AGELLAN COMMERCIAL REAL ESTATE INVESTMENT TRUST

AGELLAN COMMERCIAL REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2013
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Contents
PART I .............................................................................................................................................................................3
FORWARD-LOOKING INFORMATION .....................................................................................................................3
NON‐IFRS FINANCIAL MEASURES ..........................................................................................................................4
PART II ............................................................................................................................................................................4
OVERVIEW .............................................................................................................................................................4
BUSINESS OVERVIEW AND STRATEGIC DIRECTION ...............................................................................................4
DECLARATION OF TRUST .......................................................................................................................................5
FINANCIAL AND OPERATIONAL HIGHLIGHTS .........................................................................................................6
SUMMARY OF SIGNIFICANT EVENTS .....................................................................................................................6
PART III ...........................................................................................................................................................................7
RESULTS OF OPERATIONS ......................................................................................................................................7
FUNDS FROM OPERATIONS ...................................................................................................................................9
PORTFOLIO PROFILE ............................................................................................................................................10
INVESTMENT PROPERTIES ...................................................................................................................................14
PART IV ........................................................................................................................................................................15
LIQUIDITY AND CAPITAL RESOURCES ..................................................................................................................15
CAPITALIZATION AND DEBT PROFILE ...................................................................................................................15
DISTRIBUTIONS AND ADJUSTED FUNDS FROM OPERATIONS .............................................................................17
PART V .........................................................................................................................................................................18
RELATED PARTY TRANSACTIONS .........................................................................................................................18
PART VI ........................................................................................................................................................................19
SIGNIFICANT ACCOUNTING POLICIES ..................................................................................................................19
PART VII .......................................................................................................................................................................19
RISKS AND UNCERTAINTIES .................................................................................................................................19
PART VIII ......................................................................................................................................................................20
CONTROLS AND PROCEDURES .............................................................................................................................20
PART IX.........................................................................................................................................................................20
SUBSEQUENT EVENTS ..........................................................................................................................................20
PART X..........................................................................................................................................................................21
FINANCIAL OUTLOOK AND MARKET GUIDANCE..................................................................................................21
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This Management’s Discussion and Analysis (“MD&A”) outlines Agellan Commercial Real Estate Investment Trust’s
(the “REIT”) operating strategies, risk profile considerations, business outlook and analysis of financial performance
and financial condition for the period ended June 30, 2013. The analysis provides a comparison to the REIT’s
quarterly forecast provided in its prospectus dated January 17, 2013 (the “Prospectus”), in connection with its initial
public offering (“IPO”). The REIT had no operations prior to January 25, 2013.
This MD&A is based on financial statements prepared in accordance with International Financial Reporting Standards
("IFRS"). All dollar amounts are in thousands of Canadian dollars, unless otherwise stated.
This MD&A should be read in conjunction with the REIT’s unaudited interim consolidated financial statements and
accompanying notes for the three and six month periods ended June 30, 2013, and with the REIT’s quarterly forecast
contained in the Prospectus (the “Forecast”).
Additional information about the REIT, including the Prospectus, the REIT’s Annual Information Form dated March
28, 2013, and the REIT’s first quarter’s operating results can be found on SEDAR at www.sedar.com.
PART I
FORWARD-LOOKING INFORMATION
Certain statements in this MD&A may constitute “forward-looking statements” under applicable Canadian securities
law. When used in this MD&A, words including, but not limited to, ‘‘plans’’, ‘‘expects’’, ‘‘scheduled’’, ‘‘estimates’’,
‘‘intends’’, ‘‘anticipates’’, “predicts”, ‘‘projects’’, ‘‘believes’’ or variations of such words and phrases or statements
to the effect that certain actions, events or results ‘‘may’’, ‘‘will’’, ‘‘could’’, ‘‘would’’, “should”, ‘‘might’’, ‘‘occur’’,
‘‘be achieved’’ or ‘‘continue’’ and similar expressions identify forward-looking statements.
Forward-looking statements reflect management’s expectations regarding objectives, plans, goals, strategies, future
growth, results of operations, performance and business prospects and opportunities of the REIT and are necessarily
based on a number of estimates 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, any of these
assumptions could prove to be inaccurate and, as a result, the forward-looking statements based on those
assumptions could be incorrect. The REIT’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 future growth potential,
results of operations, future prospects and opportunities, the demographic and industry trends remaining
unchanged, future levels of indebtedness, the tax laws as currently in effect remaining unchanged, and the current
economic conditions remaining unchanged. 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. 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 presented in Part VII in this MD&A.
These forward-looking statements are made as of 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.
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NON‐IFRS FINANCIAL MEASURES
Certain terms used in the MD&A such as “Funds from Operations” (“FFO”), “Adjusted Funds from Operations”
(“AFFO”), “Net Operating Income” (“NOI”), “Gross Book Value” (“GBV”), “Payout Ratio”, “Interest Coverage” 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 or cash flow 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 and the REIT’s
ability to earn and distribute cash returns to holders of the REIT’s units (“Units”). These terms are defined in this
MD&A and are reconciled to the consolidated financial statements of the REIT for the period ended June 30, 2013
in Parts III and IV below. Such terms do not have a standardized meaning prescribed by IFRS and may not be
comparable to similarly titled measures presented by other publicly traded entities.
PART II
OVERVIEW
The REIT is an unincorporated, open-ended real estate investment trust established pursuant to the Declaration of
Trust (“DOT”) dated November 1, 2012 and amended and restated on January 24, 2013, under the laws of the
Province of Ontario. The REIT completed its IPO on January 25, 2013. The REIT’s Units are listed and publicly traded
on the Toronto Stock Exchange (“TSX”) under the symbol ACR.UN. As at June 30, 2013, there were 19,403,536 Units
of the REIT outstanding.
