment properties – IFRIC 21 (note 6)
Fair value adjustment to investment properties (note 6)
Deferred compensation expense (note 15)
Allowance for expected credit losses (note 9)
Fair value adjustment on deferred compensation (note 20)
Income from equity accounted joint venture
Amortization of intangible assets (note 8)
Deferred income tax recovery (note 11)
Amortization of lease incentives (note 6)
Change in non-cash working capital (note 29)
Cash flows provided by operating activities
Cash flows from financing activities:
Repayment of mortgages payable
Proceeds from mortgages payable
Repayment of bank indebtedness
Proceeds from bank indebtedness
Financing costs incurred
Proceeds from issuance of REIT Units, net of issuance costs (note 16)
Proceeds from issuance of preferred units of subsidiary (note 12)
Distributions paid
Interest paid
Cash flows provided by financing activities
Cash flows from investing activities:
Acquisitions of investment properties
Business combination (note 4)
Investment in joint venture (note 7)
Proceeds from disposition of investment properties (note 5)
Additions to investment properties, including lease incentives
Cash flows used in investing activities
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Year ended
December 31,
2019
2018
$ 98,946 $
35,197
50,646
24,150
(5,473)
1,787
(1,787)
(63,213)
5,188
(114)
1,981
(1,053)
3,567
(1,112)
2,017
(4,345)
71,586
(32,072)
-
(256,000)
455,000
(1,806)
222,072
113
(42,931)
(26,209)
318,167
(355,542)
-
(2,641)
4,174
(25,543)
(379,552)
10,201
8,245
(1,102)
511
(511)
(24,280)
3,254
-
837
-
1,565
(606)
1,602
(561)
55,505
(33,864)
30,000
(86,500)
185,000
(2,193)
-
-
(34,285)
(20,151)
38,007
(72,390)
(9,861)
-
-
(9,653)
(91,904)
1,608
6,637
Cash and cash equivalents, end of period
$ 18,446 $ 8,245
Non-cash transactions:
Issuance of Class B Units in business combination (note 4)
$ -
$ 10,000
See accompanying notes to consolidated financial statements.
86
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
WPT Industrial Real Estate Investment Trust (the "REIT") is an unincorporated, open-ended real
estate investment trust established pursuant to a Declaration of Trust dated March 4, 2013, under
the laws of the Province of Ontario as amended and restated on April 26, 2013.
The REIT was formed for the purpose of acquiring, developing, and owning primarily industrial
investment properties, located in the United States, with a particular focus on warehouse and
distribution investment properties.
The REIT’s Units are listed and publicly traded in Canada on the Toronto Stock Exchange ("TSX"),
in U.S. dollars, under the symbol “WIR.U”, and in the U.S. on the OTCQX marketplace under the
symbol “WPTIF”. The registered office of the REIT is at 199 Bay Street, Suite 4000, Toronto,
Ontario.
As at December 31, 2019, the REIT owned a portfolio of investment properties comprised of 73
industrial properties, one office property, and two industrial properties through an equity accounted
joint venture, located in 18 states in the U.S. and is the developer and manager of three industrial
properties.
87
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
1.
Basis of presentation:
(a) Statement of compliance:
The consolidated financial statements of the REIT have been prepared by management in
accordance with International Financial Reporting Standards (“IFRS”), as issued by the
International Accounting Standards Board ("IASB").
These consolidated financial statements were approved by the board of trustees of the REIT
(the “Board of Trustees”) on March 11, 2020.
(b) Basis of measurement:
The consolidated financial statements have been prepared on a historical cost basis except
for investment properties, right-of-use assets, amounts payable under deferred compensation
plans, lease liabilities, derivative instruments and Class B Units (“Class B Units”) which have
been measured at fair value. The consolidated financial statements are presented in U.S.
dollars, which is the REIT's functional currency, and all amounts have been rounded to the
nearest thousands, except per unit amounts and when otherwise indicated.
(c) Basis of consolidation:
The consolidated financial statements comprise the financial statements of the REIT and its
subsidiaries including the REIT’s interest in WPT Industrial, Inc. and WPT Industrial, LP (the
“Partnership”). Subsidiaries are entities controlled by the REIT. The financial statements of
the subsidiaries are prepared using the same reporting periods as the REIT using consistent
accounting policies. All intercompany balances, transactions and unrealized gains and losses
arising from intercompany transactions are eliminated on consolidation.
2.
Significant accounting policies
(a) Business combinations:
When an investment is acquired, the REIT considers the substance of the assets and activities
of the acquisition in determining whether the acquisition represents an asset acquisition or a
business combination. A transaction is considered to be a business combination if the
acquired investment meets the definition of a business in accordance with IFRS 3, Business
88
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
Combinations (“IFRS 3”), being an integrated set of activities and assets that are capable of
being managed for the purpose of providing a return to the Unitholders.
Business combinations are accounted for under the acquisition method. Identifiable assets
acquired and liabilities and contingent liabilities assumed in a business combination are
measured initially at fair value as at the acquisition date. Goodwill, if any, is the excess of the
cost of acquisition over the fair value of the REIT's share of the identifiable net assets acquired.
If the cost of acquisition is less than the fair value of the REIT's share of the net assets
acquired, the difference is recognized immediately in the consolidated statements of net
income and comprehensive income. Transaction costs incurred in connection with business
combinations are expensed as incurred.
If the acquisition of an investment does not represent a business, it is accounted for as an
acquisition of a group of assets and liabilities. The cost of the acquisition is allocated to the
assets and liabilities acquired based upon their relative fair values at the acquisition date, and
no goodwill is recognized. Acquisition-related costs are capitalized to the investment at the
time the acquisition is completed.
(b) Investment properties:
Investment properties are initially recorded at cost, including related transaction costs in the
case of asset acquisitions, and includes primarily industrial investment properties held to earn
rental revenue and/or for capital appreciation. The REIT accounts for its investment properties
in accordance with International Accounting Standard ("IAS") 40, Investment Property. The
REIT has selected the fair value method of accounting to account for real estate classified as
investment properties. As a result, subsequent to initial recognition, investment properties are
carried at fair value, with gains and losses arising from changes in fair value recognized in the
consolidated statements of net income and comprehensive income during the year in which
they arise.
Investment properties include land, buildings, improvements to investment properties and all
direct leasing costs incurred in obtaining and retaining property tenants. Lease incentives that
do not provide benefits beyond the initial lease term are amortized as a reduction to
investment properties revenue on a straight-line basis over the term of the lease.
Capital expenditures, including tenant improvements, are added to the carrying value of the
investment properties only when it is probable that future economic benefits will flow to the
investment property and cost can be measured reliably. Repairs and maintenance
expenditures are expensed when incurred.
89
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
Properties Under Development
Investment properties under development for future use as investment property are accounted
for under IAS 40. Costs eligible for capitalization to investment properties under development
are initially recorded at cost, and subsequent to initial recognition are accounted for using the
fair value method.
The cost of investment properties under development includes direct development costs,
management fees, consulting and legal fees, property taxes and borrowing costs directly
attributable to investment properties under development. The REIT capitalizes borrowing
costs to qualifying assets by determining whether the borrowings are general or specific to a
project.
Upon practical completion of a development, the development property is transferred to
investment properties at the fair value on the date of practical completion. The REIT considers
practical completion to have occurred when the property is capable of operating in the manner
intended by management. Generally, this occurs upon completion of construction and receipt
of all necessary occupancy and other material permits.
Dispositions
Investment properties are derecognized when they have been disposed of or permanently
withdrawn from use and no future economic benefit is expected from their disposal. Prior to
their disposal, the carrying values of the investment properties are adjusted to reflect their fair
values. This adjustment is recorded as a fair value gain or loss.
(c) Fair value measurement:
The REIT measures financial instruments, such as derivatives, and non-financial assets, such
as investment properties, at fair value at each balance sheet date. Fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date under current market conditions. The
fair value measurement is based on the presumption that the transaction to sell the asset or
transfer the liability takes place either:
•
•
In the principal market for the asset or liability, or
In the absence of a principal market, in the most advantageous market for the asset
or liability
90
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
The principal or the most advantageous market must be accessible by the REIT.
The fair value of an asset or a liability is measured using the assumptions that market
participants would use when pricing the asset or liability assuming that market participants act
in their economic best interests. A fair value measurement of a non-financial asset considers
a market participant's ability to generate economic benefits by using the asset in its highest
and best use or by selling it to another market participant that would use the asset in its highest
and best use.
The REIT uses valuation techniques that are appropriate in the circumstances and for which
sufficient data are available to measure fair value, maximizing the use of relevant observable
inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial
statements are categorized within the fair value hierarchy, described as follows, based on the
lowest level input that is significant to the fair value measurement as a whole:
•
•
•
Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or
liabilities
Level 2 – Inputs other than quoted prices included within level 1 that are observable for
the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices);
and
Level 3 - Inputs for the asset or liability that are not based on observable market data
(unobservable inputs).
For assets and liabilities that are recognized in the financial statements on a recurring basis,
the REIT determines whether transfers have occurred between levels in the hierarchy by re-
assessing categorization (based on the lowest level input that is significant to the fair value
measurement as a whole) at the end of each reporting period.
For the purpose of fair value disclosures, the REIT has determined classes of assets and
liabilities on the basis of the nature, characteristics and risks of the asset or liability and the
level of the fair value hierarchy as explained above.
(d) Cash, cash equivalents and restricted cash:
Cash and cash equivalents include all short-term investments with an original maturity of three
months or less and excludes cash subject to restrictions that prevent its use for current
91
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
purposes. Restricted cash represents amounts required to be held in escrow by various
mortgages payable, related to insurance, real estate taxes and capital expenditures. These
items are included in either other non-current assets or restricted cash depending on their
required holding period.
(e) Revenue recognition:
The REIT accounts for tenant leases as operating leases given that it has retained
substantially all of the risks and benefits of ownership of its investment properties.
Revenue from investment properties includes base rents that each tenant pays in accordance
with the terms of its respective lease, recoveries of operating expenses, including property
taxes, common area maintenance, lease termination fees and other incidental income.
Revenue recognition under a lease commences when the tenant has the right to use the
investment property.
The total amount of contractual rent to be received from operating leases is recognized on a
straight-line basis over the term of the lease, resulting in an accrual recording the cumulative
difference between the rental revenue as recorded on a straight-line basis and rents received
from tenants in accordance with their respective lease terms. This accrual is presented as a
straight-line rent receivable and forms a component of investment properties.
Recoveries of operating expenses from tenants are recognized as revenue in accordance with
the terms of the underlying leases, which is generally in the year in which the corresponding
costs are incurred. Other revenue is recorded at the time the service is provided.
An allowance for doubtful accounts is maintained for estimated losses resulting from the
inability of tenants to meet the contractual obligations under their lease agreements. Such
allowances are reviewed periodically based on the recovery experience of the REIT and the
creditworthiness of the tenants.
The REIT also earns asset and property management service fees to manage, develop and
operate industrial real estate investment properties on behalf of and in partnership with third-
party investors. These fees are recognized on an accrual basis over the period during which
the related services are provided. Asset and property management services also may result
in the REIT earning a performance fee when performance of underlying investment properties
exceeds established returns. Those returns are calculated based on fixed percentages in
excess of predetermined thresholds as outlined in the governing documents for each
92
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
respective investment partnership. Performance fees are not recognized in revenue until the
amounts can be established and there is a low probability of reversal from future events.
