Bentall Kennedy Prime Canadian Property Fund Ltd. Consolidated Financial Statements December 31, 2015 (in thousands)

Transcription

1 Bentall Kennedy Prime Canadian Property Fund Ltd. Consolidated Financial Statements (in thousands)

2 February 9, 2016 Independent Auditor s Report To the Shareholders of Bentall Kennedy Prime Canadian Property Fund Ltd. We have audited the accompanying consolidated financial statements of Bentall Kennedy Prime Canadian Property Fund Ltd. (the Company ) and its subsidiaries, which comprise the consolidated balance sheet as at and the consolidated statements of earnings and retained earnings and cash flows for the year then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. These consolidated financial statements have been prepared by management to comply with the financial reporting provisions of the Third Amended and Restated Investment Agreement (the Investment Agreement ) dated October 31, 2014 between Bentall Kennedy Prime Canadian Property Fund Ltd. and Bentall Kennedy (Canada) Limited Partnership. Management s responsibility for the consolidated financial statements Management is responsible for the preparation of these consolidated financial statements in accordance with the financial reporting provisions of the Investment Agreement, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. PricewaterhouseCoopers LLP PricewaterhouseCoopers Place, 250 Howe Street, Suite 700, Vancouver, British Columbia, Canada V6C 3S7 T: , F: PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

3 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements of Bentall Kennedy Prime Canadian Property Fund Ltd. and its subsidiaries as at and for the year then ended are prepared, in all material respects, in accordance with the financial reporting provisions of the Investment Agreement. Basis of accounting and restriction on distribution and use Without modifying our opinion, we draw attention to note 2 to the consolidated financial statements, which describes the basis of accounting. The consolidated financial statements are prepared to assist the Company to comply with the financial reporting provisions of the Investment Agreement referred to above. As a result, the consolidated financial statements may not be suitable for another purpose. Our report is intended solely for the Company and Bentall Kennedy (Canada) Limited Partnership and should not be distributed to or used by any other parties. Chartered Professional Accountants

4 Consolidated Balance Sheet As at (in thousands) Assets Investment properties (notes 3 and 11) Income-producing properties 3,459,897 3,148,209 Properties under development 162,938 86,034 Properties held for development 124,495 58,636 Net unrealized appreciation 305, , ,053,305 3,590,549 Prepaid expenses and other assets 19,929 21,868 Accounts receivable (note 11) 9,462 7,414 Purchase commitment deposits (note 5) 5,500 - Cash and cash equivalents 131, ,609 Liabilities 4,219,420 3,914,440 Mortgages payable (note 7) 998,148 1,019,928 Net unrealized appreciation 66,518 62,548 1,064,666 1,082,476 Credit facility (note 6) 30,298 1,192 Dividends payable (note 9) 38,706 21,068 Accounts payable and accrued liabilities (notes 7 and 8) 83,741 68,788 1,217,411 1,173,524 Non-controlling interest - Bentall Kennedy Prime Canadian Property Fund LP 639, ,852 Non-controlling interest - Bentall Kennedy Prime Canadian Property Fund (Canada) Holdings Inc. 7,343 5,423 Shareholders Equity Retained earnings 60, ,994 Share capital (note 9) 2,072,241 1,846,213 Net unrealized appreciation 222, ,434 2,355,145 2,181,641 4,219,420 3,914,440 Shareholders equity per share Commitments and contingent liabilities (note 5) Subsequent event (note 16) Approved by the Board of Directors Director Director The accompanying notes are an integral part of these consolidated financial statements.

5 Consolidated Statement of Earnings and Retained Earnings For the year ended (in thousands) Rental revenue 207, ,900 Expense recoveries (note 10) 120, ,619 Property revenue 328, ,519 Property operating expenses (note 11) (140,166) (130,137) Property income 188, ,382 Mortgage interest and standby fees (notes 6 and 7) (41,093) (49,056) Net property income 147, ,326 Investment and other income 2,081 2, , ,917 Administrative costs (1,658) (1,522) Portfolio management fees (note 11) (15,375) (15,087) (17,033) (16,609) Earnings from properties and investments 132, ,308 Gain on sale of investment properties (note 12) 6,746 33,834 Net earnings for the year 138, ,142 Attributable to Non-controlling interest - Bentall Kennedy Prime Canadian Property Fund LP 28,477 29,812 Non-controlling interest - Bentall Kennedy Prime Canadian Property Fund (Canada) Holdings Inc Owners of Bentall Kennedy Prime Canadian Property Fund Ltd. 110, , , ,142 Retained earnings - Beginning of year 115,994 94,941 Net income for the year attributable to the owners of Bentall Kennedy Prime Canadian Property Fund Ltd. 110, ,273 Dividends (166,096) (101,220) Retained earnings - End of year 60, ,994 The accompanying notes are an integral part of these consolidated financial statements.