The REIT was created for the purpose of acquiring and owning industrial, office and retail properties in select markets
in the United States and Canada. The REIT currently has an interest in 24 properties located in the United States and
Canada.
The objectives of the REIT are to (i) provide investors with stable, predictable and growing cash distributions on a
tax –efficient basis; (ii) enhance the value of the REIT’s assets and maximize long-term Unitholder value through
active management; and (iii) expand the asset base of the REIT and increase the REIT’s AFFO per Unit, including
through accretive acquisitions.
BUSINESS OVERVIEW AND STRATEGIC DIRECTION
The REIT invests in income producing properties in the United States and Canada in the industrial, office and retail
asset classes. The REIT's current portfolio aggregates approximately 4.3 million square feet of gross leasable area
(“GLA”) in 24 properties. The properties are located in Texas (16 properties), Ontario (3 properties), and one property
in each of Quebec, Illinois, Indiana, Ohio and Maryland.
Management believes investment in a commercial real estate platform that is diversified with respect to both asset
class and geography has the potential to deliver attractive risk adjusted returns. In addition to active asset
management, the REIT is well positioned to capitalize on its strategy of maximizing real estate value by analyzing
market trends and opportunities. This diversified strategy safeguards the REIT from relying on single local economies
and/or the investment dynamics of a single asset class. The improving fundamentals in both the underlying Canadian
and United States economies through the first and second quarters of 2013 can only serve to assist the REIT in
achieving its near-term goals of renewing existing tenants, leasing vacant space and pursuing acquisitions.
The REIT continues to focus on optimizing cash flows through active management with an emphasis on tenant
retention, increasing occupancy and extending the weighted average lease term of the portfolio.
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The REIT intends to target external growth in markets that offer high quality commercial real estate at compelling
relative valuations. The REIT utilizes a flexible, opportunity driven growth strategy and takes advantage of its agile
framework to source attractive relative valuations in various asset classes and geographies.
Given current property market conditions in the United States and Canada, management believes that the REIT
should focus its near— to medium-term acquisition efforts on the United States market for a number of reasons,
including (i) compelling trends in exchange rates, (ii) improving operating fundamentals and attractive commercial
real estate valuations in the United States and (iii) the relative availability of high quality, income-producing
commercial real estate in the United States.
DECLARATION OF TRUST
The investment guidelines of the REIT are outlined in the DOT, a copy of which is filed on SEDAR and is also available
on request to all Unitholders. Some of the main investment guidelines and operating policies in the DOT are
summarized starting on page 105 of the Prospectus, and include in part, the following:
Investment Guidelines
1. Investing and operating income-producing commercial real estate located in Canada and the United States;
2. Investing in joint venture arrangements with respect to real estate; and
3. Investing in mortgages and mortgage bonds and similar instruments secured by real estate.
Operating Policies
1. The REIT’s maximum portfolio debt capacity is not to exceed 60% of GBV or 65% including convertible
debentures;
2. The REIT cannot guarantee third-party debt outside its existing structure and potential joint venture partner
structures, except under certain specific conditions and meeting certain defined criteria;
3. The REIT must obtain and appraisal and engineering survey of each property that it intends to acquire; and
4. Environmental Phase I site assessments are required prior to the acquisition of any property by the REIT.
Further information regarding the DOT can also be located starting on page 108 of the Prospectus. At June 30, 2013,
the REIT was in material compliance with all investment guidelines and operating policies stipulated in the DOT.
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FINANCIAL AND OPERATIONAL HIGHLIGHTS
FINANCIAL AND OPERATIONAL HIGHLIGHTS
January 25, 2013
June 30, 2013
Summary of Operational Information
Number of Properties
Gross Leasable Area ("GLA") (in 000's)
Occupancy % (at period end)
Average lease term to maturity (years)
23
4,210
91%
4.4
24
4,310
92%
4.5
Summary of Financial Information
Gross Book Value
Debt
Debt to Gross Book Value
Interest Coverage (year to date period)
Weighted average interest rate
$430,984
$243,695
57%
N/A
4.0%
$480,674
$267,037
56%
3.3
3.8%
For the three months
ended June 30, 2013
$14,647
$8,866
$5,772
$4,212
$0.217
$3,749
$0.193
89%
19,403,536
19,403,130
For the year to date period
ended June 30, 2013
$25,102
$15,152
$9,853
$7,135
$0.369
$6,550
$0.339
92%
19,403,536
19,334,978
Revenue
Net operating Income ("NOI")
Funds from Operations ("FFO")
Adjusted funds from Operations ("AFFO")
AFFO per Unit
Distributions declared
Distributions per Unit
Payout Ratio (1)
Units outstanding at period-end:
Weighted average Units outstanding
(1)
Defined as Distributions declared divided by AFFO
SUMMARY OF SIGNIFICANT EVENTS


On June 12, 2013, the REIT acquired 11000 Corporate Centre Drive, Houston, Texas (“Beltway 8 Corporate
Centre II”) for a total purchase price of USD $18.25 million excluding acquisition costs, representing an
implied capitalization rate of 8.16%. The property is a two-storey commercial office facility located in the
fast growing Techway and Energy Corridor in Houston, Texas. The property has approximately 101,000
square feet of gross leasable area, and is 100% occupied by three tenants. Constructed in 2003, the building
is part of a larger corporate office park which has attracted many investment grade tenants. The lead
tenant, National Oilwell Varco, is S&P rated “A”, and will occupy approximately 75% of the property until
2020.