(f) Financial instruments:
(i) Designation of financial instruments:
The following summarizes the REIT's classification and measurement of financial assets
and financial liabilities:
Financial assets and liabilities
Classification
Measurement
Amounts receivable (rent and
receivables)
Restricted cash
Cash and cash equivalents
Bank indebtedness
Mortgages payable and
construction loan
Class B Units
Loans and receivables
Amortized cost
Loans and receivables
Loans and receivables
Other liabilities
Other liabilities
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Fair value through profit
and loss (“FVTPL”)
Fair value
Derivative instruments
Deferred tax liability
Security deposits
Lease liability
Amounts payables and accrued
FVTPL
Other liabilities
Other liabilities
Other liabilities
Other liabilities
liabilities
Fair value
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Deferred compensation
FVTPL
Fair value
(ii) Financial assets:
Financial assets are classified and measured based on amortized cost or fair value
through profit or loss. Transaction costs that are directly attributable to the acquisition of
a financial asset, with the exception of those classified as at fair value through profit or
loss, are accounted for as part of the respective asset’s carrying value at inception and
amortized over the expected life of the financial instrument using the effective interest
method. Transaction costs directly attributable to the acquisition of financial assets
classified as at fair value through profit or loss are recognized immediately in the
consolidated statements of net income and comprehensive income.
An allowance for expected credit losses (“ECL”) is recognized at each balance sheet date
for all financial assets measured at amortized cost or those measured at fair value through
93
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
profit or loss. The ECL model requires considerable judgment, including consideration of
how changes in economic factors affect ECLs, which are determined on a probability-
weighted basis.
The carrying amount of the financial asset is reduced through an allowance account, and
the amount of the loss is recognized in the consolidated statements of net income and
comprehensive income within investment properties operating expenses. Bad debt write-
offs occur when management determines collection is not possible. Any subsequent
recoveries of amounts previously written off are credited against investment properties
operating expenses in the consolidated statements of net income and comprehensive
income. Amounts receivables that are less than three months past due are not considered
impaired unless there is evidence that collection is not possible.
(iii) Financial liabilities:
The REIT classifies financial liabilities on initial recognition as other liabilities measured at
amortized cost, or in the case of Class B Units, deferred compensation, lease liability, and
derivative instruments at fair value, with changes in FVTPL. The REIT initially recognizes
borrowings on the date they are originated. All other financial liabilities are recognized
initially on the trade date at which the REIT becomes party to the contractual provisions
of the instrument. Mortgages payable and other financial liabilities are initially recognized
at fair value less directly attributable transaction costs, or at fair value when assumed in
a business combination or asset acquisition. Subsequent to initial recognition, these
financial liabilities are recognized at amortized cost using the effective interest rate
method.
The REIT derecognizes a financial liability when its contractual obligations are discharged,
cancelled or expired.
(iv) Finance costs:
Finance costs include interest expense on mortgages payable and bank indebtedness
(defined in note 13), distributions on Class B Units and Deferred Partnership Units
(“DPUs”), interest expense on lease liabilities, the gain or loss on the change in fair value
of financial liabilities designated as FVTPL, amortization associated with mark-to-market
adjustments and financing costs incurred in connection with obtaining long-term
financings. Mark-to-market adjustments and financing costs incurred are amortized using
the effective interest rate method over the term of the related mortgages payable.
94
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
Unamortized mark-to-market adjustments and financing costs incurred are fully amortized
when mortgages payable are retired before maturity.
(v) Derivative financial instruments:
The REIT may use derivative financial instruments to manage risks from fluctuations in
interest rates. All derivative instruments are valued at their respective fair values with
changes in fair value recorded in the consolidated statements of net income and
comprehensive income.
(g) Income taxes:
(i) Canadian status:
The REIT is a mutual fund trust pursuant to the Income Tax Act (Canada). Under current
tax legislation, a mutual fund trust that is not a Specified Investment Flow Through ("SIFT")
trust pursuant to the Income Tax Act (Canada) is entitled to deduct distributions of taxable
income such that it is not liable to pay income taxes provided that its taxable income is
fully distributed to unitholders. The REIT intends to continue to qualify as a mutual fund
trust that is not a SIFT trust and to make distributions not less than the amount necessary
to ensure that the REIT will not be liable to pay income taxes.
(ii) U.S. REIT status:
The REIT is treated as a U.S. corporation for all purposes under the Internal Revenue
Code of 1986, as amended (the "Code") and, as a result, it is permitted to elect to be
treated as a real estate investment trust under the Code, notwithstanding the fact that it
is organized as a Canadian entity. In general, a company which elects to be taxed as a
real estate investment trust, distributes at least 90% of its real estate investment trust
taxable income, subject to certain adjustments, to its unitholders in any taxable year, and
complies with certain other requirements (including asset, income and other tests) is not
subject to federal income taxation to the extent of the income which it distributes. If it fails
to qualify as a real estate investment trust in any taxable year, without the benefit of certain
relief provisions, it will be subject to federal (including any applicable alternative minimum
tax for taxable years beginning before January 1, 2018), state and local income tax at
regular corporate income tax rates on its taxable income. Even if it qualifies for taxation
as a real estate investment trust, it may be subject to certain state and local taxes on its
income, property or net worth and to federal income and excise taxes on its undistributed
income. The REIT has reviewed the real estate investment trust requirements and has
95
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
determined that it qualifies as a real estate investment trust under the Code. Accordingly,
no provision for U.S. federal income or excise taxes has been made with respect to the
income of the REIT. In certain instances, the REIT may be subject to certain state and
local taxes which are not material to the financial statements.
The REIT expects no significant increases or decreases in uncertain tax positions due to
changes in tax positions within one year of December 31, 2019. The REIT has no material
interest or penalties relating to income taxes recognized in the consolidated statements
of net income and comprehensive income for the years ended December 31, 2019 and
2018 or in the consolidated statements of financial position as at December 31, 2019 and
2018. As at December 31, 2019, returns for the calendar years 2016 through 2018 remain
subject to examination by U.S. and various state and local tax jurisdictions.
(iii) U.S. income taxes:
The REIT has a U.S. taxable REIT subsidiary (“TRS”) that is subjected to U.S. federal and
state income taxes separate from the REIT. In general, a TRS may perform and engage
in real estate or non-real estate businesses that are not permitted REIT activities.
The REIT uses judgment to interpret tax rules and regulations in determining the
appropriate rates and amounts in recording current and deferred income taxes. Actual
income taxes could significantly vary from these estimates as a result of future events,
including changes in income tax law or the outcome of reviews by tax authorities and
related appeals. To the extent that the final tax outcome is different from the amounts that
were initially recorded, such difference will impact the income tax provision in the period
in which such determination is made.
The recognition of deferred income tax assets and liabilities also requires significant
judgment as the recognition is dependent on the REIT's projection of future taxable profits
and tax rates that are expected to be in effect in the period the asset will be realized or
the liability settled. Any changes to this projection will result in changes in the amount of
deferred tax assets and liabilities and the deferred tax expense in the consolidated
statements of net income and comprehensive income.
The REIT records deferred income tax assets and liabilities using the asset and liability
method of accounting on differences arising between the financial statement carrying
values and their respective income tax basis. Deferred tax is measured using enacted or
substantively enacted income tax rates expected to apply in the years in which those
temporary differences are expected to be recovered or settled. A deferred tax asset is
96
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
recognized for unused tax losses, tax credits and deductible temporary differences, to the
extent that it is probable that future taxable profits will be available against which they can
be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to
the extent that it is no longer probable that the related tax benefit will be realized.
(h) Distributions declared:
Distributions declared to unitholders are recognized as a liability in the period in which the
distributions are approved by the Board of Trustees and are recorded as a reduction of
accumulated income.
(i) REIT Units:
The REIT Units (defined in note 16) are redeemable at the option of the holder and, therefore,
are considered puttable instruments in accordance with IAS 32, Financial Instruments -
Presentation ("IAS 32"). Puttable instruments are required to be accounted for as financial
liabilities, except where certain conditions are met in accordance with IAS 32, in which case,
the puttable instruments may be presented as equity. The REIT Units meet the conditions of
IAS 32 and are, therefore, presented as equity.
(j) Class B Units:
Class B Units are entitled to distributions per unit in an amount equal to the distributions per
unit declared in respect of the REIT Units, and are redeemable by the holder thereof for cash
or REIT Units (on a one-for-one basis, subject to customary anti-dilution adjustments), as
determined by the general partner of the Partnership in its sole discretion. The Class B Units
are puttable, and, therefore, meet the definition of a financial liability under IAS 32 and are
accordingly classified as non-current liabilities in the consolidated statements of financial
position.
All Class B Units are financial liabilities and are measured at fair value at each reporting
period, based upon the value of a REIT Unit, with any changes in fair value recorded in the
consolidated statements of net income and comprehensive income.
(k) Deferred compensation plans:
As described in note 15, the REIT has a Deferred Unit Incentive Plan ("DUIP") and unit option
plan (the "Plan") that provides for the granting of deferred trust units (“DTUs”), DPUs, and
options to certain of the trustees, officers, employees, consultants and service providers, as
97
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
well as employees of such service providers. Deferred compensation is measured at fair value
as at the grant date and compensation expense is recognized in general and administrative
expense over the related vesting period. The amounts are fair valued each reporting period
and the change in fair value is recognized as compensation expense. The unit based
compensation is presented as a liability.
(l)
Intangible assets:
Finite life intangible assets represent the estimated discounted future net cash flow from asset
and property management fees the REIT expects to earn over the life of the management
agreements acquired in connection with the internalization transaction (note 4). The intangible
assets are amortized on a straight-line basis based on (i) the period of estimated future net
cash flow for the investment properties identified in the contracts at the time of the transaction
or (ii) the life of the underlying contracts identified in note 4. The intangible assets estimated
useful lives are between one and ten years.
Indefinite life intangible assets are measured at cost less any accumulated impairment loss.
Intangible assets are evaluated for impairment annually or more often if events or
circumstances indicate there may be an impairment. Any impairment of the REIT’s intangible
asset is recorded in earnings for the period in which the impairment is identified.
(m) Joint arrangements:
Upon the creation of a joint arrangement, the REIT’s management reviews its classification to
determine if it is a joint venture to be accounted for using the equity method or if it is a joint
operation for which we must recognize the proportionate share of assets, liabilities, revenues,
and expenses. The REIT holds 10% interests in its joint arrangements. It has joint control over
them since, under the contractual agreements, unanimous consent is required form all parties
to the agreements in decisions concerning all relevant activities. The joint arrangements in
which the REIT is involved are structured so that they provide the REIT rights to these entities’
net assets. Therefore, these arrangements are presented as joint ventures and are accounted
for using the equity method.
(n) Critical accounting judgments, estimates and assumptions:
Preparing the consolidated financial statements requires management to make judgments,
estimates and assumptions in the application of the policies outlined above. Management
bases its judgments and estimates on historical experience and other factors it believes to be
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
reasonable under the circumstances. However, uncertainty about these assumptions and
estimates could result in outcomes that could require a material adjustment to the carrying
amount of the asset or the liability affected in the future.
(i) Critical accounting judgments:
The following are the critical judgments used in applying the REIT's accounting policies
that have the most significant effect on the amounts in the consolidated financial
statements:
(a) Investment properties:
The REIT assesses whether an acquisition transaction should be accounted for as an
asset acquisition or a business combination under IFRS 3, Business Combinations.
This assessment requires management to make judgments on whether the assets
acquired and liabilities assumed constitute a business as defined in IFRS 3 and if the
integrated set of activities, including inputs and processes acquired, is capable of
being conducted and managed as a business, and the REIT obtains control of the
business.
Management makes judgments with respect to whether lease incentives provided in
connection with a lease enhance the value of the leased space, which determines
whether or not such amounts are treated as tenant improvements and added to
investment properties. Lease incentives, such as cash, rent-free periods and lessee-
or lessor-owned improvements, may be provided to lessees to enter into an operating
lease. Lease incentives that do not provide benefits beyond the initial lease term are
amortized as a reduction of rental revenue on a straight-line basis over the term of
the lease.
Judgment is also applied in determining whether improvements to the investment
property and costs incurred in obtaining and retaining property tenants are additions
to the carrying amounts of the investment properties.
