UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report
of Foreign Private Issuer Pursuant to
Rule
13a-16 or 15d-16
Under
the Securities Exchange Act of 1934
For the month of August 2015
Commission File Number 001-35391
BROOKFIELD CANADA OFFICE PROPERTIES
(Exact name of registrant as specified in
its charter)
181 Bay Street, Suite 330, Brookfield Place
Toronto, Ontario, Canada M5J 2T3
(Address of principal executive offices)
Indicate by check mark whether the registrant
files or will file annual reports under cover of Form 20-F or Form 40-F.
Form
20-F ¨ Form 40-F
Yes þ
Indicate
by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):¨
Indicate
by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):¨
DOCUMENTS FILED AS PART OF THIS FORM
6-K
See the Exhibit List to this Form 6-K.
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: |
August 12, 2015 |
Brookfield Canada Office Properties |
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By: |
/s/ Michelle L. Campbell |
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Name: |
Michelle L. Campbell |
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Title: |
Assistant Secretary |
EXHIBIT LIST
Exhibit |
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Description |
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99.1 |
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Brookfield Canada Office Properties 2015 Q2 Interim Report |
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99.2 |
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Certification of Chief Executive Officer |
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99.3 |
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Certification of Chief Financial Officer |
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Exhibit 99.1
![](tex99-1logo.jpg)
SECOND
QUARTER REPORT |
JUNE
30, 2015 |
Dear Unitholders:
Net income for the three months ended June
30, 2015 was $83.6 million ($0.90 per unit), compared to $39.2 million ($0.42 per unit) during the same period in 2014. Equity
per unit increased to $34.10 per unit from $33.19 per unit at the end of 2014.
Funds from operations was $36.8 million
($0.39 per unit) for the three months ended June 30, 2015, compared to $38.6 million ($0.41 per unit) during the same period in
2014. Adjusted funds from operations was $21.4 million ($0.23 per unit) for the three months ended June 30, 2015, compared to $31.5
million ($0.34 per unit) during the same period in 2014.
Net operating income from commercial properties
was $63.2 million for the three months ended June 30, 2015, compared to $66.4 million during the same period in 2014. Same-property
net operating income was $63.1 million, compared to $64.4 million during the same period in 2014.
HIGHLIGHTS FOR THE SECOND QUARTER
Brookfield Canada Office Properties (the
“Trust” or “BOX”) leased 938,000 square feet of space, at an average net rent of $23 per square foot compared
to an average expiring net rent of $20 per square foot. The Trust’s occupancy rate finished the quarter at 95.0%. This compares
favourably with the Canadian national average of 90.0%.
Leasing highlights from the second quarter
include:
| • | 562,000 square feet in Ottawa |
| - | An average nine-year, 544,000-square-foot renewal with Public Works and Government Services Canada
at Jean Edmonds Towers |
| • | 193,000 square feet in Toronto |
| - | A five-year, 42,000-square-foot renewal with TSX Inc. at Exchange Tower |
| - | A 10-year, 24,000-square-foot new lease with Willis Canada Inc. at First Canadian Place |
| • | 167,000 square feet in Calgary |
| - | An accelerated one-year, 136,000-square-foot lease extension with TransCanada Pipelines Ltd. at Fifth Avenue Place |
| - | A five-year, 26,000-square-foot renewal and expansion with PetroChina International at Suncor Energy Centre |
| • | 16,000 square feet in Vancouver |
| - | A 10-year, 13,000-square-foot new lease with Axim Georgia Inc. at Royal Centre |
The Trust completed several financing initiatives
including:
Established new financing at Place de
Ville I and II, Ottawa for $175.0 million ($43.8 million at ownership). The new financing has a 10-year term maturing June
10, 2025 with a fixed interest rate of 3.752% per annum.
Extended the $137.8 million debt at
Royal Centre, Vancouver, for an additional year to June 2016 at a rate of bankers’ acceptance plus 150 basis points.
Extended the $97.3 million debt at Hudson’s
Bay Centre, Toronto, for an additional year to May 2016 at a rate of bankers’ acceptance plus 140 basis points.
Construction continues on schedule at
the Bay Adelaide East and Brookfield Place Calgary East development projects. At Bay Adelaide East, the tower curtain wall
is installed with testing and commissioning of the mechanical and electrical work underway. The lobby structural glazing is complete
and lobby finishes have begun. Bay Adelaide East is currently 69% pre-leased and is on target to be completed in late 2015.
At Brookfield Place Calgary East, the tower
core has been poured to level 19 and the structural steel erection is underway up to level 11. The project is currently 71% pre-leased
to anchor tenant Cenovus and is on target to be completed in late 2017.
DISTRIBUTION DECLARATION
The Board of Trustees of Brookfield Canada
Office Properties announced a distribution of $0.1033 per Trust unit payable on August 14, 2015 to holders of Trust Units of record
at the close of business on July 31, 2015.
OUTLOOK
“The second quarter was highlighted
by the execution of two key initiatives in Ottawa - the cementing of stabilized occupancy in our portfolio through the Public Works
and Government Services renewal at Jean Edmonds Towers as well as the placement of long-term debt at attractive terms at our Place
de Ville complex” said Jan Sucharda, president and chief executive officer. “Furthermore, construction progress remains
on track at our two active development projects in Toronto and Calgary which will fuel our growth strategy.”
![](tex99-1sig.jpg)
Jan Sucharda
President and Chief Executive Officer
July 20, 2015
Portfolio by City
Brookfield Canada Office Properties’
portfolio is composed of interests in 27 premier office properties totaling 20.4 million square feet, including 4.0 million square
feet of parking and other. Landmark properties include Brookfield Place Toronto and First Canadian Place in Toronto and Bankers
Hall in Calgary. Our development portfolio consists of 980,000 square feet and 1.4 million square feet in the downtown cores of
Toronto and Calgary, respectively.