The REIT completed an early lease renewal of IBM Canada’s premises comprising approximately 102,000
square feet at Parkway Place for an additional ten years at market rates. IBM Canada’s renewal premises
comprises both office and data centre space. In addition, the tenant renewed approximately 22,000 square
feet of enclosed space outside the building’s BOMA GLA that is used to support IBM’s data centre space.
The early renewal extends the lease until 2025. In addition, the REIT has reduced the scope of the existing
restrictive covenant in favour of IBM, which allows for greater leasing flexibility for the REIT going forward.
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



On July 8, 2013, subsequent to the end of the second quarter, the REIT completed an early lease renewal
with CH2M Hill Canada for one additional year at market rates. CH2M Hill Canada occupies 57,713 square
feet at Parkway Place. CH2M Hill Canada’s lease now matures in March 2018.
Subsequent to the end of the second quarter, the REIT entered into two new leases at Parkway Place for a
combined 36,289 square feet, resulting in a reduction of approximately 36% of the original 101,000 square
feet of vendor lease space at Parkway Place.Operating results for the three month period ended June 30,
2013 were generally in line with management’s expectations and assumptions used in the REIT’s Forecast
included in the Prospectus, with occupancy increasing from 90.7% to 92.3%.
AFFO for the three month period ended June 30, 2013 was $4,212, against forecasted AFFO of $4,112,
favourable by $100, or 2.4%, due primarily to higher than anticipated revenue and interest savings.
During the three month period ended June 30, 2013, the REIT declared distributions of $0.06458 per Unit
on April 15, 2013, May 22, 2013 and June 18, 2013 consistent with its annualized target of $0.775 per Unit.
PART III
RESULTS OF OPERATIONS
Comparison to Forecast
The REIT’s results of operations for the three month period ended June 30, 2013, and from the commencement of
operations on January 25, 2013 to June 30, 2013 (“operations to date”) are summarized below. For purposes of this
MD&A, in comparing the REIT’s operations to date for the period ended June 30, 2013 against the related “Forecast”
figures, the related “Forecast” figures have been pro-rated to reflect the REIT’s actual operational period to date,
being January 25, 2013 to June 30, 2013. As discussed elsewhere in this MD&A, the REIT commenced operations on
January 25, 2013.
RESULTS OF OPERATIONS
Revenue
Base rent
Property operating costs recoveries
Parking and other
Total property and property related revenue
Expenses
Property operating
Property taxes
General and administrative
Finance costs
Deferred income taxes
Total Expenses
Fair value adjustments on investment properties
Fair value adjustments on financial instruments
Net Income
Calculation of Net Operating Income
Property and property related revenue
Operating expenses
For the three months ended
June 30, 2013
Actual
Forecast Variance
For the operations to date period
ended June 30, 2013
Actual
Forecast Variance
$8,571
$5,333
$743
$14,647
$8,228
$5,576
$663
$14,467
$343
($243)
$80
$180
$14,653
$9,275
$1,174
$25,102
$14,118
$9,598
$1,149
$24,865
$535
($323)
$25
$237
$3,707
$2,074
$705
$2,389
$7
$8,882
$3,742
$2,115
$707
$2,375
$809
$9,748
($35)
($41)
($2)
$14
($802)
($866)
$6,343
$3,607
$1,216
$4,083
$1,087
$16,336
$6,480
$3,666
$1,225
$4,120
$1,402
$16,893
($137)
($59)
($9)
($37)
($315)
($557)
($1,431)
$172
$0
$0
($1,431)
$172
($13,513)
$557
$0
$0
($13,513)
$557
$7,024
$4,719
$2,305
$21,722
$7,972
$13,750
$14,647
$5,781
$14,467
$5,857
$180
($76)
$25,102
$9,950
$24,865
$10,146
$237
($196)
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Net Operating Income ("NOI")
NOI margin
$8,866
61%
$8,610
60%
$256
$15,152
60%
$14,719
59%
$433
Property and property related revenue
For the three months ended June 30, 2013 and for the operations to date period ended June 30, 2013, property and
property related revenue was higher by $180 and $237 respectively as compared to the Forecast. This is a result of
higher than anticipated base rent was partially offset by lower operating cost recoveries due to lower than
anticipated property operating expenses.
Variance in base rental revenue for the three months ended June 30, 2013, and for the operations to date period
ended June 30, 2013 was higher by $343, and $535 respectively, primarily due to an upward adjustment in IFRS
straight line rent, favorable foreign exchange rates, new leases at higher than forecasted rents, and incremental rent
from the acquisition of Beltway 8 Corporate Centre II.
Please refer to the commentary on operating expenses below for details on operating expense recovery.
Property Operating and Tax Expenses
Property operating expenses are comprised of amounts recoverable from tenants (including property taxes, repairs
and maintenance, utilities and insurance) and non-recoverable expenses including certain property operating costs.
The REIT absorbs these costs to the extent of vacancies that cannot be recovered through the “gross-up” provision
of leases. Operating expenses for the three months ended June 30, 2013, and for the operations to date period
ended June 30, 2013 were $35, and $137 less than forecasted, primarily due to timing variances with respect to
property operating costs, unutilized contingencies, offset partially by increased expenses from the acquisition of
Beltway 8 Corporate Centre II. These timing variances are expected to reverse by the end of the year.
General and Administrative Expenses
General and administrative expenses contained in the Forecast reflected management’s best estimate of legal fees,
trustee fees, annual report costs, transfer agent fees, insurance costs, salaries, benefits and incentive compensation
for the REIT. The REIT’s expenses for the three months ended June 30, 2013, and for the operations to date period
ended June 30, 2013 of $705, and $1,216 respectively, were not materially different than the Forecast.