6 Consolidated Statement of Cash Flows For the year ended (in thousands) Cash flows from operating activities Net earnings for the year 138, ,142 Item not affecting cash - gain on sale of investment properties (6,746) (33,834) 132, ,308 Changes in non-cash working capital items Purchase commitment deposits (5,500) - Accounts receivable (2,048) (772) Prepaid expenses and other assets 1,939 (4,660) Accounts payable and accrued liabilities 14,953 12, , ,529 Cash flows from investing activities Additions to investment properties (141,861) (63,179) Proceeds from disposition of investment properties sold 12,736 99,453 Acquisition of investment properties (318,580) (55,975) Non-controlling interest investment in Bentall Kennedy Prime Canadian Property Fund LP 60,267 42,387 Non-controlling interest investment in Bentall Kennedy Prime Canadian Property Fund (Canada) Holdings Inc. 1,650 5,450 (385,788) 28,136 Cash flows from financing activities Increase in credit facility 29,106 1,192 Additions to mortgages payable 14,411 - Repayments of mortgages payable (36,191) (52,813) Issuance of common shares (note 9)* 226, ,656 Dividends paid on common shares (note 9)* (152,499) (101,779) 80,855 (40,744) (Decrease) increase in cash and cash equivalents (163,385) 112,921 Cash and cash equivalents - Beginning of year 294, ,688 Cash and cash equivalents - End of year 131, ,609 Supplemental cash flow information Interest paid 45,066 48,248 *A portion of the dividends paid, 116,205 ( ,506), are reinvested as a non-cash contribution. The accompanying notes are an integral part of these consolidated financial statements.

7 1 Nature of the business and basis of presentation Bentall Kennedy Prime Canadian Property Fund Ltd. (the "Company") was incorporated on June 2, 1983 under the provisions of the Canada Business Corporations Act to invest monies received from registered Canadian pension funds and other eligible shareholders in real estate, participating mortgages and property for development or resale. Under the terms of the Third Amended and Restated Investment Agreement ( the Investment Agreement ) dated October 31, 2014 between the Company and Bentall Kennedy (Canada) Limited Partnership, the advisor and property manager, subscription and holding of common shares of the Company continue to be restricted to registered Canadian pension funds and other eligible shareholders. The Bentall Kennedy Prime Canadian Property Fund Partnerships (the "Partnerships") comprise 67 ( ) separate limited partnerships. Each of the limited partnerships comprising the Partnerships has been formed under the Limited Partnership Act (Ontario) (extra-provincially Registered as required) to invest monies received from either Bentall Kennedy Prime Canadian Property Fund Ltd., Bentall Kennedy Prime Canadian Property Fund LP or Bentall Kennedy Prime Canadian Property Fund (Canada) Holdings Inc. in real estate, participating mortgages and property for development or resale. The general partners of the Partnerships are affiliates of Bentall Kennedy (Canada) Limited Partnership and the general partners have a 0.001% interest in the Partnerships. The structure of the Partnerships allows Canadian non-pension fund investors to invest in units of the Partnerships through investment in Bentall Kennedy Prime Canadian Property Fund LP, allows Canadian pension fund investors to invest in units of the Partnerships through investment in Bentall Kennedy Prime Canadian Property Fund Ltd. and allows institutional investors within the European Economic Area (the "EEA") to invest in units of the Partnerships through investment in Bentall Kennedy Prime Canadian Property Fund (Canada) Holdings Inc. 2 Significant accounting policies These consolidated financial statements have been prepared in accordance with the significant accounting policies set out below to comply with the Investment Agreement. These accounting policies are designed to provide the shareholders with relevant and useful financial information, recognizing in particular that the shareholders as registered Canadian pension funds are required to report their investments at fair market value. (1)