(b) Leases:
The REIT uses judgment in determining whether certain leases, in particular those
with long contractual terms where the lessee is the sole tenant in an investment
property where the REIT is the lessor and long-term ground leases, are operating or
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
finance leases. Management has determined that all of its leases are operating leases
as the REIT has retained substantially all of the risks and benefits of ownership.
(c) Joint arrangements:
The REIT uses judgment in determining whether the REIT has joint control and
whether the arrangements are joint operations or joint ventures. In assessing whether
the joint arrangements are joint operations or joint ventures, management applies
judgment to determine the REIT’s rights and obligations in the arrangement based on
factors such as the structure, legal form and contractual terms of the arrangement.
(d) Income taxes:
The REIT is a mutual fund trust pursuant to the Income Tax Act (Canada) and a real
estate investment trust pursuant to the Code. Under current tax legislation, the REIT
is not liable to pay Canadian or U.S. income tax provided that its taxable income is
fully distributed to unitholders each year. The REIT has reviewed the requirements for
real estate investment trust status and has determined that it qualifies as a real estate
investment trust pursuant to the Code.
(ii) Estimates and assumptions:
Management makes estimates and assumptions that affect carrying amounts of assets
and liabilities, the disclosure of contingent assets and liabilities, and the reported amount
of income for the year. Actual results could differ from these estimates. The estimates and
assumptions that are critical in determining the amounts reported in the consolidated
financial statements include the valuation of investment properties.
Critical assumptions relating to the estimates of fair values of investment properties
include discount rates that reflect current market uncertainties and capitalization rates. If
there is any change in these assumptions or regional, national or international economic
conditions, the fair value of investment properties may change materially.
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
The REIT adopted the following standards and amendments to existing standards issued by the
IASB:
(i)
IFRS 16, Leases
The REIT adopted the new requirements for IFRS 16, Leases, using the full retrospective
method effective January 1, 2019. Under this method, the standard is applied retrospectively
with the cumulative effect of initially applying the standard recognized at the date of initial
application. The new standard replaces the existing lease guidance in IAS 17, Leases and
related interpretations and requires lessees to bring most leases onto the consolidated
statement of financial position. Lessor accounting is substantially unchanged under IFRS 16
and leases with tenants are to be accounted for as operating leases in a consistent manner
to the current accounting treatment.
At transition, for leases classified as operating leases under IAS 17, lease liabilities were
measured at the present value of the remaining lease payments, discounted at the REIT’s
incremental borrowing rate. The REIT elected to measure its right-of-use assets at an amount
equal to the lease liability, adjusted for any prepaid or accrued lease payments. As at January
1, 2019, the REIT recognized lease liabilities of $3,336 recorded as a lease liability and right
of-use asset of $3,336 recorded on its consolidated statement of financial position. The
nature and timing of the related expenses will change as IFRS 16 replaces the straight-line
operating lease expense with a depreciation charge for right-of-use assets and interest
expense on lease liabilities.
At the commencement date of a lease the REIT will recognize a liability to make lease
payments and an asset representing the rights to use the underlying asset during the lease
term. Certain right-of-use assets related to land leases meet the definition of investment
property under IAS 40, Investment Property; therefore, the fair value model is applied to
those assets. Interest expense on the lease liability and the fair value gain (loss) on the right-
of-use asset is recognized separately. The REIT applies the recognition exemptions for lease
contracts that, at the commencement date, have a lease term of 12 months or less and do
not contain a purchase option and lease contracts for which the underlying asset is of low
value.
(ii)
IFRIC Interpretation 23, Uncertainty over Income Tax Treatments
The REIT adopted the new requirement for IFRS Interpretation Committee (“IFRIC”)
Interpretation 23 Uncertainty over Income Tax Treatments (the “Interpretation”), effective
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
January 1, 2019 with no impact to the consolidated financial statements. The Interpretation
provides guidance on the accounting for current and deferred tax liabilities and assets in
circumstances in which there is uncertainty over income tax treatments. The Interpretation
requires: a) the REIT to contemplate whether uncertain tax treatments should be considered
separately, or together as a group, based on which approach provides better predictions of
the resolution; b) determine if it is probable that the tax authorities will accept the uncertain
tax treatment and c) if it is not probable that the uncertain tax treatment will be accepted,
measure the tax uncertainty based on the most likely amount or expected value, depending
on whichever method better predicts the resolution of the uncertainty.
3.
Changes in accounting policies:
The REIT noted the following standards and amendments to existing standards issued by the
IASB are expected to be relevant to the REIT in preparing its consolidated financial statements in
2020:
In October 2018, the IASB issued amendments to IFRS 3. The amendments are in relation to
whether a transaction meets the definition of a business combination. The amendment clarifies
the definition of a business and provides additional illustrative examples, including those relevant
to the real estate industry. A significant change in the amendment is the option for an entity to
assess whether substantially all of the fair value of the gross assets acquired is concentrated in a
single asset or group of similar assets. If such a concentration exists, the transaction is not viewed
as an acquisition of a business and no further assessment of the business combination guidance
is required. This will be relevant where the value of the acquired entity is concentrated in one
property, or a group of similar properties. The amendment is effective for periods beginning on or
after January 1, 2020, with earlier application permitted. There will be no impact on transition since
the amendments are effective for business combinations for which the acquisition date is on or
after the transition date.
4.
Acquisitions:
Prior year business combination:
On July 31, 2018, the REIT (through its wholly owned subsidiaries) internalized management (the
“Internalization”) and acquired 100% of the membership interests of WPT Capital Advisors, LLC
(“WPT Capital”), a related party, through the issuance of separate share purchase agreements
with Alberta Investment Management Corporation and affiliates (“AIMCo”), a related party, and
the principals of WPT Capital (the “Acquisition”) (collectively, the (“Transaction”)). Concurrently
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
with the Transaction, all of
employees of the REIT or its subsidiaries (see note 17).
the executives and other employees of WPT Capital became
The aggregate consideration to WPT Capital included (i) 728,237 Class B Units valued at $10,000
and (ii) $16,811 in cash consideration. The components of the purchase price were made up of
$20,000 related to the private capital business of WPT Capital and $6,811 related to the
internalization of management, which was based on internalization provisions in the asset
management and property management agreements (the “Management Agreements”) and
equaled the fees paid to WPT Capital over the preceding twelve months. The principals of WPT
Capital received all of the Class B Units and AIMCo received all of its consideration in cash. The
Class B Units are subject to lock-up provisions providing for a release of 1/3 of the units annually
beginning on the third anniversary of the Acquisition.
In conjunction with the Internalization, the REIT awarded $9,800 of deferred equity compensation
to certain employees which vest 50% upon each of the fourth and fifth anniversaries of the award
date. The awards are also subject to an additional lock-up period of three years after vesting.
The awards are considered remuneration for post-internalization services and will be recorded as
they are expensed over the related vesting period as accounted for under IFRS 2. See note 15 for
further detail.
The REIT acquired two assets: (i) management contracts related to investment properties held by
AIMCo and certain members of REIT’s management team (the “AIMCo Venture Management
Contracts”) and (ii) management contracts related to a private capital venture (the “Venture”)
formed by WPT Capital with Canada Pension Plan Investment Board (“CPPIB”), AIMCo, and the
REIT as investors/limited partners (“the “Venture Management Contracts”) (see note 7). Each
asset is identified as an intangible asset. The REIT also acquired assets and assumed liabilities
of working capital totaling ($139) from WPT Capital.
The REIT, through a wholly owned TRS subsidiary, recorded a deferred tax liability totaling $4,286
as a result of the acquired intangible assets, noted above, having a higher financial statement
carrying value than the respective income tax basis. As a result of the deferred tax liability, the
REIT recorded goodwill totaling $4,286.
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
The Acquisition has been recognized as a business combination, in accordance with IFRS 3,
Business Combinations, with transaction costs of $8,560, including the $6,811 related to the
Internalization, expensed during the year ended December 31, 2018. The REIT has recorded all
identifiable assets acquired which were measured at best estimates of the respective fair values
on July 31, 2018. The amounts are as follows:
Assets acquired:
Intangible assets:
Venture Management Contracts
AIMCo Venture Management Contracts
Goodwill
Deferred tax liability
Amounts receivable
Prepaid expenses
Other non-current assets
Amounts payable and accrued liabilities
Net assets acquired
Consideration given by the REIT consists of the following:
Cash consideration, net of working capital
Class B Units
Total consideration
Total
$ 15,804
4,196
4,286
24,286
(4,286)
708
53
10
(910)
(139)
$ 19,861
9,861
10,000
$ 19,861
In accordance with IFRS 3, the REIT is required to disclose on a pro forma basis, the REIT’s
results for the year-to-date incorporating the effect of the acquisition as if it had been effective
January 1, 2018. The AIMCo Venture Management Contracts generated fee revenue of $472 for
the period from January 1, 2018 through the acquisition date. It is impracticable to determine net
income for the contracts as WPT Capital provided a number of services and did not allocate costs
to each revenue stream. Management noted that the Venture Management Contracts commenced
in conjunction with the Transaction date and there is no reportable fee revenue or net income for
the period from January 1, 2018 through the date of acquisition.
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
Asset acquisitions:
Infill Logistics Portfolio
On April 5, 2019, the REIT acquired a portfolio of 13 industrial buildings and three land parcels
located in multiple markets across the U.S. (the “Infill Logistics Portfolio”) for a purchase price of
$226,000 (exclusive of closing and transaction costs). The purchase price was satisfied with funds
from Term Loan I (as defined in note 13), Term Loan II (as defined in note 13), the unsecured
revolving credit facility and cash on hand.
Private Capital Portfolio
On August 28, 2019, the REIT acquired, from AIMCo and certain members of the REIT’s
management team, a portfolio of four industrial buildings located in multiple markets across the
U.S. (the “Private Capital Portfolio”) for a purchase price of $109,300 (exclusive of closing and
transaction costs). The purchase price was satisfied with funds from the unsecured revolving credit
facility.
Nashville Property
On September 30, 2019, the REIT acquired from a third party, an investment property located in
La Vergne (Nashville), Tennessee (the “Nashville Property”) for a purchase price of $33,000
(exclusive of closing and transaction costs). The purchase price was satisfied with funds from the
unsecured revolving credit facility and cash on hand.
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
The assets acquired, and liabilities assumed in these transactions occurring in the year ended
December 31, 2019 were allocated as follows:
Infill Logistics
Portfolio
Private Capital
Portfolio
Nashville
Property
Total
Investment properties (1)
Amounts receivable
Prepaid expenses
Amounts payable and
accrued liabilities
Security deposits
Prepaid rent
$ 225,836 $ 108,392
274
114
73
293
$ 33,806
-
-
(2,172)
(893)
(123)
(7,890)(2)
(84)
-
$ 368,034
347
407
(11,921)
(1,202)
(123)
355,542
(1,859)
(225)
-
31,722
Net assets acquired
223,014
100,806
Consideration given by the REIT consists of the following:
Cash
Total consideration
100,806(2)
$ 223,014 $ 100,806
(1) Includes total closing and transaction costs of $1,343 and an IFRIC 21 liability of $2,025 assumed on acquisition that is
355,542
$ 355,542
31,722
$ 31,722
223,014
offset by an equal adjustment to investment property.
(2) Included in cash consideration and reduced from amounts payable and accrued liabilities is $3,017, which related to a
tax obligation that the REIT paid on behalf of the seller following the completion of the acquisition.
Prior year asset acquisitions:
St. Paul Property
On June 20, 2018, the REIT acquired from a third party, an investment property located in St.
Paul, MN (the “St. Paul Property”) for a purchase price of $8,300 (exclusive of closing and
transaction costs). The purchase price was satisfied with funds from the senior secured revolving
credit facility.