Finance Costs
The three months ended June 30, 2013 and the operations to date period ended June 30, 2013 had a variance of
$14, and (-$37), respectively as compared to the Forecast. The unfavorable variance in the three months ended June
30, 2013 is primarily due to increased interest expenses due to the acquisition of Beltway 8 Corporate Centre II. On
an operations to date basis, this unfavorable variance was offset by interest savings in the period ended March 31,
2013 due to a lower draw on the REIT’s operating facility, coupled with savings as a result of lower interest rates on
both the REIT’s swap agreement, and monthly banker’s acceptance transactions.
Deferred Income Tax
For the three months ended June 30, 2013 and for the operations to date period ended June 30, 2013 deferred tax
expense had a favourable variance of $802 and $315 as compared to the Forecast. The deferred tax expense for the
three month period ended June 30, 2013 of $7 is due to an increase in the fair market value of the properties in the
United States. The effective tax rate for the year differs from the expected statutory tax rate in the United States of
40% as a significant portion of the consolidated net income is earned directly by the REIT.
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Fair value adjustments on investment properties
Under IFRS, the REIT has elected to use the fair value model to account for its investment properties. Under the fair
value model, the investment properties are carried on the consolidated balance sheet at fair value. During the three
months ended June 30, 2013 and for the operations to date period ended June 30, 2013, the REIT recognized a fair
value gain of $1,431 and $13,513, respectively, on investment properties. Please refer to Part III – Investment
Properties for further details on the investment properties.
Fair value adjustments on other financial instruments
During the three months ended June 30, 2013 and for the operations to date period ended June 30, 2013, the REIT
recognized a fair value loss of $172 and $557, respectively. Interest rate swap contracts were used to fix the interest
rate on certain variable rate loans. Foreign exchange hedging instruments were used to fix the currency exchange
rate on U.S cash flows. The fair value movements are non-cash in nature and are expected to reverse over the life
of the contracts.
FUNDS FROM OPERATIONS
Funds from Operations (“FFO”) is a supplemental non-IFRS industry wide financial measure of a REIT’s operating
performance. The REIT calculates FFO as net earnings in accordance with IFRS, excluding: (i) fair value adjustments
on investment properties; (ii) gains (or losses) from sales of investment properties; (iii) amortization of tenant
incentives; (iv) fair value adjustments and other effects of redeemable Units classified as liabilities and the Class B
Units of Agellan Commercial REIT U.S. LP., if any; (v) acquisition costs expensed as a result of the purchase of a
property being accounted for as a business combination; (vi) changes in fair value of financial instruments which are
economically effective hedges but which do not qualify for hedge accounting; (vii) foreign exchange gains/losses on
monetary items not forming part of a net investment in a foreign operation; (viii) deferred income tax expense; and
(ix) adjustments for equity accounted entities, joint ventures and non-controlling interests calculated to reflect FFO
on the same basis as consolidated properties. The REIT’s method of calculating FFO may differ from other issuers’
methods and accordingly may not be directly comparable to FFO reported by other issuers.
A reconciliation of IFRS net income to FFO for the three month period ended June 30, 2013, and for the operations
to date period ended June 30, 2013 are summarized below:
FUNDS FROM OPERATIONS
Net Income
Add:
Fair value adjustments to
investment properties
Fair value adjustments to financial
instruments
Deferred income taxes
Funds from Operations ("FFO")
Basic FFO per Unit
For the three months ended
June 30, 2013
Actual
Forecast
Variance
For the operations to date period
ended June 30, 2013
Actual
Forecast
Variance
$7,024
$4,719
$2,305
$21,722
$7,972
$13,750
($1,431)
$0
($1,431)
($13,513)
$0
($13,513)
$172
$7
$0
$809
$172
($802)
$557
$1,087
$0
$1,402
$557
($315)
$5,772
$0.297
$5,528
$0.280
$244
$9,853
$0.510
$9,374
$0.478
$479
19,403
19,762
19,335
19,620
Weighted average units outstanding
Basic (in 000's)
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PORTFOLIO PROFILE
As of June 30, 2013, the REIT’s portfolio consisted of 24 properties, located in attractive, high-growth markets across
Canada and the United States. The properties have a total GLA of approximately 4.3 million square feet across 48
buildings.
Property
Canada
20 Valleywood Drive
243, 245, 251, 255 Consumers
Road
240 Bank Street
195-215 Bellehumeur
Sub-Total Canadian Properties
United States
City
Province
/ State
Asset Class
Year Built/
Renovated
# of
Buildings
35
Occupancy(1)
Q1
Q2
1
92%
83%
814
4
91%
91%
39
45
934
1
3
9
50%
100%
90%
67%
100%
90%
487
2
96%
96%
434
70
1
1
88%
100%
88%
100%
Markham
Ontario
Office
Toronto
Ontario
Office
Ottawa
Gatineau
Ontario
Quebec
Office
Retail
1000 & 1100 Warrenville Rd
Naperville
Illinois
Office
2151 Airwest Boulevard
8271 Anderson Court
3671-3701, 37073743 Interchange and
3949 Business Park
2100 East St. Elmo Road
2130, 2150, 2170 Woodward
Street
4120 Freidrich Lane
2120 West Braker Lane
Plainfield
Odenton
Indiana
Maryland
Industrial
Industrial
1981/1988
and 2007
2000
2001
Columbus
Ohio
Industrial
1974/1996
184
3
82%
82%
Austin
Texas
Industrial
1982
50
1
100%
100%
Austin
Texas
Industrial
1984
187
3
100%
100%
Austin
Austin
Fort
Worth
Dallas
Houston
Houston
Houston
Houston
Houston
Houston
Houston
Houston
Houston
Houston
Texas
Texas
Industrial
Industrial
1984
1984
73
46
1
1
72%
74%
88%
83%
Texas
Industrial
1999
254
1
100%
100%
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Office
1981/1999
1967
1980
1990
1990
1990
1982
1981
1979
1979
2003
344
97
149
95
75
123
119
80
199
210
101
3,376
4,310
1
1
4
2
3
2
4
2
3
2
1
39
48
100%
100%
84%
78%
86%
79%
81%
100%
99%
86%
92%
91%
100%
100%
84%
74%
91%
79%
83%
100%
99%
92%
100%
93%
92%
1201 John Burgess Road
5800 W Kiest Blvd
2301 Minimax Drive
5975 South Loop East
9001-9101 Jameel Road
6300-6320 Rothway Street
6100 & 6120 West by Northwest
1400-1412 North Sam Houston
232, 302-350 West 38th Street
2055, 2105, 2155 Silber Road
6500 & 6600 Long Point Road
11000 Corporate Center Drive
Sub-Total U.S. Properties
Total Portfolio
1987
1971/1978
and 2008
1967/1988
1988
Approx.