8 The following significant accounting policies have been consistently applied in the preparation of the consolidated financial statements for the current year: a) Investment properties are carried at amounts which are based on their appraised value. All such properties are required to be appraised not less than annually by professionally qualified independent appraisers. For those appraisals not performed near year end by independent appraisers, the Company updates the appraisals internally to the year-end date. At the year end, approximately one quarter of the properties were appraised by independent appraisers. The appraisals are in accordance with generally accepted appraisal practices and procedures, based mainly on the discounted cash flows of the income approach. The net unrealized appreciation, which reflects both appraisal increases or decreases and adjustments to market yields for related mortgage financing as computed by the Company, is included in the carrying value of the properties and mortgages payable, respectively, and recorded directly as a separate component of shareholders' equity. Amortization is not recorded on properties, as it is not considered meaningful when the objective of the business is to acquire, develop and hold property for eventual sale and the properties are carried at annually appraised values, which take into account the actual condition of the properties. b) The Company records the components of income-producing properties acquired or developed, including land, buildings, customer relationship intangibles and in-place operating leases, as income-producing properties. c) The Company capitalizes all direct costs relating to the acquisition of properties. Operating costs, certain indirect costs, and property taxes are capitalized for properties under development only. d) The Company capitalizes leasing costs to income-producing properties. e) Rental revenue is recorded as earned in accordance with the lease agreements in place with tenants. f) Fees received from a developer in connection with the use of land owned by the Company to construct and lease-up a building for ultimate sale to the Company are recorded as income on an accrual basis. g) Gains and losses on the disposal of income-producing properties, as well as the related revenues and net income for the period of the disposal and for the period prior to disposal, will be included as components of continuing operations. h) Investment properties classified as held for sale and related liabilities are not presented separately in the consolidated balance sheet. i) Certain capital and maintenance costs that are recoverable under the tenant leases over specified periods of time are recorded as deferred recoverable costs on the consolidated balance sheet. These costs are amortized to recoverable property expense and matched with the corresponding expense recovery. (2)

9 j) Properties under development are transferred to income-producing properties at the earlier of 75% occupancy, obtaining positive cash flow from operations, or one year after substantial completion of the project. For all other accounting policies, the Investment Agreement specifies that the basis of accounting used in these consolidated financial statements is consistent with generally accepted accounting principles ("GAAP"). Under Canadian GAAP, the Company has elected to follow accounting standards for private enterprises ("ASPE"). The following are in accordance with ASPE: a) The consolidated financial statements comprise the financial statements of the Company and The Bentall Kennedy Prime Canadian Property Fund Partnerships as at December 31 each year. The financial statements of The Bentall Kennedy Prime Canadian Property Fund Partnerships are prepared for the same reporting period as the Company, using consistent accounting policies. All significant balances and transactions between the Company and The Bentall Kennedy Prime Canadian Property Fund Partnerships have been eliminated. Non-controlling interests of % ( %) represent the portion of net operating income for the year and net assets not held by the Company and are presented separately in the consolidated statement of earnings and retained earnings and within equity in the consolidated balance sheet, separately from the shareholders' equity. b) Investments, consisting of bank deposits and bankers' acceptances, with maturities of three months or less are considered to be cash equivalents and are recorded at cost, which approximates current market value. c) Investments with maturities of greater than three months but less than one year are considered to be short-term investments and are recorded at cost, which approximates current market value. d) Investments in co-ownerships are accounted for using the proportionate consolidation method. All significant intercompany balances and transactions have been eliminated. e) The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant areas requiring the use of management estimates are investment properties and mortgages payable. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent; however, actual results could differ from those estimates. (3)