(Square
feet in 000’s) |
Number
of
Properties |
|
Leased
% |
|
Office |
|
Retail |
|
Leasable
Area |
|
Parking
and
Other |
|
Total |
|
Ownership
Interest
% |
|
Owned
Interest |
TORONTO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brookfield
Place Toronto |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bay
Wellington Tower |
1 |
|
|
92.5 |
% |
|
1,297 |
|
|
44 |
|
|
1,341 |
|
|
68 |
|
|
1,409 |
|
|
100 |
% |
|
1,409 |
|
Retail
& Parking(1) |
1 |
|
|
92.5 |
% |
|
— |
|
|
52 |
|
|
52 |
|
|
503 |
|
|
555 |
|
|
56 |
% |
|
308 |
|
First
Canadian Place |
1 |
|
|
91.0 |
% |
|
2,383 |
|
|
229 |
|
|
2,612 |
|
|
220 |
|
|
2,832 |
|
|
25 |
% |
|
708 |
|
Bay
Adelaide West |
1 |
|
|
90.3 |
% |
|
1,157 |
|
|
32 |
|
|
1,189 |
|
|
409 |
|
|
1,598 |
|
|
100 |
% |
|
1,598 |
|
Exchange
Tower |
1 |
|
|
91.8 |
% |
|
961 |
|
|
66 |
|
|
1,027 |
|
|
203 |
|
|
1,230 |
|
|
50 |
% |
|
615 |
|
Hudson's
Bay Centre |
1 |
|
|
97.1 |
% |
|
532 |
|
|
213 |
|
|
745 |
|
|
175 |
|
|
920 |
|
|
100 |
% |
|
920 |
|
2
Queen St. East |
1 |
|
|
100.0 |
% |
|
448 |
|
|
16 |
|
|
464 |
|
|
71 |
|
|
535 |
|
|
25 |
% |
|
134 |
|
Queen’s
Quay Terminal |
1 |
|
|
95.9 |
% |
|
429 |
|
|
54 |
|
|
483 |
|
|
28 |
|
|
511 |
|
|
100 |
% |
|
511 |
|
105
Adelaide St. West |
1 |
|
|
99.9 |
% |
|
177 |
|
|
7 |
|
|
184 |
|
|
31 |
|
|
215 |
|
|
100 |
% |
|
215 |
|
HSBC
Building |
1 |
|
|
99.8 |
% |
|
194 |
|
|
— |
|
|
194 |
|
|
34 |
|
|
228 |
|
|
100 |
% |
|
228 |
|
22
Front St. West |
1 |
|
|
99.9 |
% |
|
136 |
|
|
7 |
|
|
143 |
|
|
1 |
|
|
144 |
|
|
100 |
% |
|
144 |
|
|
11 |
|
|
93.4 |
% |
|
7,714 |
|
|
720 |
|
|
8,434 |
|
|
1,743 |
|
|
10,177 |
|
|
|
|
6,790 |
|
OTTAWA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Place
de Ville I |
2 |
|
|
91.6 |
% |
|
571 |
|
|
11 |
|
|
582 |
|
|
364 |
|
|
946 |
|
|
25 |
% |
|
237 |
|
Place
de Ville II |
2 |
|
|
94.8 |
% |
|
587 |
|
|
7 |
|
|
594 |
|
|
330 |
|
|
924 |
|
|
25 |
% |
|
231 |
|
Jean
Edmonds Towers |
2 |
|
|
99.8 |
% |
|
544 |
|
|
10 |
|
|
554 |
|
|
108 |
|
|
662 |
|
|
25 |
% |
|
166 |
|
|
6 |
|
|
95.3 |
% |
|
1,702 |
|
|
28 |
|
|
1,730 |
|
|
802 |
|
|
2,532 |
|
|
|
|
634 |
|
CALGARY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers
Hall |
3 |
|
|
94.0 |
% |
|
1,940 |
|
|
222 |
|
|
2,162 |
|
|
481 |
|
|
2,643 |
|
|
50 |
% |
|
1,322 |
|
Bankers
Court |
1 |
|
|
99.8 |
% |
|
256 |
|
|
7 |
|
|
263 |
|
|
70 |
|
|
333 |
|
|
50 |
% |
|
167 |
|
Suncor
Energy Centre |
2 |
|
|
100.0 |
% |
|
1,708 |
|
|
25 |
|
|
1,733 |
|
|
349 |
|
|
2,082 |
|
|
50 |
% |
|
1,041 |
|
Fifth
Avenue Place |
2 |
|
|
99.7 |
% |
|
1,428 |
|
|
49 |
|
|
1,477 |
|
|
294 |
|
|
1,771 |
|
|
50 |
% |
|
886 |
|
|
8 |
|
|
97.6 |
% |
|
5,332 |
|
|
303 |
|
|
5,635 |
|
|
1,194 |
|
|
6,829 |
|
|
|
|
3,416 |
|
VANCOUVER |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royal
Centre |
1 |
|
|
91.5 |
% |
|
488 |
|
|
93 |
|
|
581 |
|
|
260 |
|
|
841 |
|
|
100 |
% |
|
841 |
|
OTHER |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merivale
Place, Nepean |
1 |
|
|
100.0 |
% |
|
— |
|
|
3 |
|
|
3 |
|
|
— |
|
|
3 |
|
|
100 |
% |
|
3 |
|
TOTAL
COMMERCIAL PROPERTIES |
27 |
|
|
95.0 |
% |
|
15,236 |
|
|
1,147 |
|
|
16,383 |
|
|
3,999 |
|
|
20,382 |
|
|
|
|
11,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEVELOPMENT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TORONTO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bay
Adelaide East(2) |
1 |
|
|
69.0 |
% |
|
980 |
|
|
— |
|
|
980 |
|
|
— |
|
|
980 |
|
|
100 |
% |
|
980 |
|
CALGARY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brookfield
Place Calgary East(2) |
1 |
|
|
71.4 |
% |
|
1,400 |
|
|
— |
|
|
1,400 |
|
|
— |
|
|
1,400 |
|
|
100 |
% |
|
1,400 |
|
TOTAL
DEVELOPMENT PROPERTIES |
2 |
|
|
|
|
2,380 |
|
|
— |
|
|
2,380 |
|
|
— |
|
|
2,380 |
|
|
|
|
2,380 |
|
TOTAL
PORTFOLIO |
29 |
|
|
|
|
17,616 |
|
|
1,147 |
|
|
18,763 |
|
|
3,999 |
|
|
22,762 |
|
|
|
|
14,064 |
|
| (1) | Brookfield Canada Office Properties owns a 50% interest in the retail operations and is entitled to a 56% interest in the
parking operations. |
| | |
| (2) | The developments were acquired on an “as-if-completed-and-stabilized basis” as described on page 12 of the MD&A
under Commercial Developments. |
Brookfield Canada Office Properties | 3 |
Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS |
|
|
|
PART I – OBJECTIVES AND FINANCIAL HIGHLIGHTS |
6 |
|
|
PART II – FINANCIAL STATEMENT ANALYSIS |
10 |
|
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PART III – RISKS AND UNCERTAINTIES |
26 |
|
|
PART IV – CRITICAL ACCOUNTING POLICIES AND ESTIMATES |
29 |
|
|
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
30 |
|
|
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS |
34 |
|
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UNITHOLDER INFORMATION |
41 |
FORWARD-LOOKING STATEMENTS
This interim report to unitholders, particularly
the section entitled Management’s Discussion and Analysis of Financial Results, contains “forward-looking information”
within the meaning of Canadian provincial securities laws and applicable regulations and “forward-looking statements”
within the meaning of “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions,
include statements regarding the Trust’s operations, business, financial condition, expected financial results, performance,
prospects, opportunities, priorities, targets, goals, ongoing objectives, strategies and outlook, as well as the outlook for the
Canadian economy for the current fiscal year and subsequent periods, and include words such as “expects”, “anticipates”,
“plans”, “believes”, “estimates”, “seeks”, “intends”, “targets”,
“projects”, “forecasts”, “likely”, or negative versions thereof and other similar expressions,
or future or conditional verbs such as “may”, “will”, “should”, “would” and “could”.