GLA (000s
Sq. ft)
Measured at March 31, 2013 (“Q1”) and June 30, 2013 (“Q2”).
*Occupancy at 243, 245, 251, 255 Consumers Road, and 195-215 Bellehumeur include Vendor Lease Tenants as described below.
(1)
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Geographic Diversification
The REIT’s properties are well diversified throughout Canada and the United States, with 90% of NOI derived from
three major markets: Ontario (40%), Texas (30%), and Illinois (20%), for the three month period ended June 30, 2013.
The following charts and graphs set out the regional diversification of the REIT’s portfolio and GLA and NOI by
location.
Geographic Diversification
Approx. GLA
(000s Sq. ft)
# of Buildings
2,201
889
487
434
184
70
45
4,310
32
6
2
1
3
1
3
48
Texas
Ontario
Illinois
Indiana
Ohio
Maryland
Quebec
Total
Occupancy(1)
Q1
92%
89%
96%
88%
82%
100%
100%
91%
Q2
94%
89%
96%
88%
82%
100%
100%
92%
Measured at March 31, 2013 (“Q1”) and June 30, 2013 (“Q2”).
*Occupancy at 243, 245, 251, 255 Consumers Road, and 195-215 Bellehumeur include Vendor Lease Tenants as described below.
(1)
GLA By Location
NOI By Location
(As at June 30, 2013)
(For the three month period ending June
30, 2013)
Maryland
3%
Ohio
2%
Maryland
Quebec
Ohio 2%
1%
4%
Quebec
2%
Texas
30%
Indiana
3%
Indiana
10%
Illinois
20%
Illinois
11%
Ontario
21%
Texas
51%
Ontario
40%
11
Asset Classification
The REIT’s properties are well diversified by asset class with approximately 62%, 36% and 2% of the portfolio’s NOI
for the three month period ended June 30, 2013 attributable to office, industrial, and retail assets, respectively. The
following charts illustrate the composition of the REIT’s portfolio and GLA and NOI by asset class.
Asset Classification
Approx. GLA
(000s Sq. ft)
2,788
1,477
45
4,310
Industrial
Office
Retail
Total
Occupancy(1)
# of Buildings
Q1
91%
92%
100%
91%
36
9
3
48
Q2
92%
92%
100%
92%
Measured at March 31, 2013 (“Q1”) and June 30, 2013 (“Q2”).
*Occupancy at 243, 245, 251, 255 Consumers Road, and 195-215 Bellehumeur include Vendor Lease Tenants as described below.
(1)
GLA By Asset Class
NOI By Asset Class
(As at June 30, 2013)
(For the three month period ending June
30, 2013)
Retail
1%
Retail
2%
Industrial
36%
Office
34%
Office
62%
Industrial
65%
12
Tenant Mix
The REIT’s tenant base is well-diversified, consisting of an approximately equal mix of single and multi-tenant
properties as measured by GLA. Of the single tenant properties, many of the tenants have large national or
multinational footprints. The ten largest tenants in the REIT’s portfolio account for approximately 52% of in-place
base rental revenue for the year to date period ended June 30, 2013 and comprise approximately 44% of GLA as of
June 30, 2013. Moreover, approximately 42% of the tenants at the REIT’s portfolio currently have investment grade
ratings from one or more major credit rating agencies.
The following table summarizes the REIT’s 10 largest tenants by minimum rent:
Tenant
Shoppers Drug Mart
Health Care Service
IBM Canada
SuperValu
National Oilwell Varco
Life Technologies
Dominos Pizza
Paychex
Cardinal Cabinets (RSI)
CEVA Logistics
Total/Weighted Average
Credit Rating*
Tenant
Since
Property
BBB+/--/AL/-AA-/A1/--/A+
AA-/Aa3/--/A+
B/B3/--/CCC
A/A2/--/-BBB/Baa3/--/BBB
-
1995
2006
1989
2001
2006
2006
2001
2007
2005
2001
Parkway Place
1000 & 1100 Warrenville Road
Parkway Place
1201 John Burgess Road
Beltway 8 Corporate Centre
2130 - 2170 Woodward Street
8271 Anderson Court
1000 & 1100 Warrenville Road
5800 West Keist Boulevard
2151 Airwest Boulevard
% of In-Place
Base Rent
% of
GLA
Remaining
Lease Term
(years)
13%
12%
5%
5%
4%
3%
3%
3%
3%
2%
52%
6%
6%
4%
6%
2%
3%
2%
1%
8%
7%
44%
7.0
10.4
7.9
5.3
7.2
1.7
2.9
1.7
3.7
4.2
6.6
* S&P/Moody’s/DBRS/Fitch
Lease Expiry Profile
The REIT’s diverse tenant base is complemented by a balanced lease maturity profile, with an average of 11.2% of
GLA maturing each year from 2013 to 2017, as illustrated by the chart below. The portfolio has a weighted average
lease term of 4.5 years.