10 3 Investment properties Incomeproducing properties Properties under development Properties held for development Total Opening balance - January 1, ,138,520 66,026 34,798 3,239,344 Acquisition 12,708 3,010 40,257 55,975 Dispositions (65,619) - - (65,619) Transfers 36,758 (19,966) (16,792) - Adjustments to 2013 acquisition costs (120) - - (120) Capital costs 8,792 41, ,860 Leasing costs (transfers) 17,170 (4,731) - 12,439 Closing balance - December 31, ,148,209 86,034 58,636 3,292,879 Net unrealized appreciation 298,139 (1,240) ,670 3,446,348 84,794 59,407 3,590,549 Incomeproducing properties Properties under development Properties held for development Total Opening balance - January 1, ,148,209 86,034 58,636 3,292,879 Acquisition 258,805-59, ,580 Dispositions (5,990) - - (5,990) Transfers 10,725 (10,725) - - Adjustments to 2014 acquisition costs Deferred recoverable costs 10, ,096 Capital costs 21,345 88,199 6, ,628 Leasing costs (transfers) 16,621 (570) - 16,051 Closing balance - December 31, ,459, , ,495 3,747,330 Net unrealized appreciation 321,978 (938) (15,065) 305,975 3,781, , ,430 4,053,305 During the year ended, 4,628,495 (2014-2,938) of interest was capitalized to investment properties. (4)

11 4 Investment in co-ownerships As at, the Company has a % interest in The Bentall Kennedy Prime Canadian Property Fund Partnerships ( %). The Bentall Kennedy Prime Canadian Property Fund Partnerships have interests in the following co-ownerships: 2015 % 2014 % Airport 407 Business Campus, Brampton, Ontario North Hills Shopping Centre, Calgary, Alberta Carelife Maple Ridge, Maple Ridge, British Columbia Carelife Fleetwood, Fleetwood, British Columbia Dagenais, Laval, Quebec Jasper Ave., Edmonton, Alberta Jasper Ave., Edmonton, Alberta West Pender, Vancouver, British Columbia Dundas Street, Toronto, Ontario West Oaks Mall, Abbotsford, British Columbia & 1875 Buckhorn Way, Mississauga, Ontario Burrard Street, Vancouver, British Columbia St. Thomas Street, Toronto, Ontario As at, the net asset value of the co-ownerships was 569,147,738 ( ,263,931). Total property revenue of the co-ownerships for the year ended was 70,697,762 ( ,451,195). 5 Commitments and contingent liabilities Purchase commitment deposits totalling 5,500,000 are held in escrow. A deposit of 4,500,000 relates to the acquisition of 8400 River Road for the purchase price of approximately 49,500,000, which is expected to close in the first quarter of A deposit of 500,000 relates to the acquisition of Airport Road for the purchase price of approximately 65,000,000 which is expected to close in February 2016 and a deposit of 500,000 which relates to the acquisition of a 50% interest in Eaton Way and 787 Cliveden Place that closed on January 29, 2016 for the purchase price of 15,075,000 (note 16). (5)

12 6 Credit facility The Partnerships have available to them a credit facility of up to 100,000,000 ( ,000,000). Interest is payable at the Royal Bank of Canada Prime Rate on amounts drawn. At, the Prime Rate was 2.7% (2014-3%) per annum. A quarterly Standby Fee is paid on the total unused portion of the facility in accordance with the following utilization levels. As at, the unused portion of the facility was 69,702,258 ( ,808,401). Utilization % Utilization % Standby fee < 25 <25, >25 - <50 >25,000 - <50, >50 - <75 >50,000 - <75, >75 >75,000 - The credit facility agreement is held with the Royal Bank of Canada and is secured by Bentall Kennedy Prime Canadian Property Fund Ltd., Bentall Kennedy Prime Canadian Property Fund LP, Bentall Kennedy Prime Canadian Property Fund (Canada) Holdings Inc. and BK Prime Canadian GP Holdco. Inc. as guarantors. The agreement requires compliance with certain financial covenants, including maintaining certain asset values, loan ratios, net operating income and appraised value thresholds. As at, the Partnerships are in compliance with all covenants. 7 Mortgages payable Mortgage liabilities are stated at fair value, which is determined based on the present value of future debt service payments discounted at prevailing interest rates for comparable debt as of the reporting date. Mortgages payable bear interest at rates which vary from 3.36% to 9.62% (weighted average at of 4.56%) and mature over varying periods to April 2028 (December 31, 2014 interest rates varied from 3.36% to 9.62% with a weighted average of 4.58%). Principal is repayable for the next five years and thereafter as follows: , , , , ,799 Thereafter 339, ,148 (6)