Although the Trust believes that the anticipated
future results, performance or achievements expressed or implied by the forward-looking statements and information are based upon
reasonable assumptions and expectations, the reader should not place undue reliance on forward-looking statements and information
because they involve known and unknown risks, uncertainties and other factors, many of which are beyond the control of the Trust,
which may cause the actual results, performance or achievements of the Trust to differ materially from anticipated future results,
performance or achievement expressed or implied by such forward-looking statements and information.
Factors that could cause actual results
to differ materially from those contemplated or implied by forward-looking statements include, but are not limited to: risks incidental
to the ownership and operation of real estate properties including local real estate conditions; the impact or unanticipated impact
of general economic, political and market factors in Canada; the ability to enter into new leases or renew leases on favourable
terms; business competition; dependence on tenants’ financial condition; the use of debt to finance the Trust’s business;
the behavior of financial markets, including fluctuations in interest rates; equity and capital markets and the availability of
equity and debt financing and refinancing within these markets; risks relating to the Trust’s insurance coverage; the possible
impact of international conflicts and other developments including terrorist acts; potential environmental liabilities; changes
in tax laws and other tax related risks; dependence on management personnel; illiquidity of investments; the ability to complete
and effectively integrate acquisitions into existing operations and the ability to attain expected benefits therefrom; operational
and reputational risks; catastrophic events, such as earthquakes and hurricanes; and other risks and factors detailed from time
to time in the Trust’s documents filed with the securities regulators in Canada and the United States.
Caution should be taken that the foregoing
list of important factors that may affect future results is not exhaustive. When relying on the Trust’s forward-looking statements
or information, investors and others should carefully consider the foregoing factors and other uncertainties and potential events.
Except as required by law, the Trust undertakes no obligation to publicly update or revise any forward-looking statements or information,
whether written or oral, that may be as a result of new information, future events or otherwise.
Brookfield Canada Office Properties | 5 |
Management’s Discussion
and Analysis of Financial Results
July 20, 2015
PART I – OBJECTIVES AND FINANCIAL
HIGHLIGHTS
BASIS OF PRESENTATION
Financial data included in this Management’s
Discussion and Analysis (“MD&A”) for the three and six months ended June 30, 2015, includes material information
up to July 20, 2015. Financial data provided has been prepared in accordance with International Financial Reporting Standards
as issued by the International Accounting Standards Board (“IFRS”). All dollar references, unless otherwise stated,
are in millions of Canadian dollars except per unit amounts. Amounts in U.S. dollars are identified as “US$.”
Brookfield Canada Office Properties (“BOX,”
the “Trust,” “we”, “our” or “us” ) was formed in connection with the reorganization
of BPO Properties Ltd. (“BPP”), a wholly-owned subsidiary of Brookfield Office Properties Inc. (“BPO” or
“Brookfield Office Properties”), on May 1, 2010, in which BPP’s directly owned office assets were transferred
to the Trust. In connection with the reorganization, the Trust also acquired BPO’s interest in Brookfield Place Toronto,
which includes Bay Wellington Tower and partial interests in the retail concourse and parking operations.
On December 1, 2011, we acquired from BPO,
a 25% interest in nine office assets from its Canadian Office Fund portfolio totaling 6.5 million square feet in Toronto and Ottawa.
On July 11, 2013, we acquired Bay Adelaide East from BPO totaling 980,000 square feet in Toronto and on October 14, 2014, we acquired
Brookfield Place Calgary East from BPO totaling 1.4 million square feet in Calgary.
The following discussion and analysis is
intended to provide readers with an assessment of the performance of BOX over the past two years as well as our financial position
and future prospects. It should be read in conjunction with the condensed consolidated interim financial statements and appended
notes, which begin on page 31 of this report. In Part II – Financial Statement Analysis, we review our operating performance
and financial position as presented in our financial statements prepared in accordance with IFRS.
We included our discussion of operating
performance on an IFRS basis beginning on page 19 of the MD&A followed by a discussion of non-IFRS measures. Included in non-IFRS
measures are commercial property net operating income, funds from operations, and adjusted funds from operations on a total and
per-unit basis. Commercial property net operating income, funds from operations and adjusted funds from operations do not have
any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other companies.
We define commercial property net operating income as income from commercial property operations after direct property operating
expenses, including property administration costs, have been deducted but prior to deducting or including interest expense, general
and administrative expenses, and fair value gains (losses). We define funds from operations as net income prior to transaction
costs, fair value gains (losses), and certain other non-cash items. Adjusted funds from operations is defined by us as funds from
operations net of second-generation leasing commissions and tenant improvements, maintaining value capital expenditures, and straight-line
rental income.
Commercial property net operating income
is an important measure that both investors and management use to assess operating performance of our commercial properties, and
funds from operations is a widely used measure in analyzing the performance of real estate. Adjusted funds from operations is a
measure used to assess an entity’s ability to pay distributions. We provide the components of commercial property net operating
income, a reconciliation of net income to commercial property net operating income, a full reconciliation of net income to funds
from operations and adjusted funds from operations, and a reconciliation of cash generated from operating activities to adjusted
funds from operations beginning on page 23.
Additional information, including our Annual
Information Form, is available on our Web site at www.brookfieldcanadareit.com or at www.sedar.com or www.sec.gov.
OVERVIEW OF THE BUSINESS
BOX is a publicly traded, real estate investment
trust listed on the Toronto and New York stock exchanges under the symbol BOX.UN and BOXC, respectively.
The Trust invests, develops and operates
commercial office properties in Toronto, Ottawa, Calgary, and Vancouver.
At June 30, 2015, the carrying value
of BOX’s total assets was $6,133.2 million. During the three months ended June 30, 2015, we generated $83.6 million of net
income ($0.90 per unit), $36.8 million of funds from operations ($0.39 per unit), and $21.4 million of adjusted funds from operations
($0.23 per unit).