LEASE EXPIRY SCHEDULE
% GLA E xp irin g Pe r Ye ar
44%
22%
14%
5%
8%
2013
2014
7%
2015
Office
2016
Retail
2017
THEREAFTER
Industrial
13
LEASE EXPIRY
(Square Footage in 000's)
By Asset Class
Office
Retail
Industrial
By Location
Canada
United States
Total
2013
2014
2015
2016
2017
Thereafter
TOTAL
9
198
37
2
269
143
3
396
15
10
271
131
24
732
927
6
806
1,262
45
2,671
4
204
207
33
275
308
87
455
542
25
271
296
91
796
887
598
1,141
1,739
838
3,140
3,979
INVESTMENT PROPERTIES
The fair value of the REIT’s investment properties as at June 30, 2013 was $470,136, representing an implied
weighted average capitalization rate of 7.7% on a projected basis. The increase in value of $1,431 for the three
month period ended June 30, 2013 is primarily attributed to a revaluation of the investment properties to reflect
current market conditions. This value is in line with recent appraisals completed, as referenced in the Prospectus.
The value of the REIT’s investment properties in Canada and the United States is based on the following allocation:
VALUE BY GEOGRAPHIC REGION
June 30, 2013
Canada
United States
$206,113
$264,023
Total
$470,136
The REIT determined the fair value of each investment property using the discounted cash flow method. The
discounted cash flow method discounts the REIT’s expected future cash flows, generally over a term of 10 years,
including a terminal value based on the application of a capitalization rate to estimated year 11 cash flows.
The key valuation assumptions for the REIT's investment properties are set out in the following table:
KEY VALUATION ASSUMPTIONS
June 30, 2013
Discount rates - range
Discount rate - weighted average
Terminal capitalization rates - range
Terminal capitalization rate - weighted average
7.50% - 9.75%
8.24%
7.00% - 9.00%
7.81%
The discounted cash flows reflect rental income from current leases and assumptions about rental income from
future leases reflecting market conditions at the reporting date, less future cash outflows in respect of such leases.
14
PART IV
LIQUIDITY AND CAPITAL RESOURCES
The REIT expects to be able to meet all of its obligations as they become due and have sufficient liquidity from the
following sources: (i) cash flow from operating activities; (ii) financing availability through the REIT’s revolving credit
facility and conventional mortgage debt secured by income producing properties; and (iii) the ability to issue equity
and convertible/unsecured debentures.
The following table details changes in cash during the three month period ended June 30, 2013:
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by/used in
Operating activities
Financing activities
Investing activities
Increase in cash and cash equivalents during the period
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
For the three months
ended June 30, 2013
$8,870
$10,567
($19,599)
($162)
$6,442
$6,280
Cash flow activity for the three month period ended June 30, 2013 primarily related to the acquisition Beltway 8
Corporate Centre II. Cash flows from financing activities of approximately $10,567 primarily relate to mortgage and
loan proceeds of $17,575, partially offset by financing fees and distributions paid by the REIT. The cash generated
from financing activities was primarily used in investing activities as reflected in the REIT’s acquisition of Beltway 8
Corporate Centre II.
CAPITALIZATION AND DEBT PROFILE
Indebtedness
CAPITALIZATION AND DEBT PROFILE
June 30, 2013
Indebtedness
Existing mortgages payable
Mark-to-market premium on existing mortgages
Unamortized financing costs
Revolving credit facility
$159,400
$3,647
($1,844)
$107,637
Unitholders' Equity
Units issued, net of issue costs, end of period
$199,740
Total Capitalization (at book value)
$468,580
15
The existing mortgages payable are secured by a charge on certain investment properties. Existing mortgages
payable include financing fees, which are capitalized when paid and amortized into finance costs over the terms of
the related mortgages (25 to 119 months) using the effective interest rate method. At June 30, 2013, the condensed
consolidated interim statement of financial position included financing fees of $1,343 and accumulated amortization
of $68. As at June 30, 2013, the mortgages carry a weighted average interest rate of 4.4%. Included in existing
mortgages payable at June 30, 2013 are U.S. dollar denominated mortgages of USD $149,320 ($156,965).
Future principal repayments and interest payments as at June 30, 2013 are as follows:
Scheduled
Principal
payment
Debt
Maturing
during the
period
Total mortgage
payable
Scheduled
interest payment
Total Debt
Service
$1,346
$2,792
$2,878
$2,972
$3,115
$9,465
$0
$0
$2,312
$0
$0
$134,520
$1,346
$2,792
$5,191
$2,972
$3,115
$143,985
$3,259
$6,422
$6,247
$6,092
$5,953
$12,581
$4,605
$9,214
$11,438
$9,064
$9,068
$156,567
$22,568
$136,832
$159,401
$40,554
$199,956
2013 - remainder
2014
2015
2016
2017
Thereafter
Face Value
Unamortized mark-to-market premium
Unamortized financing fees
Carrying amount
$3,646
($1,275)
$161,772
The REIT also obtained a revolving credit facility, secured by charges on three Canadian properties. The maximum
amount available to the REIT under this facility is $120,000, in two tranches of $60,000 each, with the first tranche
maturing over two years and second tranche over four years. The facility bears interest at bankers' acceptance plus
1.75% or prime plus 0.75%. As at June 30, 2013, the amounts drawn on the facility were $55,000 from the first
tranche and $52,637 from the second tranche, for a total of $107,637. The interest rate on $60,000 drawn on the
facility has been fixed at 3.15% using an interest rate swap.