13 Fourteen mortgages totalling 251,318,957 ( eighteen mortgages totalling 261,322,753) have recourse and two mortgages totalling 21,820,000 ( ,820,000) have partial recourse. Recourse and partial recourse mortgages are indemnified by Bentall Kennedy Prime Canadian Property Fund Ltd., Bentall Kennedy Prime Canadian Property Fund LP and Bentall Kennedy Prime Canadian Property Fund (Canada) Holdings Inc. First mortgages, assignment of rents and leases and general security agreements on the properties are provided as security. Certain of the mortgages require compliance with financial covenants, including a debt service ratio and a maximum loan to value ratio. As at, the Partnerships are in compliance with all covenants. Accrued mortgage interest, included in accounts payable and accrued liabilities at December 31, 2015 is 3,562,217 (2014-3,197,230). 8 Accounts payable and accrued liabilities Included in accounts payable and accrued liabilities at of 83,741,245 ( ,787,658) are government remittances, such as sales taxes and withholdings taxes aggregating 1,505,127 ( ,978), which are required to be paid to government authorities and are recognized when the amounts become due. 9 Share capital The authorized share capital of the Company consists of an unlimited number of common shares without par value. These may be issued only to registered Canadian pension funds and other eligible shareholders. The sale, transfer or other disposition of shares is restricted. The continuity of share capital is as follows: Number of shares Amount Balance - December 31, ,140,008 1,733,557 Shares issued for cash 5,123,027 40,150 Dividends re-invested 9,267,826 72,506 Balance - December 31, ,530,861 1,846,213 Shares issued for cash 14,502, ,823 Dividends re-invested 15,366, ,205 Balance - 311,399,650 2,072,241 Dividends are equal to the Company's proportional ownership of The Bentall Kennedy Prime Canadian Property Fund Partnerships' distributable income and are declared on a quarterly basis and paid in the following quarter pursuant to the provisions of the Investment Agreement. (7)

14 10 Expense recoveries Operating expense recoveries are recorded in accordance with the terms of the respective lease agreements. 11 Advisor and property manager The Partnerships have advisory and management agreements with Bentall Kennedy (Canada) Limited Partnership under which Bentall Kennedy (Canada) Limited Partnership is responsible for the acquisition, disposal, leasing, and management of real estate properties and performance of all administrative functions on behalf of the Partnerships. During the year, charges of 35,651,043 ( ,410,880) were incurred for the above fees of which 14,567 is receivable at ( ,966). These fees are charged in the consolidated financial statements to properties under development, income-producing properties, property operating expenses and portfolio management fees. These transactions occurring in the normal course of operations are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties Bentall Kennedy (Canada) Limited Partnership Property management fees 9,620 9,178 Leasing fees 3,564 3,183 Supervision fees Development fees 3,179 2,444 Acquisition fees 3, Disposition fees Communication fees Portfolio management fees 15,375 15, Gain on sale of investment properties 35,651 31,411 When investment property is disposed, all the cumulative net unrealized appreciation relating to the property is removed from the carrying value of the property as well as the separate component of shareholders' equity. The net proceeds less the cost of the property is recorded in net earnings. 13 Income taxes The Company as a Canadian pension corporation is exempt from income taxes under Section 149(1) (o.2) of the Income Tax Act. The Company will retain this status as long as all of its shareholders continue to be registered Canadian pension funds (note 9) and the Company limits its activities to those permitted under Section 149(1) (o.2), which include investing in real property or investing in units of partnerships that invest in real property. (8)

15 14 Financial instruments Fair value Fair value estimates of financial instruments are made at a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair values. Financial instruments include cash and cash equivalents, tenant and other receivables, mortgages payable and accounts payable and accrued liabilities. Except for mortgages payable which are adjusted to market values (note 2(a)), the fair value of financial instruments approximates their carrying values due to the short-term nature of these instruments. Credit risk The Company is exposed to credit risk on its receivables. The exposure to this risk is limited to the immaterial balances due from numerous tenants in several properties and is mitigated by management review of credit extended. Interest rate risk Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in interest rates and the degree of volatility of these rates. The Company does not use derivative instruments to reduce its exposure to interest rate risk. 15 Comparative figures Certain comparative figures have been reclassified to conform with the presentation adopted in the current year. 16 Subsequent event On January 29, 2016, the Partnerships acquired a 50% share of Eaton Way and 787 Cliveden Place, an industrial asset located in Delta, British Columbia, for the purchase price of 15,075,000. (9)