FINANCIAL HIGHLIGHTS
BOX’s financial results are as follows:
|
Three months ended Jun. 30 |
|
Six months ended Jun. 30 |
(Millions, except per-unit amounts) |
2015 |
|
2014 |
|
2015 |
|
2014 |
Results of operations |
|
|
|
|
|
|
|
Commercial property revenue |
$ |
126.3 |
|
|
$ |
124.9 |
|
|
$ |
253.9 |
|
|
$ |
250.5 |
|
Net income |
83.6 |
|
|
39.2 |
|
|
142.3 |
|
|
81.3 |
|
Funds from operations(1) |
36.8 |
|
|
38.6 |
|
|
73.9 |
|
|
79.5 |
|
Adjusted funds from operations(1)(2) |
21.4 |
|
|
31.5 |
|
|
50.0 |
|
|
71.2 |
|
Distributions |
28.8 |
|
|
28.4 |
|
|
57.7 |
|
|
55.7 |
|
Per unit amounts – attributable to unitholders |
|
|
|
|
|
|
|
Net income |
0.90 |
|
|
0.42 |
|
|
1.53 |
|
|
0.87 |
|
Funds from operations(1) |
0.39 |
|
|
0.41 |
|
|
0.79 |
|
|
0.85 |
|
Adjusted funds from operations(1)(2) |
0.23 |
|
|
0.34 |
|
|
0.54 |
|
|
0.76 |
|
Distributions |
0.31 |
|
|
0.30 |
|
|
0.62 |
|
|
0.59 |
|
(Millions, except per-unit amounts) |
Jun. 30, 2015 |
|
Dec. 31, 2014 |
Balance sheet data |
|
|
|
Total assets |
$ |
6,133.2 |
|
|
$ |
5,943.4 |
|
Investment properties |
6,041.9 |
|
|
5,802.4 |
|
Investment property and corporate debt |
2,755.1 |
|
|
2,649.7 |
|
Total equity |
3,181.7 |
|
|
3,096.3 |
|
Total equity per unit |
34.10 |
|
|
33.19 |
|
| (1) | Non-IFRS measure. Refer to description of non-IFRS measures
and reference to reconciliation to comparable IFRS measures beginning on page 22. |
| (2) | Based on actual leasing commissions, tenant improvements
and maintaining value capital expenditures incurred. |
COMMERCIAL PROPERTY OPERATIONS
Our strategy to own premier properties
in high-growth, and in many instances supply-constrained markets with high barriers to entry, has created one of Canada’s
most distinguished portfolios of office properties. Our commercial-property portfolio consists of interests in 27 properties totaling
20.4 million square feet, including 4.0 million square feet of parking and other. Our development portfolio consists of the Bay
Adelaide East development site totaling 980,000 square feet in Toronto and the Brookfield Place Calgary East development site totaling
1.4 million square feet in Calgary. Our markets are the financial, government and energy sectors in the cities of Toronto, Ottawa,
Calgary, and Vancouver. Our strategy is concentrating operations within a select number of Canadian gateway cities with attractive
tenant bases in order to maintain a meaningful presence and build on the strength of our tenant relationships within these markets.
Gross Leasable Area by City |
Gross Leasable Area by Tenant Base |
as of June 30, 2015 |
as of June 30, 2015 |
|
|
![](tex99-1pg7a.jpg) |
![](tex99-1pg7b.jpg) |
We remain focused on the following strategic
priorities:
| • | Realizing value from our investment properties through proactive leasing initiatives; |
| • | Prudent capital management, including the refinancing of mature investment properties; and |
| • | Acquiring high-quality investment properties in our primary markets for value when opportunities arise. |
Brookfield Canada Office Properties | 7 |
The following table summarizes our commercial property portfolio
by region as at June 30, 2015:
Region |
Number of
Properties |
|
Total Area
(000’s Sq. Ft.) |
|
BOX’s
Owned Interest
(000’s Sq. Ft.) |
|
Fair Value
(Millions) |
|
Fair Value
Per Sq. Ft. |
|
Debt(1)
(Millions) |
|
Net Book
Equity(2)
(Millions) |
Commercial properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern region |
18 |
|
|
12,712 |
|
|
7,427 |
|
|
$ |
3,200.5 |
|
|
$ |
431 |
|
|
$ |
1,427.9 |
|
|
$ |
1,772.6 |
|
Western
region |
9 |
|
|
7,670 |
|
|
4,257 |
|
|
2,028.9 |
|
|
477 |
|
|
894.2 |
|
|
1,134.7 |
|
Total |
27 |
|
|
20,382 |
|
|
11,684 |
|
|
$ |
5,229.4 |
|
|
$ |
448 |
|
|
$ |
2,322.1 |
|
|
$ |
2,907.3 |
|
| (1) | Excludes debt associated with our development properties
and corporate debt. |
| (2) | Represents fair value less debt and excludes working
capital and is a non-IFRS measure. |
An important characteristic of our portfolio
is the strong credit quality of our tenants. We direct special attention to credit quality, particularly in the current economic
environment, in order to ensure the long-term sustainability of rental revenues through economic cycles. Major tenants with over
500,000 square feet of space in the portfolio include government and related agencies, Suncor Energy Inc., Bank of Montreal, Imperial
Oil and Canadian Natural Resources. A detailed list of major tenants is included in Part III (“Risks and Uncertainties”)
of this MD&A, beginning on page 26.
Our strategy is to sign long-term leases
in order to mitigate risk and reduce our overall re-tenanting costs. We typically commence discussions with tenants regarding their
space requirements well in advance of the contractual expiration, and although each market is different, the majority of our leases,
when signed, extend between five and 10-year terms. As a result of this strategy, approximately 4.4% of our leases, on average,
mature annually up to and including 2019. Our average lease term is eight years.
The following is a breakdown of lease maturities
by region with associated in-place rental rates on our commercial properties:
|
Total Portfolio |
|
Toronto, Ontario |
|
Ottawa, Ontario |
|
|
|
|
|
Net Rent |
|
|
|
|
|
Net Rent |
|
|
|
|
|
Net Rent |
|
000's |
|
|
|
per |
|
000's |
|
|
|
per |
|
000's |
|
|
|
Per |
Year of Expiry |
Sq. Ft. |
|
% |
|
Sq. Ft.(1) |
|
Sq. Ft. |
|
% |
|
Sq. Ft.(1) |
|
Sq. Ft. |
|
% |
|
Sq. Ft.(1) |
Currently available |
825 |
|
|
5.0 |
|
|
|
|
559 |
|
|
6.6 |
|
|
|
|
81 |
|
|
4.7 |
|
|
|
2015 |
217 |
|
|
1.3 |
|
|
$ |
37 |
|
|
188 |
|
|
2.2 |
|
|
$ |
38 |
|
|
2 |
|
|
0.1 |
|
|
$ |
28 |
|
2016 |
773 |
|
|
4.7 |
|
|
26 |
|
|
318 |
|
|
3.8 |
|
|
29 |
|
|
50 |
|
|
2.9 |
|
|
20 |
|
2017 |
575 |
|
|
3.5 |
|
|
32 |
|
|
493 |
|
|
5.8 |
|
|
33 |
|
|
6 |
|
|
0.3 |
|
|
24 |
|
2018 |
752 |
|
|
4.6 |
|
|
35 |
|
|
577 |
|
|
6.8 |
|
|
33 |
|
|
3 |
|
|
0.2 |
|
|
20 |
|
2019 |
914 |
|
|
5.6 |
|
|
29 |
|
|
707 |
|
|
8.4 |
|
|
28 |
|
|
86 |
|
|
5.0 |
|
|
23 |
|
2020 |
1,512 |
|
|
9.2 |
|
|
34 |
|
|
1,167 |
|
|
13.8 |
|
|
32 |
|
|
9 |
|
|
0.5 |
|
|
27 |
|
2021 |
1,221 |
|
|
7.5 |
|
|
30 |
|
|
525 |
|
|
6.2 |
|
|
34 |
|
|
566 |
|
|
32.7 |
|
|
23 |
|
2022 and beyond |
9,594 |
|
|
58.6 |
|
|