Ratios / Covenants
Pursuant to the DOT the REIT may not incur or assume any indebtedness if, after giving effect to the incurring or
assumption of such indebtedness, the total indebtedness of the REIT would be more than 60% of the GBV of its
assets. The REIT’s overall borrowing policy is to obtain secured mortgage financing on a primarily fixed rate basis,
with a term to maturity that is appropriate having regard to the lease maturity profile for each property and which
allows the REIT to (i) achieve and maintain staggered debt maturities to lessen exposure to interest rate fluctuations
and refinancing risk in any particular period and (ii) fix the rates and extend loan terms as long as possible when
borrowing conditions are favourable. Subject to market conditions and the growth of the REIT, management of the
REIT currently intends to maintain indebtedness in a range of 55% to 60% of GBV. The following summarizes the
status of these key ratios as at and for the year to date period ended June 30, 2013:
16
RATIOS/COVENANTS
June 30, 2013
Gross Book Value
Debt
Debt to Gross Book Value
Amount of debt at fixed rates
Interest coverage (1)
Weighted average interest rate
(1)
$480,674
$267,037
56%
$219,400
3.32
3.8%
Defined as FFO plus finance costs divided by cash mortgage interest payments.
Interest rates and debt maturities will be reviewed regularly by the trustees of the REIT (“Trustees”) to ensure the
appropriate debt management strategies are implemented. The REIT intends to finance its ongoing operations
primarily with a combination of fixed rate secured debt with staggered maturities and floating rate secured shortterm, construction and/or revolving debt. The fixed rate debt is expected to be comprised primarily of first charge
mortgages.
The REIT is targeting to distribute 90% of its AFFO to Unitholders. Accordingly, the REIT does not retain a material
amount of operating cash flow to finance its capital requirements, including loan principal payments, acquisitions,
redevelopments, and portfolio capital expenditures. Capital requirements for loan principal payments, acquisitions
and redevelopment are generally sourced by financing for each project through mortgages and/or the revolving
credit facility.
No off-balance sheet arrangements exist.
DISTRIBUTIONS AND ADJUSTED FUNDS FROM OPERATIONS
Distributions
The REIT has adopted a distribution policy pursuant to which the REIT intends to make cash distributions to
Unitholders on a monthly basis equal to, on an annual basis, approximately 90% of AFFO. The AFFO payout ratio for
the year to date period ended June 30, 2013 was 92%. The current annualized AFFO payout ratio is in in line of
management’s target of 90%.
Adjusted Funds From Operations
Adjusted Funds from Operations is a supplemental non-IFRS industry wide financial measure of a REIT’s cash
generating activities after providing for (stabilized) operating capital requirements. Management considers AFFO to
be a useful measure of cash available for distributions. The REIT calculates AFFO as net income (computed in
accordance with IFRS), subject to certain adjustments, including: (i) adding back the following items: depreciation of
buildings and improvements (including amortization of tenant installation costs and financing costs) and
amortization of related intangibles (including amortization of value of tenant rents regarding in-place lease
agreements, amortization of differential between in-place rent and above market rents, amortization of customer
relationships) and amortization of any net discount on long-term debt assumed from vendors of properties at rates
of interest less than fair value; (ii) deducting the following items: amortization of differential between in-place rents
and below market rents and amortization of any net premium on long-term debt assumed from vendors of
properties at rates of interest greater than fair value; (iii) adjusting for differences, if any, resulting from recognizing
17
rental revenues on a straight line basis as opposed to contractual rental amounts; and (iv) deducting reserves for
tenant inducements, leasing commissions, financing costs and sustaining capital expenditures, as determined by the
REIT.
The REIT’s method of calculating AFFO may differ from other issuers’ methods and accordingly may not be directly
comparable to AFFO reported by other issuers. A reconciliation of IFRS net income to AFFO for the operations to
date period ended June 30, 2013 is set out below:
ADJUSTED FUNDS FROM OPERATIONS
For the three months ended
June 30, 2013
For the operations to date period
ended June 30, 2013
Actual
Forecast
Variance
Actual
Forecast
Variance
$7,024
$4,719
2,305
21,722
7,972
13,750
($1,431)
$0
($1,431)
($13,513)
$0
($13,513)
$172
$7
$0
$809
$172
($802)
$557
$1,087
$0
$1,402
$557
($315)
FFO
Add:
Amortization of fair value adjustment on
assumed debt
$5,772
$5,528
$244
$9,853
$9,374
$479
($173)
($154)
($19)
($283)
($266)
($17)
Amortization of deferred financing costs
Straight-line rent
$106
($474)
$97
($382)
$9
($92)
$175
($863)
$167
($662)
$8
($201)
$6
$10
($4)
$10
$17
($7)
($732)
($293)
($705)
($282)
($27)
($11)
($1,255)
($502)
($1,222)
($489)
($33)
($13)
$4,212
$4,112
$100
$7,135
$6,920
$215
$0.217
$0.208
$0.369
$0.353
19,403
19,762
19,335
19,620
Net Income
Add:
Fair value adjustments to investment
properties
Fair value adjustments to financial
instruments
Deferred income taxes
Unit price performance fee expense
Reserve for stabilized leasing
commissions and tenant inducements
Reserve for stabilized capital expenditure
AFFO
Basic AFFO per Unit
Weighted average units outstanding
Basic (in 000's)
PART V
RELATED PARTY TRANSACTIONS
Asset management services
The REIT engaged ACPI or its related parties to perform asset management services for a fee of 0.4% of the gross
book value, as defined in asset management agreement (the "External Management Agreement") between the REIT
18
and ACPI. The costs of these services, aggregating $470 for the three months ended June 30, 2013, were charged to
general and administrative expenses. ACPI is also entitled to a Unit Price Performance Fee five years following the
IPO or upon termination of the External Management Agreement, which shall be equal to the product of:
I.