Rogers Property
On June 29, 2018, the REIT acquired from a third party, an investment property located in Rogers,
MN (the “Rogers Property”) for a purchase price of $20,425 (exclusive of closing and transaction
costs). The purchase price was satisfied with funds from the unsecured revolving credit facility.
Louisville Property
On September 28, 2018, the REIT indirectly acquired from AIMCo and certain members of the
REIT’s management team, an investment property located in Louisville, KY (the “Louisville
Property”) for a purchase price of $17,860 (exclusive of closing and transaction costs). The
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
purchase price was satisfied with funds from the unsecured revolving credit facility. See additional
disclosures in note 17.
Franklin Park Property
On November 6, 2018, the REIT acquired from a third party, an investment property located in
Franklin Park, Illinois (the “Franklin Park Property”) for a purchase price of $26,800 (exclusive of
closing and transaction costs). The purchase price was satisfied with funds from the unsecured
revolving credit facility.
The assets acquired, and liabilities assumed in these transactions occurring in 2018 were
allocated as follows:
Investment properties (1)
Amounts receivable
Prepaid expenses
Amounts payable and
accrued liabilities
Security deposits
Prepaid rent
St. Paul
Property
Rogers
Property
Louisville
Property
$ 8,550 $ 20,690 $ 17,911
-
-
10
-
-
-
(30)
-
-
(4)
-
(317)
(940)
(200)
(8)
Franklin
Park
Property
Total
$ 26,828 $ 73,979
-
193
(293)
-
-
10
193
(1,267)
(200)
(325)
Net assets acquired
$ 8,530 $ 20,369 $ 16,763
26,728 $ 72,390
Consideration given by the REIT consists of the following:
Cash
Total consideration
16,763
$ 8,530 $ 20,369 $ 16,763
(1) Includes total closing and transaction costs of $594 and an IFRIC 21 liability of $511 assumed on acquisition that is
$ 26,728 $ 72,390
20,369
72,390
26,728
8,530
offset by an equal adjustment to investment property.
5.
Asset dispositions:
On May 23, 2019, the REIT sold the investment property located at 500 Sumner Way, New
Century, Kansas to a third party purchaser for net cash proceeds of $4,174 (inclusive of closing
and working capital adjustments).
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
6.
Investment properties:
The reconciliation of the carrying amount of investment properties for the years ended December
31, 2019 and 2018 are set out below:
Balance, beginning of period
Investment property acquisitions
Investment property disposition
Additions to investment properties, including
lease incentives
Amortization of straight-line rent
Amortization of lease incentives
Fair value adjustment to investment properties
2019
2018
$ 1,117,672 $ 1,009,582
368,034
(4,297)
24,999
5,473
(2,017)
63,213
73,979
-
10,331
1,102
(1,602)
24,280
$ 1,573,077
$ 1,117,672
Property tax liability under IFRIC 21
Fair value adjustment to investment properties
– IFRIC 21
(1,787)
1,787
(511)
511
$ 1,573,077
$ 1,117,672
Straight-line rent includes the cumulative difference between rental revenue as recorded on a
straight-line basis and rents received from the tenants in accordance with their respective lease
terms.
Investment properties include the current fair value of the land, building, improvements to the
investment property, all direct leasing costs incurred in obtaining and retaining property tenants
and investment properties under development. Management reviews the fair value of the
investment properties regularly using independent property valuations and market conditions
existing at the reporting date, which are generally accepted market practices. Judgment is also
applied in determining the extent and frequency of independent third party appraisals. The REIT
determines the fair value of an investment property at the end of each reporting period using a
combination of the following methods: (i) an internal valuation using the discounted cash flow
model, which discounts the expected future cash flows, including a terminal value, based on the
application of a terminal capitalization rate to the assumed final year's estimated cash flows, and
reviewing the key assumptions from previous and current appraisals and updating the value for
changes in the property cash flow, physical condition and changes in market conditions, and (ii)
appraisals by an independent third party, according to professional appraisal standards and IFRS.
Refer to note 26 for the fair value hierarchy of investment properties measured at fair value in the
consolidated statements of financial position.
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
Management obtains an independent third party appraisal for each investment property contained
within the portfolio at the time of acquisition. Additionally, the REIT obtains independent third party
appraisals for existing investment properties on a three-year rotation, such that approximately
one-third of the portfolio is appraised annually.
The key valuation metrics for investment properties are set out below:
Weighted average terminal capitalization rate
Range of terminal capitalization rates
Weighted average discount rate
Range of discount rates
6.16%
5.00% - 8.50%
6.76%
5.64% - 8.80%
6.46%
5.25% - 9.00%
7.09%
6.00% - 9.19%
December 31, 2019
December 31, 2018
The fair value of investment properties is most sensitive to changes in the discount and terminal
capitalization rates. Changes in the terminal capitalization rates and discount rates would result in
a change to the fair value of the REIT’s investment properties as set out below as at December
31, 2019:
Weighted average terminal capitalization rate:
25-basis point increase
25-basis point decrease
Weighted average discount rate:
25-basis point increase
25-basis point decrease
$
$
$
$
(37,883)
41,205
(29,595)
30,318
Right-of-use asset
The REIT had a non-cancellable ground lease for land related to one of its investment properties.
Annual payments under the lease were approximately $100 through May 31, 2023. Annual
payments thereafter are adjusted based on changes in the consumer price index until expiration
in 2073. On May 23, 2019, the REIT sold the investment property (note 5).
In October 2019, the REIT recorded a right-of-use asset and lease obligation of $1,346 and
$1,346, respectively, for an office lease.
As at December 31, 2019 and 2018, the right-of-use assets were valued at $1,317 and $3,336,
respectively, and the lease liabilities at $1,356 and $3,336, respectively.
In accordance with IFRS 16, the REIT has recognized depreciation and interest expense, instead
of operating lease expense. During the years ended December 31, 2019 and 2018, the REIT
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
recognized $30 and $0 of depreciation expense, respectively. The REIT recognized $9 and $0 of
interest expense during the years ended December 31, 2019 and 2018, respectively.
7.
Equity Accounted Joint Venture
The REIT has an equity method accounted investment in a joint venture. The REIT’s ownership
interest in each equity investee is as follows:
Equity Investee
Principal Activity
December 31, 2019 December 31, 2018
WPT Industrial
Venture I LP
Develop or acquire and reposition
and own industrial properties.
10%
10%
Joint ventures are included in the REIT’s financial statements as investments using the equity
method, whereby the investment is initially recognized at cost and adjusted thereafter for the post-
acquisition change in the net assets. The REIT’s share of joint venture profit or loss is included in
the statements of net income and comprehensive income.
The Venture incurred $10,530 and $(500) in net income (loss) and comprehensive income (loss)
for the years ended December 31, 2019 and 2018. The following table present the financial results
of the REIT’s equity-accounted investment at 100% and the REIT’s ownership interests are set
out below:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets
Equity-accounted investment in joint venture
December 31, 2019 December 31, 2018
$ 605
64,200
(317)
(27,550)
$
$
36,938
3,745
$ -
600
-
-
$ 600
$ -
The REIT, through one of its subsidiaries, is the non-recourse carve out and completion guarantor
on a construction loan within WPT Industrial Venture I LP, in which the REIT performs asset
management, property management and development duties. As at December 31, 2019 and
December 31, 2018, the construction loan had an outstanding balance of $27,803 and $0. The
REIT has been indemnified by the limited partners of WPT Industrial Venture I, LP based on the
equity contributed to the project.
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
8.
Intangible assets and goodwill:
Intangible assets and goodwill consist of the following as at December 31, 2019 and 2018:
Management contracts
Goodwill
2019
2018
$ 14,868 $ 18,435
4,286
4,286
$ 19,154
$ 22,721
As part of the Transaction, the REIT recorded a deferred tax liability (note 4) related to the
difference between the financial statement carrying value and respective income tax basis of the
acquired intangible assets. As such, the REIT recorded goodwill to the extent of the tax liability
recorded.
Management contracts consist of the AIMCo Venture Management Contracts and the Venture
Management Contracts (see note 4). The reconciliation of the management contracts carrying
value for the following periods is set out below:
AIMCo Venture
Management
Contracts
Venture
Management
Contracts
Total
Intangible
Assets
Balance, as at December 31, 2017
$ - $ - $ -
Acquisition of management contracts
Amortization
4,196
(907)
15,804
(658)
20,000
(1,565)
Balance, as at December 31, 2018
$ 3,289
$ 15,146 $ 18,435
Amortization
(1,987)
(1,580)
(3,567)
Balance, as at December 31, 2019
$ 1,302
$ 13,566 $ 14,868
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
9.
Amounts receivable:
Receivables are recorded at their estimated net realizable value and are periodically evaluated for
collectability based on the recovery experience of the REIT and the creditworthiness of the
tenants.
Amounts receivable are as follows:
Tenant receivables
Other receivables
Allowance for expected credit losses
December 31, 2019 December 31, 2018
$ 2,799
$ 2,029
1,023
(114)
544
-
$ 3,708 $ 2,573
The carrying value of amounts receivable approximates fair value.
10. Amounts payable and accrued liabilities:
Amounts payable and accrued liabilities consist of the following:
Deferred compensation (see note 15)
Accrued liabilities and other payables
Rent received in advance
Distribution payable
Accrued real estate taxes
Accrued interest
Trade payables
Unearned revenue
11.
Income taxes:
December 31, 2019 December 31, 2018
$ 15,422 $ 10,849
12,466
4,104
4,075
3,942
1,270
900
845
4,924
2,700
2,971
3,796
1,276
317
294
$ 43,024 $ 27,127
The REIT is taxed as “mutual fund trust” under the Income Tax Act (Canada). Pursuant to the
Declaration of Trust and subjected to the specified investment flow-through (“SIFT”) rules, the
Trustees intend to distribute or designate all taxable income to the Unitholders of the REIT and to
deduct such distributions and designations for Canadian income tax purposes.
112
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
The REIT’s TRS is subject to taxation in the U.S on the taxable income earned. The estimated
combined federal and state statutory tax rate was 28.7% during 2019 and 2018. Deferred income
tax recovery recorded for the years ending December 31, 2019 and 2018 were $1,112 and $606,
respectively.
As part of the Transaction (see note 4), the REIT recorded a deferred tax liability totaling $4,286
as a result of the acquired intangible assets having a higher financial statement carrying value
than the respective income tax basis.
The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities are as follows:
Deferred tax asset:
Legal expenses
Net operating loss
Deferred tax asset
Deferred tax liabilities:
December 31, 2019 December 31, 2018
$ 161
221
$ 180
17
$ 382
$ 197
Acquired intangible assets book vs. tax basis
$ 2,950
$ 3,877
Deferred tax liability
Deferred tax liability, net
2,950
3,877
$ 2,568
$ 3,680
The reconciliation for deferred tax assets and liability for the periods presented are as follows:
As at December 31, 2017
Deferred tax liability assumed
Change in deferred tax liability
Change in deferred tax assets
As at December 31, 2018
Change in deferred tax liability
Change in deferred tax assets
As at December 31, 2019
$
$
$
-
4,286
(409)
(197)
3,680
(927)
(185)
2,568
113
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
12. Other liabilities
Other liabilities consists of the following:
Derivative instruments (note 13)
Deferred tax liability, net (note 11)
Security deposits
Preferred units of subsidiary
Lease liabilities (note 6)
2019
2018
$ 9,317
2,568
2,284
113
1,356
$ 2,770
3,680
1,534
-
3,336
Total other liabilities
$ 15,638
$ 11,320
(1) Includes lease liabilities on transition of IFRS 16, effective January 1, 2019. Refer to Note 6 for
more details.
Preferred units of subsidiary
In 2019, a wholly owned subsidiary of the REIT issued 125 preferred units at $1,000 per unit for
net proceeds of $113. On consolidation, the preferred units of the wholly owned subsidiary are
reflected as a liability of the REIT.