30 |
|
|
3,900 |
|
|
46.4 |
|
|
28 |
|
|
927 |
|
|
53.6 |
|
|
19 |
|
Parking and other |
3,999 |
|
|
— |
|
|
— |
|
|
1,743 |
|
|
— |
|
|
— |
|
|
802 |
|
|
— |
|
|
— |
|
Total |
20,382 |
|
|
100.0 |
% |
|
|
|
10,177 |
|
|
100.0 |
|
|
|
|
2,532 |
|
|
100.0 |
|
|
|
Average market net rent(2) (3) |
|
|
|
$ |
30 |
|
|
|
|
|
|
$ |
32 |
|
|
|
|
|
|
$ |
18 |
|
|
Calgary, Alberta |
|
Vancouver, B.C. |
|
Other |
|
|
|
|
|
Net Rent |
|
|
|
|
|
Net Rent |
|
|
|
|
|
Net Rent |
|
000's |
|
|
|
per |
|
000’s |
|
|
|
per |
|
000’s |
|
|
|
Per |
Year of Expiry |
Sq. Ft. |
|
% |
|
Sq. Ft.(1) |
|
Sq. Ft. |
|
% |
|
Sq. Ft.(1) |
|
Sq. Ft. |
|
% |
|
Sq. Ft.(1) |
Currently available |
135 |
|
|
2.4 |
|
|
|
|
50 |
|
|
8.5 |
|
|
|
|
— |
|
|
— |
|
|
|
2015 |
24 |
|
|
0.4 |
|
|
$ |
40 |
|
|
3 |
|
|
0.5 |
|
|
$ |
1.52 |
|
|
— |
|
|
— |
|
|
$ |
— |
|
2016 |
360 |
|
|
6.4 |
|
|
25 |
|
|
45 |
|
|
7.7 |
|
|
27 |
|
|
— |
|
|
— |
|
|
— |
|
2017 |
63 |
|
|
1.1 |
|
|
28 |
|
|
13 |
|
|
2.2 |
|
|
31 |
|
|
— |
|
|
— |
|
|
— |
|
2018 |
142 |
|
|
2.5 |
|
|
42 |
|
|
30 |
|
|
5.2 |
|
|
35 |
|
|
— |
|
|
— |
|
|
— |
|
2019 |
79 |
|
|
1.4 |
|
|
42 |
|
|
41 |
|
|
7.1 |
|
|
27 |
|
|
1 |
|
|
33.3 |
|
|
28 |
|
2020 |
271 |
|
|
4.8 |
|
|
43 |
|
|
65 |
|
|
11.2 |
|
|
32 |
|
|
— |
|
|
— |
|
|
— |
|
2021 |
105 |
|
|
1.9 |
|
|
43 |
|
|
25 |
|
|
4.3 |
|
|
39 |
|
|
— |
|
|
— |
|
|
— |
|
2022 and beyond |
4,456 |
|
|
79.1 |
|
|
34 |
|
|
309 |
|
|
53.3 |
|
|
19 |
|
|
2 |
|
|
66.7 |
|
|
26 |
|
Parking and other |
1,194 |
|
|
— |
|
|
— |
|
|
260 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Total |
6,829 |
|
|
100.0 |
|
|
|
|
841 |
|
|
100.0 |
|
|
|
|
3 |
|
|
100.0 |
|
|
|
Average market net rent(2) |
|
|
|
|
$ |
30 |
|
|
|
|
|
|
$ |
25 |
|
|
|
|
|
|
$ |
— |
|
| (1) | Net rent at expiration of lease. |
| (2) | Average market net rent represents management’s
estimate of average rent per square foot for buildings of similar quality to our portfolio. However, it may not necessarily be
representative of the specific space that is rolling in any specific year. Included on page 21 is the average leasing net rent
achieved on our year-to-date leasing as compared to the average expiring net rent. |
| (3) | Average market net rent for Toronto reflects higher
market rents for Brookfield Place Toronto and Bay Adelaide West, which comprise 31% of BOX’s exposure in Toronto. |
COMMERCIAL DEVELOPMENTS
The following table summarizes our development
projects at June 30, 2015:
|
Region |
|
Location |
|
Number of
Sites |
|
Owned
Interest |
|
Leasable Area
(000's Sq. Ft.) |
Bay Adelaide East |
Toronto |
|
Bay and Adelaide Street |
|
1 |
|
|
100 |
% |
|
980 |
|
Brookfield Place Calgary East |
Calgary |
|
Within one block of Fifth Avenue Place, Bankers Hall and Suncor Energy Centre |
|
1 |
|
|
100 |
% |
|
1,400 |
|
Bay Adelaide East is currently 69.0% pre-leased,
of which 60.0% relates to Deloitte LLP and Borden Ladner Gervais as anchor tenants, and is on target to be completed in late 2015.
Brookfield Place Calgary East is currently
71.4% pre-leased to anchor tenant Cenovus and is on target to be completed in late 2017.
PERFORMANCE MEASUREMENT
The key indicators by which we measure
our performance are:
| • | Commercial property net operating income; |
| • | Funds from operations per unit; |
| • | Adjusted funds from operations per unit; |
| • | Overall indebtedness level; |
| • | Weighted-average cost of debt; and |
Although we monitor and analyze our financial
performance using a number of indicators, our primary business objective of generating reliable and growing cash flow is monitored
and analyzed using net income, commercial property net operating income, funds from operations, and adjusted funds from operations.
Although net income is calculated in accordance with IFRS, IFRS does not prescribe standardized meanings for commercial property
net operating income, funds from operations, and adjusted funds from operations; therefore, they are unlikely to be comparable
to similar measures presented by other entities. We provide the components of commercial property net operating income, a reconciliation
of net income to commercial property net operating income and a full reconciliation of net income to funds from operations and
adjusted funds from operations beginning on page 23 of this MD&A.
Net Income
Net income is calculated in accordance
with IFRS. Net income is used as a key indicator in assessing the profitability of the Trust.
KEY PERFORMANCE DRIVERS
In addition to monitoring and analyzing
performance in terms of net income, we consider the following items to be important drivers of our current and anticipated financial
performance:
| • | Increases in occupancies by leasing vacant space; |
| • | Increases in rental rates through maintaining or enhancing the quality of our assets and as market conditions permit; and |
| • | Reduction in operating costs through achieving economies of scale and diligently managing contracts. |
We also believe that the key external performance
drivers include the availability of:
| • | Debt capital at a cost and on terms conducive to our goals; |
| • | Equity capital at a reasonable cost; |
| • | New property acquisitions that fit into our strategic plan; and |
| • | Investors for dispositions of peak value or non-core assets. |
Brookfield Canada Office Properties | 9 |
PART II – FINANCIAL STATEMENT
ANALYSIS
ASSET PROFILE
Our total asset carrying value was $6,133.2
million at June 30, 2015 (compared to $5,943.4 million at December 31, 2014). The following is a summary of our assets:
(Millions) |
Jun. 30, 2015 |
|
Dec. 31, 2014 |
Non-current assets |
|
|
|
Investment properties |
|
|
|
Commercial properties |
$ |
5,229.4 |
|
|
$ |
5,131.7 |
|
Commercial developments |
812.5 |
|
|
670.7 |
|
|
6,041.9 |
|
|
5,802.4 |
|
Current assets |
|
|
|
Tenant and other receivables |
20.2 |
|
|
34.3 |
|
Other assets |
11.9 |
|
|
8.9 |
|
Cash and cash equivalents |
59.2 |
|
|
58.9 |
|
|
91.3 |
|
|
102.1 |
|
Assets held for sale |
— |
|
|
38.9 |
|
Total |
$ |
6,133.2 |
|
|
$ |
5,943.4 |
|
COMMERCIAL PROPERTIES
Commercial properties comprise of our direct
interests in wholly owned commercial properties and our proportionate share of the related assets, liabilities, revenue and expenses
in our jointly controlled commercial properties.