II.
The Unit price on the date that is five years following the IPO based on the 20-day volume weighted average
price of the Units on the stock exchange on which the Units are then listed, less $13.00 and One million.
The Unit Price Performance Fee shall not be payable to ACPI in the event the REIT terminates ACPI for cause
or ACPI terminates the External Management Agreement. The Unit Price Performance Fee calculated using
the Black-Scholes pricing model was $6 for the three months ended June 30, 2013 and is accrued to general
and administrative expenses.
Property management services
The REIT engaged ACPI or its related parties to perform property management services for fees as defined in the
REIT’s property management agreements. The costs of these services, aggregating $145 for the three months ended
June 30, 2013, were charged to property operating expenses.
Vendor lease tenants
The REIT has entered into lease agreements whereby certain vendors will lease space in two properties for terms of
approximately five years. Rental revenue from these leases was $1,025 for the three months ended June 30, 2013
for minimum rent and operating cost recoveries. Subsequent to the end of the second quarter, the REIT entered
into two new leases at Parkway Place for a combined 36,289 square feet, resulting in a reduction of approximately
36% of the original 101,000 square feet of vendor lease space at Parkway Place.
PART VI
SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies is described in notes 1 and 2 of the REIT’s consolidated financial
statements for the period ended June 30, 2013. There are no material changes to the REIT’s significant accounting
policies as of June 30, 2013.
PART VII
RISKS AND UNCERTAINTIES
The REIT’s annual information form for the year ended December 31, 2012 contains detailed information on risk
factors pertaining to the REIT and is available on SEDAR at www.sedar.com. There have been no changes to the
nature or the number of risk factors pertaining to the REIT since the date of the most recently filed annual
information form and the disclosures in this MD&A are subject to the risk factors outlined therein.
19
PART VIII
CONTROLS AND PROCEDURES
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 by National Instrument 52-109 – Certification
of Disclosure in Issuers’ Annual and Interim Filings, adopted by the Canadian Securities Administrators) to provide
reasonable assurance that (i) material information relating to the REIT, including its consolidated subsidiaries, is
made known to them by others within those entities, particularly during the period in which the interim filings are
being prepared, and (ii) material information required to be disclosed in the interim fillings or other reports filed or
submitted by the REIT under securities legislation is recorded, processed, summarized and reported on a timely basis
and within the time period specified by securities legislation.
Internal Controls Over Financial Reporting
The REIT’s Chief Executive Officer and Chief Financial Officer have designed the REIT’s internal control over financial
reporting (as defined in National Instrument 52-109, Certification of Disclosure in Issuer’s Annual and Interim Filings)
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with IFRS.
Inherent Limitation
Internal controls over financial reporting cannot provide absolute assurance of achieving financial reporting
objectives because of their inherent limitations. Internal control over financial reporting is a process that involves
human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures.
Internal control 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 internal control over financial reporting. However, these inherent limitations are known features of the
financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not
eliminate, this risk.
PART IX
SUBSEQUENT EVENTS
On July 8, 2013, subsequent to the end of the second quarter, the REIT completed an early lease renewal with CH2M
Hill Canada for one additional year at market rates. CH2M Hill Canada occupies 57,713 square feet at Parkway Place.
Subsequent to the end of the second quarter, the REIT entered into two new leases at Parkway Place for a combined
36,289 square feet, resulting in a reduction of approximately 36% of the original 101,000 square feet of vendor lease
space at Parkway Place.
Subsequent to the end of the second quarter, the REIT entered into an option agreement with a prestigious European
car manufacturer to locate their corporate head office and corporate dealership on a portion of the excess lands on
a 20 year lease basis at $3.5 million per acre. The agreement is subject to certain conditions that have yet to be met.
20
The REIT declared a monthly distribution for the month ended July 30, 2013 of $0.06458 per Unit, consistent with
its annualized target rate of $0.775 per Unit.
PART X
FINANCIAL OUTLOOK AND MARKET GUIDANCE
Management’s outlook for the REIT is consistent with the disclosure included in the Prospectus, with no material
change to the operating or economic environment within which the REIT operates. Further, management believes
that the health of its balance sheet and the stability and diversity of its portfolio will continue to meet expectations.
In order to achieve its 2013 objectives the REIT will focus on:




Increasing occupancy in the portfolio
Maximizing net operating income
Acquiring assets on an accretive basis
Improving operational productivity
Apart from the sometimes significant difference between vendor and purchaser pricing, the current market for
acquisitions is favourable for the REIT’s expansion plans. In the near term, the REIT intends to focus on acquisitions
in the United States where valuations, financing and operating fundamentals are currently more attractive than in
Canada. The REIT will pursue acquisitions, with a focus on properties within markets the REIT already operates. The
REIT will also target external growth in markets that offer high quality commercial real estate at compelling relative
valuations. The REIT will utilize a flexible, opportunity driven growth strategy and take advantage of its agile
framework to source attractive relative valuations in various asset classes and geographies. While it is expected that
acquisitions will be immediately accretive, the REIT will consider those acquisitions that improve the overall quality
of the portfolio and/or will be accretive over the longer term.
21