The preferred units are non-voting preferred units. Unitholders holding preferred units are entitled
to receive dividends from the wholly owned subsidiary at a per annum rate equal to 12.0% payable
on June 30 and December 31 of each year. Unitholders holding preferred units will be allocated
such return in priority to any allocations or distributions to all other classes and series of units of
the wholly owned subsidiary. However, after payment of such return to unitholders holding
preferred units, preferred unitholders are not otherwise entitled to share in the income of the wholly
owned subsidiary.
The wholly owned subsidiary may redeem the preferred units at any time, for a price equal to
$1,000 per preferred unit, plus accumulated and unpaid distribution and a redemption premium if
the preferred units are redeemed before December 31, 2021. The wholly owned subsidiary had
no redemptions during the year ended December 31, 2019.
Due to the fixed distributions and preferred treatment for the preferred units, they meet the
definition of a liability. In addition, the REIT does not expect to redeem any preferred units within
the next year. Thus, the preferred units are classified as non-current liabilities.
114
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
13. Debt
Debt consists of the following as at December 31, 2019 and 2018:
Mortgages payable
Bank indebtedness
Term loans
Unsecured revolving credit facility
2019
2018
$ 312,024 $ 344,169
273,296
98,841
74,326
99,958
Total debt
$ 684,161 $ 518,453
Mortgages payable:
Mortgages payable consist of the following as at December 31, 2019 and 2018:
Mortgages payable
Mark-to-market adjustments
Financing costs, net
Carrying value
Less current portion
Long-term portion
2019
2018
$ 312,013
$ 344,085
710
(699)
312,024
(87,723)
1,129
(1,045)
344,169
(32,072)
$ 224,301
$ 312,097
Mortgages payable that are due and payable within 12 months after the date of the consolidated
statements of financial position presented, including scheduled principal payments on mortgages
payable, are classified as current liabilities. Mortgages payable are collateralized by investment
properties with a fair value of $708,400 and $712,350 as at December 31, 2019 and 2018,
respectively. Mortgages payable bore interest at various rates ranging from 2.87% to 5.80% and
have a weighted average effective interest rate of 3.8% as at December 31, 2019 and 2018.
Maturity dates range from 2020 – 2024 as at December 31, 2019. The weighted average term to
maturity on mortgages payable was 2.3 years and 3.0 years as at December 31, 2019 and 2018,
respectively.
On August 29, 2018, the REIT refinanced an existing fixed rate mortgage payable in the amount
of $17,808, with proceeds from a new, five-year, $30,000 interest-only mortgage payable bearing
a variable rate equal to one-month LIBOR plus a margin of 133 basis points. The REIT used the
excess proceeds of $12,224 and cash on hand to repay a maturing fixed rate mortgage with an
outstanding balance of $12,511. The REIT incurred financing costs $331, which are being
115
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INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
amortized using the effective interest rate method over the remaining term. On October 8, 2018
the REIT entered into an agreement to economically fix the interest rate using an interest rate
swap at LIBOR of 3.00%, for a total fixed rate equal to 4.33%.
On April 25, 2019, the REIT repaid a mortgage payable bearing a fixed interest rate of 3.41% with
a remaining principal balance of $28,325, with funds from the unsecured revolving credit facility.
The property, previously encumbered by the mortgage payable, was added to the unencumbered
asset pool thereby increasing the availability on the unsecured revolving credit facility.
Future contractual cash flows of mortgages payable principal and interest are as follows as at
December 31, 2019:
2020
2021
2022
2023
2024
Principal
Payments
Interest
Payments(1)
Total
Payments
87,723
73,676
26,426
83,185
41,003
10,137
8,239
5,249
2,747
1,158
97,860
81,915
31,675
85,932
42,161
$ 312,013
$ 27,530
$ 339,543
(1) Includes interest from a variable rate mortgage which is fixed utilizing an interest rate swap.
The REIT's mortgages payable contain customary representations, warranties, and events of
default, which require the REIT to comply with affirmative and negative covenants. These
covenants include (a) net worth thresholds, (b) senior debt service coverage ratios, (c) total
indebtedness to gross book value ratios, and (d) liquid asset thresholds. As at December 31, 2019
and 2018, the REIT was in compliance with all covenants of its mortgages payable.
Bank indebtedness:
Bank indebtedness consists of the following:
Unsecured revolving credit facility
Term Loan I
Term Loan II
Term Loan III
Financing costs, net
December 31, 2019
December 31, 2018
$ 100,000
125,000
80,000
70,000
(2,863)
$ 101,000
75,000
-
-
(1,716)
Carrying value
$ 372,137
$ 174,284
116
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INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
On June 26, 2018, the REIT entered into a $300,000 unsecured credit facility (the “Credit Facility”),
comprised of the unsecured revolving credit facility and an unsecured delayed draw term loan with
availability to borrow up to $175,000 and $125,000, respectively (subject to requisite
unencumbered assets). The unsecured delayed draw term loan has a draw availability period of
one year and a maturity date of June 26, 2023. On June 26, 2018, the REIT drew $75,000 on the
delayed draw term loan (the “Term Loan I”) and $13,000 on the unsecured revolving credit facility,
using the proceeds to pay closing costs and repay the existing senior secured revolving credit
facility (“Secured Revolving Facility”) balance of $86,000 in full.
On March 26, 2019, the REIT amended and restated the Credit Facility, thereby increasing the
availability from $300,000 to $450,000 (subject to requisite unencumbered assets). The increase
was comprised of a new delayed draw term loan (the “Term Loan II”) of $80,000 and an increase
to the unsecured revolving facility of $70,000. The amended and restated Credit Facility also
extended the maturity date of the unsecured revolving facility to March 26, 2023, with the option
for two six-month extensions. The Term Loan II has a draw availability period of one year and a
maturity date of March 26, 2024.
On April 5, 2019, the REIT used proceeds of $50,000, $80,000, and $78,000 from Term Loan I,
Term Loan II, and the Unsecured Revolving Facility, respectively, to fund the acquisition of the
Infill Logistics Portfolio. Concurrently, the investment properties acquired were added to the
unencumbered asset pool thereby increasing the availability on the Credit Facility.
On September 26, 2019, the REIT amended and restated the Credit Facility, thereby increasing
availability from $450,000 to $575,000 (subject to requisite unencumbered assets). The increase
was comprised of a delayed draw term loan (the “Term Loan III”) of $125,000. Term Loan III has
a draw availability period of one year and maturity date of January 15, 2025. The amended and
restated Credit Facility also contains an accordion feature which increases the REIT’s availability
to $875,000 (subject to requisite unencumbered assets and lender approval). On September 26,
2019, the REIT drew $70,000 on the Term Loan III, using the proceeds to repay the unsecured
revolving facility.
On October 29, 2019, the REIT used the funds from the October 2019 bought deal offering to
repay $81,000 of the outstanding balance on the unsecured revolving credit facility.
For the year ended December 31, 2019, the REIT drew net funds from the unsecured revolving
credit facility of $(1,000).
117
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INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
The unsecured revolving credit facility, Term Loan I, Term Loan II, Term Loan III’s interest rates
are based on either LIBOR or base rate, plus an applicable margin based on leverage. The base
rate is equal to the greater of: (a) the "prime rate" plus 1.0%, (b) 0.5% above the federal funds
effective rate, or (c) 30-day LIBOR plus the applicable margin. As at December 31, 2019, the
unhedged interest rate on the unsecured revolving credit facility, Term Loan I, Term Loan II and
Term Loan III are as follows:
Unsecured revolving credit facility
Term Loan I
Term Loan II
Term Loan III
December 31, 2019
December 31, 2018
3.45%
3.38%
3.34%
3.40%
3.86%
3.79%
-
-
Financing costs related to the Credit Facility of $3,768 are being amortized using the effective
interest rate method over the respective terms ending on March 26, 2023, June 26, 2023, March
26, 2024, and January 15, 2025.
Availability on the Credit Facility was $481,767 as at December 31, 2019, of which the REIT had
drawn $375,000, leaving remaining availability of $106,767.
The Credit Facility is subject to certain guarantees by the REIT and its related subsidiaries. The
REIT’s Credit Facility contains customary representations, warranties, and events of default,
which require the REIT to comply with certain covenants. The REIT was in compliance with all
covenants as at December 31, 2019 and 2018. See note 27 for further discussion on financial
covenants.
Derivative instruments – Interest rate swap:
On August 28, 2018, the REIT entered into an agreement to economically fix the interest rate for
$75,000 of Term Loan I using an interest rate swap at LIBOR of 2.78% plus an applicable margin
based on leverage.
On October 1, 2018, the REIT entered into an agreement to economically fix the interest rate for
a $30,000 variable rate mortgage using an interest rate swap at 4.33%.
On December 31, 2018, the REIT entered into an agreement to economically fix the interest rate
for $50,000 of Term Loan I using an interest rate swap at LIBOR of 2.82% plus an applicable
margin based on leverage.
118
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
On April 5, 2019, the REIT entered into an agreement to economically fix the interest rate for Term
Loan II totaling $80,000 using an interest rate swap at LIBOR of 2.26% plus an applicable margin
based on leverage.
The following table summarizes the details of the interest rate swaps outstanding as at December
31, 2019 and 2018:
Transaction Date
August 28, 2018
October 1, 2018
December 31, 2018
April 5, 2019
Principal
Amount
Interest
Rate
$ 75,000
30,000
50,000
80,000
4.38%
4.33%
4.42%
3.86%
$ 235,000
4.21%
Maturity Date
June 30, 2023
August 31, 2023
June 30, 2023
March 26, 2024
Fair Value
Financial
Instrument
Classification
December 31,
2019
December 31,
2018
FVTPL
FVTPL
FVTPL
FVTPL
$ (3,199)
(2,317)
(2,193)
(1,608)
$ (1,145)
(786)
(839)
-
$ (9,317)
$ (2,770)
Total fair value expense recognized during the years ended December 31, 2019 and 2018, which
is reported under finance costs, was $6,547 and $2,770, respectively.
14. Class B Units:
On July 31, 2018, 728,237 Class B Units were issued with a fair value of $10,000 as consideration
in the Acquisition of WPT Capital and Internalization.
On September 26, 2018, Welsh Property Trust, LLC (“Welsh”) redeemed 2,361,672 Class B Units
in exchange for ownership and control over 2,361,672 REIT Units.
Class B Units are valued at the REIT Units’ closing price per the TSX as at December 31, 2019
and 2018, which was $13.79 and $12.85, respectively.
119
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
The following table shows the change in the carrying value and number of Class B Units
outstanding for the periods presented:
Units
Value
As at December 31, 2017
Class B Units issued, July 31, 2018
Redemption of Class B Units for REIT Units, September 26, 2018
Fair value adjustment to Class B Units
3,611,807
728,237
(2,361,672)
-
$ 45,942
10,000
(31,197)
677
As at December 31, 2018
Redemption of Class B Units for REIT Units, 2019
Fair value adjustment to Class B Units
As at December 31, 2019
1,978,372
$ 25,422
(257,513)
-
(3,543)
1,852
1,720,859
$ 23,731
Included in finance costs for the years ended December 31, 2019 and 2018 are $1,424 and
$2,422, respectively, of distributions declared on Class B Units. Total distributions payable on
Class B Units as at December 31, 2019 and 2018 were $109 and $125, respectively.
15. Deferred compensation plans:
Deferred Unit Incentive Plan (“DUIP”)
Deferred Trust Units (“DTUs”)
On April 26, 2013, the REIT authorized a DUIP, as amended and restated on May 13, 2016, that
provides for the granting of Deferred Trust Units (“DTUs”) to trustees, officers, employees,
consultants and service providers, as well as employees of such service providers. DTUs defined
as notional units with a fair value based on the REIT Units’ closing price per the TSX. The
maximum number of REIT Units reserved for issuance under the DUIP is 5% of the total number
of REIT Units issued and outstanding from time to time. Vested DTUs may be redeemed in whole
or in part for units of the REIT issued from treasury or cash. Whenever cash distributions are paid
to REIT unitholders, additional DTUs are credited to the participant's outstanding DTU balance
based on the 5-day volume-weighted average price on the grant date. These additional units vest
on the same schedule as their corresponding DTUs.