The fair value of our commercial properties
was $5,229.4 million as at June 30, 2015 (compared to $5,131.7 million at December 31, 2014). The increase in value of
commercial properties is primarily attributable to increases at Bay Wellington Tower and Bay Adelaide West in Toronto, Royal Centre
in Vancouver and increases across the remainder of the portfolio as a result of capital expenditures, leasing costs and the recognition
of net fair value gains resulting from improvements to tenant profiles and rental curves related to new leases and renewals.
A breakdown of our commercial properties
is as follows:
|
|
|
|
|
BOX’s |
|
|
|
|
|
|
|
|
|
Owned |
|
Fair Value |
|
Fair Value |
|
Number of |
|
Total Area |
|
Interest |
|
Jun. 30, 2015 |
|
Dec. 31, 2014 |
|
Properties |
|
(000's Sq. Ft.) |
|
(000's Sq. Ft.) |
|
(Millions) |
|
(Millions) |
Eastern region |
18 |
|
|
12,712 |
|
|
7,427 |
|
|
$ |
3,200.5 |
|
|
$ |
3,145.7 |
|
Western region |
9 |
|
|
7,670 |
|
|
4,257 |
|
|
2,028.9 |
|
|
1,986.0 |
|
Total commercial properties |
27 |
|
|
20,382 |
|
|
11,684 |
|
|
$ |
5,229.4 |
|
|
$ |
5,131.7 |
|
Fair value per Sq. Ft. |
|
|
|
|
|
|
$ |
448 |
|
|
$ |
439 |
|
The key valuation metrics for our commercial
properties are as follows:
|
June 30, 2015 |
|
December 31, 2014 |
|
Maximum |
|
Minimum |
|
Weighted
Average |
|
Maximum |
|
Minimum |
|
Weighted
Average |
Eastern region |
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
7.00 |
% |
|
5.85 |
% |
|
6.24 |
% |
|
7.00 |
% |
|
6.00 |
% |
|
6.34 |
% |
Terminal cap rate |
6.50 |
% |
|
5.25 |
% |
|
5.61 |
% |
|
6.50 |
% |
|
5.25 |
% |
|
5.63 |
% |
Hold period (yrs) |
15 |
|
|
10 |
|
|
11 |
|
|
15 |
|
|
10 |
|
|
11 |
|
Western region |
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
6.75 |
% |
|
5.85 |
% |
|
6.23 |
% |
|
6.75 |
% |
|
6.00 |
% |
|
6.32 |
% |
Terminal cap rate |
6.00 |
% |
|
5.00 |
% |
|
5.55 |
% |
|
6.00 |
% |
|
5.50 |
% |
|
5.63 |
% |
Hold period (yrs) |
10 |
|
|
10 |
|
|
10 |
|
|
11 |
|
|
10 |
|
|
10 |
|
Fair values are most sensitive to changes
in discount rates and timing or variability of cash flows. A 25 basis-point decrease in the discount and terminal capitalization
rates will impact the fair value of commercial properties by $97.1 million and $142.0 million, or 1.9% and 2.7%, respectively,
at June 30, 2015.
Upon the signing of the majority of our
leases, we provide a capital allowance for tenant improvements or tenant inducements for leased space in order to accommodate the
specific space requirements of the tenant. In addition to these allowances, leasing commissions are paid to third-party brokers
and Brookfield Office Properties Management LP (“BOPM LP”), a subsidiary of BPO. We may experience a delay between
lease commencement and the payment of leasing costs due to timing of the tenant installation and the required inspections and certifications.
For the three and six months ended June 30, 2015, such expenditures totaled $11.5 million and $18.1 million, respectively
(compared to $5.0 million and $9.4 million during the same periods in 2014). The increase is primarily related to tenant installation
costs incurred on the lease-up of space at Exchange Tower, Queen's Quay Terminal, Jean Edmonds Towers, Fifth Avenue Place and Royal
Centre.
We also invest in ongoing maintenance and
capital improvement projects to sustain the high quality of the infrastructure and tenant service amenities in our properties.
Capital expenditures for the three and six months ended June 30, 2015 totaled $5.4 million and $8.7 million, respectively
(compared to $4.5 million and $5.7 million during the same periods in 2014). These expenditures exclude repairs and maintenance
costs. Fluctuations in our capital expenditures vary period over period based on required and planned expenditures on our commercial
properties.
Capital expenditures include maintaining
value expenditures, which are those required in order to maintain the properties in their current operating state. Capital expenditures
also include projects which represent improvements to an asset or reconfiguration of space that adds productive capacity in order
to increase rentable area or increase current rental rates. For the three and six months ended June 30, 2015, maintaining
value capital expenditures totaled $2.9 million and $3.9 million, respectively (compared with $1.2 million and $1.5 million during
the same periods in 2014), while the remaining capital expenditures of $2.5 million and $4.8 million, respectively (compared with
$3.3 million and $4.2 million during the same periods in 2014) primarily consist of the food court renovation and the floor conversion
project at First Canadian Place, washroom upgrades at Exchange Tower and Queen's Quay Terminal, entrance doors replacement at 105
Adelaide St. West and external plaza and common area upgrades at Fifth Avenue Place. Capital expenditures are recoverable in some
cases through contractual tenant cost-recovery payments. During the three and six months ended June 30, 2015, $4.8 million
and $7.9 million, respectively, of our total capital expenditures were recoverable (compared with $3.8 million and $5.0 million
during the same periods in 2014).
The following table summarizes the second-generation
leasing commissions and tenant improvements, and maintaining value capital expenditures recorded on our commercial properties during
the three and six months ended June 30, 2015. “Second-generation” leasing commissions and tenant improvements
includes both new and renewal tenants for all of our commercial properties and vary with the timing of renewals, vacancies and
tenant mix. These costs historically have been lower for renewals of existing tenants compared to new tenants.