120
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
The REIT has granted or approved DTUs with the following vesting periods:
Vesting Type
Vesting Period
Target Payout
Dividends
Basic DTUs
Varies between one to five years
n/a
Accrue monthly
Performance DTUs
100% following three-year
performance period
Trustee Fee DTUs
Immediately
Trustee Match
DTUs
Three years; 33% per year on the
anniversary date
0% - 150%
Accrue monthly
n/a
n/a
Accrue monthly
Accrue monthly
Performance DTUs entitle certain officers and employees to receive the value of the Performance
DTUs at the end of the applicable performance period, based upon the REIT achieving certain
performance conditions. The target payout will be based on the REIT’s relative total shareholder
return performance compared to a predetermined peer group.
All members of the Board of Trustees have elected to receive their annual retainers and meeting
fees for the current fiscal year and since inception in the form of DTUs. Annually, the REIT matches
50% of all annual trustee compensation received in DTUs.
A summary of DTUs granted under the DUIP is set forth below:
Basic
DTUs
Performance
DTUs
Total as at December 31, 2017
Granted
Distributions
Redeemed
Total as at December 31, 2018
Granted
Distributions
Redeemed
576,838
131,140
36,188
(44,000)
700,166
2,568
34,539
(168,320)
-
52,555
1,031
-
53,586
76,862
5,577
-
Trustee
DTUs (1)
158,539
48,864
10,016
-
217,419
31,471
13,217
-
Total
DTUs
735,377
232,559
47,235
(44,000)
971,171
110,901
53,333
(168,320)
Total as at December 31, 2019
(1) Includes Trustee fee and Trustee match DTUs.
568,953
136,025
262,107
967,085
Additional Trustee DTUs of $166 had been earned and recorded as deferred compensation
liability as at December 31, 2019, but are not yet granted.
121
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
A summary of the vested DTUs granted and the total fair value of DTUs, inclusive of vested and
unvested DTUs, is set forth below:
Vested DTUs
December 31, 2018
December 31, 2019
Total Fair Value
December 31, 2018
December 31, 2019
Basic
DTUs
Performance
DTUs
Trustee
DTUs (1)
Total
DTUs
251,200
292,219
-
-
184,673
241,176
435,873
533,395
$ 8,997
$ 7,936
$ 707
$ 1,207
$ 2,794
$ 3,656
$ 12,498
$ 12,799
(1) Includes Trustee fee and Trustee match DTUs.
Total compensation expense related to DTUs for the years ended December 31, 2019 and 2018
was $3,532 and $3,155, respectively. These amounts include adjustments based on the fair value
of the DTUs and are reported within general and administrative expenses as at December 31,
2019 and 2018.
Deferred Partnership Units (“DPUs”)
On July 31, 2018, the REIT authorized a subplan under the DUIP that provides for the granting of
Deferred Partnership Units (“DPUs”) to trustees, officers, and employees of the REIT. DPUs are
defined as exchangeable units granted by the Partnership that are economically equivalent to a
REIT Unit and are exchangeable, at the holder’s option, to Class B Units or cash. Whenever cash
distributions are paid to REIT unitholders, DPU Unitholders also receive a cash distribution for
every outstanding DPU. DPUs vest based on various vesting periods (three to five years), as
defined in each specific award.
On July 31, 2018, the REIT issued 695,542 DPUs to officers and employees of the REIT, in
conjunction with the Transaction (see note 4), which vest 50% upon each of the fourth and fifth
anniversaries of the award date. The awards are also subject to an additional lock-up period of
three years after vesting.
122
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INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
The following table shows the change in the number of DPUs outstanding for the periods
presented:
Total as at December 31, 2017
Granted in 2018
Total as at December 31, 2018
Granted in 2019
Total as at December 31, 2019
Total DPUs Granted
-
695,542
695,542
76,106
771,648
For the years ended December 31, 2019 and 2018, distributions declared on DPUs, which are
included in finance costs were $567 and $220, respectively. Total distributions payable on DPUs
as at December 31, 2019 and 2018 were $49 and $44, respectively. As at December 31, 2019
and 2018, 79,739 and 0 DPUs have vested, respectively. The fair value of all outstanding DPUs
as at December 31, 2019 and 2018 was $10,739 and $8,938, respectively.
Total compensation expense related to DPUs for the years ended December 31, 2019 and 2018
were $3,231 and $842, respectively. The amount includes adjustments based on the fair value of
the DPUs and is reported within general and administrative expenses as at December 31, 2019
and 2018.
The movement in the DUIP balance was as follows:
Total as at December 31, 2017
Deferred compensation expense
Fair value adjustment
DTUs redeemed for cash and REIT Units
Total as at December 31, 2018
Deferred compensation expense
Fair value adjustment
DTUs redeemed for cash and REIT Units
Total as at December 31, 2019
Unit Option Plan (the “Plan”)
$ 6,551
3,254
743
(561)
$ 9,987
5,188
1,575
(2,310)
$ 14,440
On April 26, 2013, the REIT authorized the Plan, as amended and restated on May 13, 2016,
under the terms of which options to purchase REIT Units may from time to time, be granted to
trustees, officers, employees of the external manager and consultants, exercisable for a maximum
123
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INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
period of 10 years from the date of grant. The maximum number of REIT Units reserved for
issuance under the Plan is 5% of the total number of REIT Units issued and outstanding from time
to time. These options vest as to one-third on the first anniversary of the grant date, and one-third
on each of the second and third anniversaries. The Plan expired on May 13, 2019 and can no
longer issue new options.
A summary of options granted under the Plan is set forth below:
Number of
options
Weighted average
exercise price
Outstanding, December 31, 2017
Exercised in 2018
Outstanding and Exercisable, December 31, 2018
Exercised in 2019
Outstanding and Exercisable, December 31, 2019
420,000
(10,000)
410,000
(80,000)
330,000
$ 10.02
10.14
$ 10.02
$ 10.14
$ 9.99
The total fair value of options granted as at December 31, 2019, December 31, 2018 and as at
the grant date was $982, $862 and $327, respectively. The aggregate intrinsic value of exercisable
options as at December 31, 2019 and 2018 was $1,307 and $1,160, respectively. The weighted
average remaining contractual life for outstanding options and for exercisable options as at
December 31, 2019 was 3.8 years.
The movement in the liability balance related to the Plan was as follows:
Total as at December 31, 2017
Fair value adjustment
Stock options exercised for REIT Units
Total as at December 31, 2018
Fair value adjustment
Stock options exercised for REIT Units
Total as at December 31, 2019
$ 796
94
(28)
$ 862
405
(285)
$ 982
Total compensation expense related to the option plan for the years ended December 31, 2019
and 2018 was $405 and $94, respectively. These amounts include adjustments based on the fair
value of the options and are reported within general and administrative expenses for the
respective periods.
124
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
As at December 31, 2019, fair value adjustments were determined using the Black-Scholes option
pricing model with the following assumptions:
Average expected option term
Risk-free interest rate
Expected volatility
Dividend yield
16. Unitholders’ equity:
1.9 years
1.58%
14.41%
5.45%
The REIT’s Declaration of Trust authorizes the issuances of an unlimited number of REIT units
(“REIT Unit”). REIT Units are ordinary units of the REIT, each of which represents a unitholders'
proportionate undivided beneficial interest and voting rights in the REIT.
On September 26, 2018, Welsh redeemed its remaining 2,361,672 Class B Units in exchange for
ownership and control over 2,361,672 REIT Units.
On February 25, 2019, the REIT issued 10,000,000 REIT Units at a price of $13.50 per REIT Unit
to a syndicate of underwriters on a bought deal basis for net cash proceeds to the REIT of
$128,948 (the “February 2019 Offering”) (inclusive of underwriters’ fees and issuance costs of
$6,052).
On October 29, 2019, the REIT issued 6,160,000 REIT Units at a price of $13.80 per REIT Unit to
a syndicate of underwriters on a bought deal basis for net cash proceeds to the REIT of $80,883
(the “October 2019 Offering”) (inclusive of underwriters’ fees and issuance costs of $4,125). On
November 27, 2019, the REIT issued an additional 924,000 REIT Units at a price of $13.80 per
REIT unit pursuant to the exercise in full of the over-allotment granted by the REIT to the
underwriters of the offering for net cash proceeds to the REIT of $12,241 (inclusive of underwriters’
fees of $510).
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WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
The following table shows the change in value and number of REIT Units outstanding for the
periods presented:
As at December 31, 2017
Redemption of Class B Units for REIT Units, September 26,
2018
DTUs redeemed for REIT Units
REIT Units issued due to exercise of stock options
Units
Value
44,545,772 $ 470,204
2,361,672
25,859
1,505
31,197
329
20
As at December 31, 2018
46,934,808 $ 501,750
REIT Units issued on completion of the February 2019 Offering,
net of issue costs
DTUs redeemed for REIT Units
REIT Units issued due to exercise of stock options
Redemption of Class B Units for REIT Units
REIT Units issued on completion of the October 2019 Offering,
including REIT Units issued through underwriters’ over
allotment, and net of issue costs
As at December 31, 2019
10,000,000
89,920
10,597
257,513
128,948
1,234
145
3,543
7,084,000
93,124
64,376,838 $ 728,744
The REIT declared distributions to unitholders of record in the amount of $44,035 ($0.76 per Unit)
and $34,436 ($0.76 per Unit) for the years ended December 31, 2019 and 2018, respectively.
Total distributions payable as at December 31, 2019 and December 31, 2018 were $4,075 and
$2,971, respectively.
17. Related party transactions:
Transactions with Key Personnel:
The REIT’s key personnel are comprised of the Trustees, the Chief Executive Officer, the Chief
Operating Officer and the Chief Financial Officer. Compensation of key personnel for the years
ended December 31, 2019 and 2018 was as follows:
Unit based compensation, including fair value adjustments
Salaries, incentives, and other employee benefits
$ 3,391 $ 2,376
2,349
1,113
$ 5,740 $ 3,489
2019
2018
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INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
Transactions with Key Personnel and AIMCo:
The following were related party transactions with key personnel of the REIT and AIMCo:
Business Combination (note 4)
On July 31, 2018, the REIT (through its wholly owned subsidiaries) internalized management and
acquired 100% of the membership interests of WPT Capital, through the issuance of separate
share purchase agreements with AIMCo and the principals of WPT Capital, collectively.
Concurrently with the Transaction, certain employees of WPT Capital became key personnel of
the REIT or its subsidiaries.
Louisville Property acquisition (note 4)
On September 28, 2018, the REIT indirectly acquired from AIMCo and certain key employees of
the REIT’s management team, the Louisville Property for a purchase price of $17,860 (exclusive
of closing and transaction costs). Under the AIMCo Venture Management Agreement, the REIT
exercised its right of first opportunity to acquire the investment property. The acquisition was
unanimously approved by the independent members of the REIT’s Board of Trustees. There are
no fees receivable or payable at December 31, 2019.
Private Capital Portfolio (note 4)
On August 28, 2019, the REIT indirectly acquired from AIMCo and certain key employees of the
REIT’s management team, the Private Capital Portfolio for a purchase price of $109,300
(exclusive of closing and transaction costs). Under the AIMCo Venture Management Agreement,
the REIT exercised its right of first opportunity to acquire the investment property. The acquisition
was unanimously approved by the independent members of the REIT’s Board of Trustees. There
are no fees receivable or payable at December 31, 2019.
WPT Capital:
Prior to the Transaction (note 4) on July 31, 2018, the REIT had related party transactions with
WPT Capital, the former asset and property manager (see note 4).