For the three and six months ended June 30,
2015, second-generation leasing commissions primarily incurred at Brookfield Place Toronto, Bankers Hall and Jean Edmonds Towers,
and tenant improvements at Brookfield Place Toronto, Exchange Tower, Queen's Quay Terminal, Bankers Hall, Fifth Avenue Place and
Royal Centre related to tenant build-outs.
|
Three months ended Jun. 30 |
|
Six months ended Jun. 30 |
|
Normalized
quarterly
activities(1) |
(Millions) |
2015 |
|
2014 |
|
2015 |
|
2014 |
|
2015 |
Second-generation leasing commissions and tenant improvements |
$ |
11.4 |
|
|
$ |
5.1 |
|
|
$ |
17.9 |
|
|
$ |
8.6 |
|
|
$ |
5.8 |
|
Maintaining value capital expenditures |
2.9 |
|
|
1.2 |
|
|
3.9 |
|
|
1.5 |
|
|
1.8 |
|
Total |
$ |
14.3 |
|
|
$ |
6.3 |
|
|
$ |
21.8 |
|
|
$ |
10.1 |
|
|
$ |
7.6 |
|
(1) A normalized level of activity is
estimated based on historical spend levels as well as anticipated levels over the next few years.
The following table summarizes the changes
in value of our commercial properties during the six months ended June 30, 2015:
(Millions) |
Jun. 30, 2015 |
Balance at beginning of period |
$ |
5,131.7 |
|
Additions: |
|
Capital expenditures and tenant improvements |
22.5 |
|
Leasing commissions |
4.1 |
|
Tenant inducements |
0.2 |
|
Fair value gains |
69.7 |
|
Other changes |
1.2 |
|
Balance at end of period |
$ |
5,229.4 |
|
Brookfield Canada Office Properties | 11 |
COMMERCIAL DEVELOPMENTS
Commercial developments consists of Bay
Adelaide East and Brookfield Place Calgary East which are high quality, centrally located development sites acquired from our parent
company, BPO for an aggregate total investment of $601.9 million and $966.3 million, respectively. The buildings were purchased
on an “as-if-completed-and-stabilized basis,” and as such, BPO retains the development obligations including construction,
lease-up and financing.
The following table summarizes the details
of the transactions and operational information as at June 30, 2015:
(Millions, except Operational Information) |
Bay Adelaide East |
Brookfield Place
Calgary East |
Initial acquisition price |
|
$ |
169.9 |
|
|
$ |
245.5 |
|
Up-front equity commitment |
|
26.0 |
|
|
81.8 |
|
First mortgage construction loan |
|
350.0 |
|
|
575.0 |
|
Final payment due to BPO on stabilization(1) |
|
56.0 |
|
|
64.0 |
|
Aggregate total investment |
|
$ |
601.9 |
|
|
$ |
966.3 |
|
|
|
|
|
|
Operational Information |
|
|
|
|
Total Leasable Area (000's Sq. Ft.) |
|
980 |
|
|
1,400 |
|
Leased % |
|
69.0% |
|
71.4% |
Target Completion Date |
|
Late 2015 |
|
Late 2017 |
| (1) | Subject to achieving stabilized net operating income
and targeted permanent financing, which is expected to occur in 2017 for Bay Adelaide East and 2018 for Brookfield Place Calgary
East. |
Commercial developments under active development
are measured using a discounted cash flow model, net of costs to complete, as of the balance sheet date. The total fair value of
development land and infrastructure was $812.5 million at June 30, 2015.
The details of development expenditures
are as follows:
|
Three months ended Jun. 30 |
|
Six months ended Jun. 30 |
(Millions) |
2015 |
|
2014 |
|
2015 |
|
2014 |
Construction costs |
$ |
54.3 |
|
|
$ |
43.0 |
|
|
$ |
122.1 |
|
|
$ |
71.8 |
|
Property taxes and other related costs |
3.0 |
|
|
1.0 |
|
|
6.3 |
|
|
2.5 |
|
Borrowing costs capitalized |
7.1 |
|
|
2.8 |
|
|
13.4 |
|
|
5.5 |
|
Total |
$ |
64.4 |
|
|
$ |
46.8 |
|
|
$ |
141.8 |
|
|
$ |
79.8 |
|
The following table summarizes the changes
in value of our commercial developments during the six months ended June 30, 2015:
(Millions) |
Jun. 30, 2015 |
Balance at beginning of period |
$ |
670.7 |
|
Additions: |
|
Development expenditures |
141.8 |
|
Balance at end of period |
$ |
812.5 |
|
TENANT AND OTHER RECEIVABLES
Tenant and other receivables decreased
to $20.2 million at June 30, 2015, from $34.3 million at December 31, 2014 mainly due to receipt of realty tax refunds
at Bay Adelaide West.
OTHER ASSETS
At June 30, 2015, the balance of other
assets is comprised of prepaid expenses and other assets of $11.9 million (compared to $8.9 million at December 31, 2014).
CASH AND CASH EQUIVALENTS
We endeavor to maintain high levels of
liquidity to ensure that we can meet distribution requirements and react quickly to potential investment opportunities. At June 30,
2015, cash balances were $59.2 million (compared to $58.9 million at December 31, 2014).
ASSETS AND ASSOCIATED LIABILITIES HELD
FOR SALE
During the fourth quarter of 2014, we reclassified
our 25% interest in 151 Yonge St. in Toronto to assets held for sale upon entering into an agreement to sell the commercial property.
On January 22, 2015, we closed on the sale of the property, generating net proceeds of $38.4 million at ownership and recognized
a fair value loss of $0.4 million during the period.
(Millions) |
Jun. 30, 2015 |
|
Dec. 31, 2014 |
Assets |
|
|
|
Commercial property |
$ |
— |
|
|
$ |
38.8 |
|
Tenant and other receivables |
— |
|
|
0.1 |
|
Assets held for sale |
$ |
— |
|
|
$ |
38.9 |
|
Liabilities |
|
|
|
Accounts payable and other liabilities |
$ |
— |
|
|
$ |
0.5 |
|
Liabilities associated with assets held for sale |
$ |
— |
|
|
$ |
0.5 |
|
LIABILITIES AND EQUITY
Our asset base of $6,133.2 million is financed
with a combination of debt and equity. The components of our liabilities and equity are as follows:
(Millions) |
Jun. 30, 2015 |
|
Dec. 31, 2014 |
Liabilities |
|
|
|
Non-current liabilities |
|
|
|
Investment property and corporate debt |
$ |
2,476.4 |
|
|
$ |
2,368.4 |
|
Current liabilities |
|
|
|
Investment property and corporate debt |
278.7 |
|
|
281.3 |
|
Accounts payable and other liabilities |
196.4 |
|
|
196.9 |
|
|
475.1 |
|
|
478.2 |
|
Liabilities associated with assets held for sale |
— |
|
|
0.5 |
|
|
2,951.5 |
|
|
2,847.1 |
|
Equity |
|
|
|
Unitholders’ equity |
881.2 |
|
|
856.7 |
|
Non-controlling interest |
2,300.5 |
|
|
2,239.6 |
|
|
3,181.7 |
|
|
3,096.3 |
|
Total liabilities and equity |
$ |
6,133.2 |
|
|
$ |
5,943.4 |
|
INVESTMENT PROPERTY AND CORPORATE DEBT
Investment property and corporate debt
(current and non-current) totaled $2,755.1 million at June 30, 2015 (compared to $2,649.7 million at December 31, 2014).