127
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
The activity from each related party, except the transactions noted above, are set forth below for
the years ended December 31, 2019 and 2018 as follows:
Fees earned under asset management agreement (1)
Acquisition fees
Asset management fees
Construction management fees
Out-of-pocket fees
Fees earned under property management agreement (2)
2019
2018
$ - $ 287
-
-
-
-
1,375
83
163
1,335
For the period from January 1, 2018 through July 31, 2018, WPT Capital provided the following
services related to the fees noted above.
(1) The asset management agreement provided for the following fees:
•
•
An acquisition fee equal to: (i) 1.0% of the purchase price paid for the first $100,000 of
investment properties acquired by the REIT or any of its affiliates in each fiscal year; (ii)
0.75% of the purchase price paid for the next $100,000 of investment properties acquired
by the REIT or any of its affiliates in each fiscal year; and (iii) 0.50% of the purchase price
paid in excess of $200,000 for investment properties acquired by the REIT or any of its
affiliates in each fiscal year. There were no acquisition fees payable as at December 31,
2019 and 2018.
Asset management fees at 0.25% of gross book value, as defined in the asset
management agreement. Asset management fees are reported within general and
administrative expenses. There were no asset management fees payable as at December
31, 2019 and 2018.
• With respect to any capital project with costs in excess of $100 undertaken by the REIT
or any of its affiliates, a construction management fee equal to 5.0% of aggregate tenant
improvements, capital expenditures and construction costs incurred in respect of such
capital project. There were no construction management fees payable as at and
December 31, 2019 and 2018.
•
The REIT reimburses the asset manager for all reasonable actual out-of-pocket costs and
expenses incurred in connection with the performance of the services described in the
asset management agreement or such other services that the REIT and WPT Capital
agree in writing are to be provided from time to time by the asset manager. There were no
net payables due as at December 31, 2019 and 2018, related to these reimbursements.
128
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INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
(2) Under the property management agreement, WPT Capital was the property manager of the
investment properties owned by the REIT and administered the day-to-day operations of the
REIT's portfolio of investment properties. Property management fees are described below for
all investment properties owned by the REIT:
•
•
•
2% of the gross property revenue for all single-tenant industrial investment properties;
3% of the gross property revenue for all multi-tenant industrial investment properties; and
4% of the gross property revenue for all office investment properties.
There were no property management fees payable as at December 31, 2019 and 2018.
18. Revenues:
The REIT enters into long-term lease contracts with tenants for space in its properties. Leases
generally provide for the tenant to pay the REIT base rent, with provisions for contractual increases
in base rent over the term of the lease, plus operating costs, property tax and insurance
recoveries. Revenues earned are recorded for the years ended December 31, 2019 and 2018 as
follows:
Base rent
Recovery of property taxes and insurance
Recovery of property operating expenses
2019
2018
$
$
$
86,035
19,189
9,905
115,129
$
69,496
14,597
8,361
92,454
The REIT leases investment properties to tenants under non-cancellable operating leases. The
leases have various terms, escalation clauses and renewal rights as well as early termination
fees.
There were no tenants that accounted for more than 10% of the REIT's total rental revenue for
the years ended December 31, 2019 or 2018.
129
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INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
As at December 31, 2019, the total future contractual minimum base rent lease payments
expected to be received under non-cancellable leases are as follows:
One year or less
2 – 5 years
Greater than 5 years
19. Management fee revenue:
$ 93,564
269,896
147,943
$ 511,403
The REIT earned revenue from asset and property management services provided as part of the
AIMCo Venture Management Contracts and Venture Management Contracts (note 4). For the
years ended December 31, 2019 and 2018, the REIT recognized management fee revenue of
$3,587 and $2,790, respectively.
20. General and administrative expenses:
General and administrative expenses incurred and charged to net income and comprehensive
income are recorded for the years ended December 31, 2019 and 2018 as follows:
Salaries and benefits
Deferred compensation (1)
Other
Fair value adjustment to deferred compensation
Severance costs
Third-party asset management fees
2019
2018
$
$
4,604
4,135
3,240
1,981
1,503
-
2,205
3,189
2,964
837
-
1,376
$
15,463
$
10,571
(1) Excludes $65 in trustee compensation expensed as part of the Transaction in 2018 (see note 4).
21.
Trustee and Employee costs
Trustee and employee costs, including salaries and wages, bonus and incentives, deferred
compensation and fair value adjustments to deferred compensation, and other employee benefits
was $12,868 and $7,566 for the years ended December 31, 2019 and 2018, respectively. The
amounts include employee costs for key management personnel in note 17.
130
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INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
Employee costs are recognized in the following line items in the consolidated statement of net
income and comprehensive income:
General and administrative expenses
Investment properties operating expenses
22.
Finance costs
2019
2018
$
$
11,338
1,530
12,868
$
$
7,171
395
7,566
Finance costs incurred and charged to net income and comprehensive income for the years ended
December 31, 2019 and 2018 are recorded as follows:
Interest on mortgages payable
Interest on bank indebtedness
Amortization of financing costs
Amortization of mark-to-market adjustments
on fixed interest rate mortgages payable
Interest on lease liability
Distributions on Class B Units and DPUs
Fair value adjustment to Class B Units
Fair value adjustment to derivative instrument
$
2019
2018
$
11,934
12,278
1,005
(419)
9
1,991
26,798
1,852
6,547
12,934
4,489
1,117
(479)
-
2,642
20,703
677
2,770
$
35,197
$
24,150
131
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INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
23. Reconciliation of liabilities arising from financing activities:
The table below is a reconciliation of the liabilities arising from financing activities:
Mortgages
Payable
Secured
Revolving
Facility
As at December 31, 2017
Scheduled principal payments
Proceeds from financing
Repayments
Financing costs paid
Other adjustments,non-cash(1)
Transferred financing costs(3)
$
348,480
(3,545)
30,000
(30,319)
(331)
(116)
-
$ 76,892
-
8,500
(86,000)
(13)
508(2)
113
Unsecured
revolving
credit
facility
Total
$ -
-
101,500
(500)
(1,137)
161
(66)
$
425,372
(3,545)
215,000
(116,819)
(2,193)
638
-
Term loans
$ -
-
75,000
-
(712)
85
(47)
As at December 31, 2018
(note 13)
$
344,169
$ -
$
74,326
$ 99,958
$
518,453
Scheduled principal payments
Proceeds from financing
Repayments
Financing costs paid
Other adjustments, non-cash(1)
(3,747)
-
(28,325)
-
(73)
-
-
-
-
-
-
200,000
-
(1,320)
290
-
255,000
(256,000)
(486)
369
(3,747)
455,000
(284,325)
(1,806)
586
As at December 31, 2019
(note 13)
$ 312,024
$ -
$ 273,296
$ 98,841
$ 684,161
(1) Represents other adjustments including amortization of financing costs and mark-to-market adjustments using
(2)
(3)
the effective interest rate method.
Includes the write-off of the remaining balance of financing costs from the Secured Revolving Facility of $274.
Includes initial financing costs from the Secured Revolving Facility of $113 that were applied to the Credit
Facility.
24. Segment reporting:
Management, when measuring the investment properties performance, does not distinguish or
group its operations on a geographical or any other basis. Accordingly, the REIT has a single
reportable segment for disclosure purposes in accordance with IFRS.
132
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Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
25. Commitment and contingencies:
(a) The REIT has agreed to indemnify, in certain circumstances, the trustees and the officers of
the REIT in respect of any taxes, penalties or interest imposed upon the trustee or officer in
consequence of his/her performance of his/her duties as a trustee or officer.
(b) In connection with an acquisition of an investment property located in Atlanta, Georgia on April
29, 2014 (the “Atlanta Property”), $40,170 of bonds were assumed. The authorized amount
of the bonds is $41,500, of which $40,170 was outstanding as at December 31, 2019 and
2018. The bonds provide for real estate tax abatement for the acquired investment properties.
Through a series of transactions, the REIT is both the bondholder and the obligor of the bonds.
Therefore, in accordance with IAS 32, the bonds are not recorded in the consolidated
statements of financial position.
(c) The REIT, through its subsidiaries, is the non-recourse carve out and completion guarantor
on several construction loans in which the REIT performs asset management, property
management and development duties. As at December 31, 2019 and 2018, the construction
loans had an outstanding balance of $27,803 and $0. The REIT has been indemnified by the
limited partners of each investment based on the equity contributed to the project.
133
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
26.
Fair value measurement:
The following table represents the fair value hierarchy of assets and liabilities measured at fair
value in the consolidated statement of financial position after initial recognition and assets and
liabilities not measured at fair value in the consolidated statement of financial position but for which
the fair value is disclosed in the notes to the consolidated financial statements as at December
31, 2019 and 2018, are as follows:
Level 1
Level 2
Level 3
Total
As at December 31, 2019
Assets:
Investment properties
Cash
Right of use asset
$
-
18,446
-
Liabilities:
Mortgages payable
Deferred compensation
Class B Units
Derivative instruments
Lease liability
Security deposits
As at December 31, 2018
Assets:
-
14,039
23,731
-
-
2,284
Level 1
$ -
$ 1,573,077
-
-
$ 1,573,077
18,446
1,317
-
1,317
314,782
982
-
9,317
1,356
-
Level 2
-
401
-
-
-
-
Level 3
314,782
15,422
23,731
9,317
1,356
2,284
Total
Investment properties
Cash
Right of use asset
$ -
8,245
-
$ -
-
3,336
$ 1,117,672
-
-
$ 1,117,672
8,245
3,336
Liabilities:
Mortgages payable
Deferred compensation
Class B Units
Derivative instruments
Lease liability
Security deposits
-
9,811
25,422
-
-
1,534
342,680
862
-
2,770
3,336
-
-
176
-
-
-
-
342,680
10,849
25,422
2,770
3,336
1,534
The carrying value of the REIT’s assets and liabilities approximated fair value except mortgages
payable which were calculated by discounting future cash flows using appropriate discount rates.
134
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
(a) Fair value of financial instruments:
The following summarizes the significant methods and assumptions used in estimating fair
values of the REIT's financial instruments, excluding financial instruments carried at amortized
cost where carrying value approximates fair value:
(i) Mortgages payable:
The REIT estimates the fair value of mortgages payable using a discounted cash flow
analysis and a yield rate that was estimated based on the borrowing rates currently
available to the REIT for mortgages payable with similar terms and maturities (Level 2).
(ii) Deferred compensation:
The fair value of Basic DTUs and DPUs granted is estimated based on the market trading
prices of the REIT Units (Level 1).
The fair value of unit options granted is estimated using the Black-Scholes option pricing
model (Level 2).
The fair value of Performance DTUs granted is based on a third-party valuation (Level 3).
(iii) Class B Units:
The fair value of Class B Units is estimated based on the market trading prices of the
REIT Units (Level 1).
(iv) Derivative instruments:
The fair value of the derivative instruments are estimated using a discounted cash flow
model using observable yield curves and applicable credit spreads (Level 2).
(v) Other financial assets and liabilities:
Amounts receivable, cash and cash equivalents, restricted cash, distributions payable,
the term loans, the unsecured revolving credit facility, amounts payable and accrued
135
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
liabilities are carried at amortized cost, which, due to their short-term nature, approximates
fair value.
27. Capital management:
The primary objective of the REIT's capital management policy is to ensure sufficient liquidity to
pursue its growth through acquisitions and investments, to fund leasing costs and capital
expenditure requirements, to maintain a flexible capital structure that optimizes the cost of capital
at acceptable risk and preserves the ability to meet financial obligations, to ensure adequate funds
are available to maintain consistent and sustainable unitholders' distributions, and to remain within
its quantitative banking covenants.
The REIT's capital structure consists of cash, debt (including mortgages payable, the Credit
Facility and Class B Units), and unitholders' equity. In managing its capital structure, the REIT
monitors performance and makes adjustments to its capital structure based on its investment
strategies and changes to economic conditions. In order to maintain or adjust its capital structure,
the REIT may issue equity or new debt, issue new debt to replace existing debt (with different
characteristics), or reduce the amount of existing debt.
Part of the REIT's objectives in securing and managing debt for its investment properties is to
stagger the maturities in order to mitigate short-term volatilities in the debt markets. The REIT's
declaration of trust stipulates that the REIT shall not incur indebtedness greater than 60% of gross
book value. As at December 31, 2019 and 2018, the REIT's debt-to-gross book value ratio was
43.7% and 46.5% (total outstanding principal balance of debt of $687,013 and $520,085 as at
December 31, 2019 and 2018, respectively, divided by gross book value of $1,573,077 and
$1,117,672 as at December 31, 2019 and 2018, respectively). The REIT has no convertible
debentures outstanding and has never issued any.
The REIT is required under the terms of its Credit Facility to meet certain financial covenants,
including:
(a) minimum unencumbered pool value shall not be less than $175,000 and shall contain at least
12 properties;
(b) The aggregate occupancy rate shall not be less than 80%;
(c) consolidated total indebtedness shall not exceed 60%;
136
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
(d) consolidated total secured indebtedness shall not exceed 40%;
(e) consolidated secured recourse indebtedness shall not exceed 10%
(f)
the outstanding principal balance of the Credit Facility shall not be greater than 60% of the
unencumbered pool value;
(g) unsecured interest coverage ratio shall not be less than 2.50 to 1.00;
(h) the ratio of adjusted consolidated earnings before interest, taxes, depreciation and
amortization to consolidated fixed charges for the most recently ended four quarters shall not
be less than 1.50 to 1.00;
(i) consolidated tangible net worth shall not be less than the sum of (i) $410,365 plus (ii) 70% of
the sum of any additional net offering proceeds subsequent to June 26, 2018, plus (iii) 70%
of the value of interests in the REIT issued upon the contribution of assets to the REIT or its
subsidiaries subsequent to June 26, 2018;
The REIT complied with all financial covenants as at December 31, 2019 and 2018.
28.
Financial risk management:
Risk Management:
The REIT's activities expose it to market risk, credit risk and liquidity risk. Risk management is
carried out by management of the REIT.
(a) Market risk is the risk that the fair value or future cash flows of a financial instrument will
fluctuate because of changes in market prices. Market risk consists of interest rate risk,
currency risk and other market price risk. There is interest rate risk associated with the REIT's
fixed interest rate mortgages payable due to the expected requirement to refinance such
mortgages payable in the year of maturity. In order to manage exposure to interest rate risk,
the REIT endeavors to manage maturities of fixed interest rate mortgages payable, enter into
interest rate swaps and match the nature of the mortgages payable with the cash flow
characteristics of the underlying asset. This risk is also minimized through the REIT having
mortgages payable in fixed term arrangements.
The REIT has no material exposure to currency risk.
137
WPT INDUSTRIAL REAL ESTATE
INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
(b) Credit risk arises from the possibility that tenants in investment properties may not fulfill their
lease or contractual obligations. The REIT mitigates its credit risks by attracting tenants of
sound financial standing and by diversifying its mix of tenants. It also monitors tenant payment
patterns and discusses potential tenant issues with property managers on a regular basis.
Cash carries minimal credit risk as all funds are maintained with highly reputable financial
institutions. The carrying amount of financial assets represents the maximum credit exposure.
(c) Liquidity risk is the risk that the REIT will encounter difficulty in meeting obligations associated
with the maturity of financial obligations. The REIT manages maturities of the fixed interest
rate mortgages payable and monitors the repayment dates to ensure sufficient capital will be
available to cover obligations.
29. Supplementary cash flow information:
Change in non-cash working capital for the years ended December 31, 2019 and 2018 comprises
the following:
2019
2018
Amounts receivable
Prepaid expenses
Restricted cash
Amounts payable and accrued liabilities
Amounts payable and accrued liabilities related to additions to
$
investment properties
Security deposits
$
(673)
(357)
(377)
432
(2,918)
(452)
$
(4,345)
$
(39)
81
(185)
426
(678)
(166)
(561)
30. Subsequent events:
On January 8, 2020, the REIT acquired from a third party, an investment property located in
Portland, Oregon (the “Portland Property”) for a purchase price of $16,200 (exclusive of closing
and transaction costs). The purchase price was satisfied with funds from the unsecured revolving
credit facility and cash on hand.
On January 16, 2020, the REIT acquired from a third party, a land parcel located in Eagan,
Minnesota, (the “Eagan Development Property”) for a purchase price of $5,125 (exclusive of
closing and transaction costs). The REIT intends to contribute the Eagan Development Property
into a joint venture with one or more institutional investors and develop a distribution building on
the site.
138
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INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
On January 27, 2020, the REIT sold the investment property and land parcel located at 4350 and
4400 Baker Road, Minnetonka, Minnesota to a third party purchaser for net cash proceeds of
$29,400 (inclusive of closing and working capital adjustments).
On February 3, 2020, the REIT entered into an agreement to economically fix the interest rate for
the $125,000 Term Loan III using an interest rate swap at LIBOR of 1.31% plus an applicable
margin based on leverage. The interest rate swap eliminates the risk of fluctuating cash flow with
the variable interest rate on Term Loan III.
On February 5, 2020 the REIT acquired from a third party, a land parcel located in Katy (Houston),
Texas, (the “Houston Development Property”) for a purchase price of $8,700 (exclusive of closing
and transaction costs). The REIT intends to contribute the Houston Development Property into a
joint venture with an institutional investor with one or more institutional investors and develop an
industrial building on the site.
On February 18, 2020, the REIT waived the due diligence conditions in its favor under a
membership purchase agreement (the “Acquisition Agreement”) to indirectly acquire 26
investment properties and one parcel of land for an aggregate purchase price of $730,000, subject
to closing adjustments as provided in the Acquisition Agreement (the “Acquisition”). The REIT
intends to use the net proceeds of the February 2020 Offering (as defined herein) to fund a portion
of the purchase price of the Acquisition and related expenses in connection with the Acquisition.
It is anticipated that the closing of the Acquisition will occur on or about March 31, 2020.
On February 27, 2020, the REIT issued 16,272,500 subscription receipts of the REIT (including
subscription receipts issued pursuant to the exercise in full of the over-allotment option granted
by the REIT to the underwriters of the offering) (the “Subscription Receipts”) at a price of $14.35
per Subscription Receipt to a syndicate of underwriters (the “Underwriters”) on a bought deal basis
for gross cash proceeds to the REIT of approximately $233,510 (exclusive of underwriters’ fees
of $9,340 and other issuance costs) (the “February 2020 Public Offering”), and 2,578,000
Subscription Receipts at a price of $14.35 per Subscription Receipt to AIMCo for cash proceeds
to the REIT of approximately $37,000 (the “February 2020 Private Offering” and together with the
February 2020 Public Offering, the “February 2020 Offering”). Each Subscription Receipt entitles
the holder thereof to receive one REIT Unit upon completion of the Acquisition by the REIT without
payment of any additional consideration or any further action on the part of the holder of the
Subscription Receipt. The REIT intends to use the net proceeds from the February 2020 Offering
to pay a portion of the purchase price of the Acquisition.
139
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INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per unit amounts)
For the years ended December 31, 2019 and 2018
On February 29, 2020, the REIT entered into a forward agreement to economically fix the interest
rate for $470,000 of term loans using an average interest rate swap at LIBOR of 0.93% plus an
applicable margin based on leverage. The REIT is expected to draw the $470 million from
increased capacity on the three delayed draw term loans under the Credit Facility and use the
proceeds to partially fund the Acquisition.
On March 2, 2020, the REIT repaid a mortgage payable bearing a fixed interest rate of 2.87% with
a remaining principal balance of $51,750, with funds from Term Loan III. The properties, previously
encumbered by a mortgage payable, were added to the unencumbered asset pool thereby
increasing the availability on the Credit Facility.
140
U N I T H O L D E R I N F O R M A T I O N
Listing
Toronto Stock Exchange
(symbol WIR.U in U.S. Funds)
(symbol WIR.UN in Canadian Funds)
OTCQX (symbol: WPTIF in U.S. Funds)
Auditor
KPMG LLP
Toronto, Canada
Transfer Agent
Computershare Trust
Company of Canada
100 University Avenue, 11th Floor
Toronto, Ontario M5J 2Y1
Phone: 1‑800‑564‑6253
or 1‑800‑663‑9097
Email: caregistryinfo@computershare.com
Cash Distributions
Paid monthly at rate of
$0.0633 per Trust Unit in
U.S. Funds
Investor Relations Contact
Scott Frederiksen
Chief Executive Office
WPT Industrial REIT
Tel: (612) 800‑8501
Email: stf@wptreit.com
Address
WPT Industrial REIT
199 Bay Street, Suite 4000
Toronto, Ontario M5L 1A9
Annual Meeting of Unitholders
Tuesday, June 16, 2020
at 1:00 pm ET
Virtually held via live audio
webcast at:
https://web.lumiagm.com/252047167 ¹
¹ This ear, out of an abundance of caution, to proactively
deal with the unprecedented public health impact of
COVID‑19 and to mitigate risks to the health and safety
of our community, Unitholders, employees and other
stakeholders and to comply with certain guidelines and
recommendations of the Ontario government, the REIT
will hold the Annual General Meeting of its Unitholders
virtually via live audio webcast.
F O R W A R D - L O O K I N G S T A T E M E N T A N D I N F O R M A T I O N
This eport contains “forward‑looking information” as defined under applicable
Canadian securities law (“forward‑looking information” or “forward‑looking
statements”) which reflect managemen ’s expectations regarding objectives, plans, goals,
strategies, future growth, results of operations, performance, business prospects and
opportunities of the REIT. The wo ds “plans”, “expects”, “does not expect”, “scheduled”,
“estimates”, “intends”, “anticipates”, “does not anticipate”, “projects”, “believes” or
variations of such words and phrases or statements to the effect that ce tain actions,
events or results “may”, “will”, “could”, “would”, “might”, “occur”, “be achieved” or
“continue” and similar expressions identify forward‑looking statements. Forward‑
looking statements are necessarily based on a number of estimates and assumptions that,
while considered reasonable by management of the REIT as of the date of this report,
are inherently subject to significant business, economic and competiti e uncertainties
and contingencies. The REI ’s estimates, beliefs and assumptions, which may prove to
be incorrect, include the various assumptions set forth herein, including, but not limited
to, the REIT’s and the property’s future growth potential, anticipated amounts of
expenses, results of operations, future prospects and opportunities, the demographic and
industry trends remaining unchanged, no change in legislative or regulatory matters,
future levels of indebtedness, the tax laws as currently in effect emaining unchanged,
the continual availability of capital, the current economic conditions remaining
unchanged, and continued positive net absorption and declining vacancy rates in the
markets in which the REIT’s properties are located.
When relying on forward‑looking statements to make decisions, the REIT cautions
readers not to place undue reliance on these statements, as forward‑looking statements
involve significant risks and unce tainties, should not be read as guarantees of future
performance or results and will not necessarily be accurate indications of whether or
not the times at or by which such performance or results will be achieved. A number
of factors could cause actual results to differ materially f om the results discussed in
the forward‑looking statements, including, but not limited to, the factors discussed
under “Risk Factors” in the REIT’s most recently filed annual information form which
is available under the REIT’s profile on SEDAR at ww .sedar.com. These fo ward‑
looking statements are made as of the date of this report and, except as expressly
required by applicable law, the REIT assumes no obligation to publicly update or revise
any forward‑looking statement, whether as a result of new information, future events
or otherwise.
WPT Industrial REIT
199 Bay St, Suite 4000
Toronto, ON M5L 1A9
wptreit.com