Investment property and corporate debt at June 30, 2015 had a weighted-average interest rate of 3.86%. Debt on our investment
properties is mainly non-recourse, thereby reducing overall financial risk to the Trust.
We attempt to match the maturity of our
investment property debt portfolio with the average lease term of our properties. At June 30, 2015, the average term to maturity
of our investment property debt was seven years, compared to our average lease term of eight years.
The details of the financing transactions
completed during the six months ended June 30, 2015 are as follows:
(Millions) |
|
|
New
Proceeds(1) |
Net
Proceeds
Generated(1) |
Interest
Rate (%) |
Mortgage
Detail |
Maturity |
Hudson's
Bay Centre |
Q2 |
Extension |
|
$ |
— |
|
|
$ |
— |
|
BA
+ 140 bps |
Limited
recourse |
May
2016 |
Royal Centre |
Q2 |
Extension |
|
— |
|
|
— |
|
BA
+ 150 bps |
Non-recourse |
June
2016 |
Place de Ville
I |
Q2 |
New |
|
21.0 |
|
|
21.0 |
|
|
3.752% |
Non-recourse |
June
2025 |
Place
de Ville II |
Q2 |
New |
|
22.8 |
|
|
22.8 |
|
|
3.752% |
Non-recourse |
June
2025 |
(1) Excludes financing costs.
During the second quarter of 2015, we upsized
our revolving corporate credit facility by $70.0 million to $350.0 million. As of June 30, 2015, $185.0 million was drawn on the
revolving corporate credit facility.
Brookfield Canada Office Properties | 13 |
The details of investment property and
corporate debt at June 30, 2015, are as follows:
|
|
Location |
|
Interest
Rate % |
|
Maturity
Date |
|
BOX’s Share
(Millions) |
|
Mortgage Details |
Income Producing |
|
|
|
|
|
|
|
|
|
|
Hudson's Bay Centre(1) |
|
Toronto |
|
2.39 |
% |
|
May 2016 |
|
$ |
97.3 |
|
|
Limited recourse - floating rate |
Royal Centre |
|
Vancouver |
|
2.49 |
% |
|
June 2016 |
|
137.8 |
|
|
Non-recourse - floating rate |
2 Queen St. East |
|
Toronto |
|
5.64 |
% |
|
December 2017 |
|
28.6 |
|
|
Non-recourse - fixed rate |
Brookfield Place Toronto |
|
Toronto |
|
3.24 |
% |
|
January 2020 |
|
503.5 |
|
|
Non-recourse - fixed rate |
22 Front St. West |
|
Toronto |
|
6.24 |
% |
|
October 2020 |
|
17.2 |
|
|
Non-recourse - fixed rate |
Bankers Court |
|
Calgary |
|
4.96 |
% |
|
November 2020 |
|
43.0 |
|
|
Non-recourse - fixed rate |
Queen's Quay Terminal |
|
Toronto |
|
5.40 |
% |
|
April 2021 |
|
82.0 |
|
|
Non-recourse - fixed rate |
Fifth Avenue Place |
|
Calgary |
|
4.71 |
% |
|
August 2021 |
|
160.9 |
|
|
Non-recourse - fixed rate |
Bay Adelaide West |
|
Toronto |
|
4.43 |
% |
|
December 2021 |
|
380.6 |
|
|
Non-recourse - fixed rate |
Exchange Tower |
|
Toronto |
|
4.03 |
% |
|
April 2022 |
|
110.6 |
|
|
Non-recourse - fixed rate |
HSBC Building |
|
Toronto |
|
4.06 |
% |
|
January 2023 |
|
41.9 |
|
|
Non-recourse - fixed rate |
105 Adelaide St. West |
|
Toronto |
|
3.87 |
% |
|
May 2023 |
|
35.6 |
|
|
Non-recourse - fixed rate |
Bankers Hall |
|
Calgary |
|
4.38 |
% |
|
November 2023 |
|
292.4 |
|
|
Non-recourse - fixed rate |
First Canadian Place |
|
Toronto |
|
3.56 |
% |
|
December 2023 |
|
77.8 |
|
|
Non-recourse - fixed rate |
Jean Edmonds Towers |
|
Ottawa |
|
6.79 |
% |
|
January 2024 |
|
15.6 |
|
|
Non-recourse - fixed rate |
Place de Ville I |
|
Ottawa |
|
3.75 |
% |
|
June 2025 |
|
21.0 |
|
|
Non-recourse - fixed rate |
Place de Ville II |
|
Ottawa |
|
3.75 |
% |
|
June 2025 |
|
22.8 |
|
|
Non-recourse - fixed rate |
Suncor Energy Centre |
|
Calgary |
|
5.19 |
% |
|
August 2033 |
|
266.5 |
|
|
Non-recourse - fixed rate |
|
|
|
|
|
|
|
|
|
|
|
Development |
|
|
|
|
|
|
|
|
|
|
Bay Adelaide East(2) |
|
Toronto |
|
2.86 |
% |
|
December 2016 |
|
220.3 |
|
|
Limited recourse - floating rate |
Brookfield Place Calgary East(3) |
|
Calgary |
|
2.72 |
% |
|
November 2017 |
|
28.9 |
|
|
Limited recourse - floating rate |
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
|
|
|
|
$350M Corporate Revolver |
|
- |
|
2.44 |
% |
|
August 2018 |
|
185.0 |
|
|
Recourse - floating rate |
|
|
|
|
3.86 |
% |
|
|
|
2,769.3 |
|
|
|
Premium on assumed mortgages |
|
|
|
|
|
|
|
1.1 |
|
|
|
Deferred financing costs |
|
|
|
|
|
|
|
(15.3 |
) |
|
|
Total |
|
|
|
3.86 |
% |
|
|
|
$ |
2,755.1 |
|
|
|
(1) This
loan has limited recourse to the Trust for up to $15.0 million.
(2) This loan
has a three year term from the date of the initial advance, and has limited recourse to the Trust for up to $75.0 million.
Two one-year extension options are available provided certain leasing thresholds have been met and no material defaults have
occurred.
(3) This loan
has limited recourse to the Trust for up to $80.0 million. A one-year extension option is available provided certain leasing
thresholds have been met and no material defaults have occurred.
Investment property and corporate debt
maturities for the next five years and thereafter are as follows:
|
|
|
|
|
|
|
|
Weighted-Average |
|
Scheduled |
|
|
|
|
|
Interest Rate (%) at |
(Millions, except interest data) |
Amortization(1) |
Maturities |
Total(1) |
|
Jun. 30, 2015 |
Remainder of 2015 |
|
$ |
21.8 |
|
|
$ |
— |
|
|
$ |
21.8 |
|
|
— |
% |
2016 |
|
44.6 |
|
|
455.4 |
|
|
500.0 |
|
|
2.65 |
% |
2017 |
|
47.9 |
|
|
57.5 |
|
|
105.4 |
|
|
4.17 |
% |
2018 |
|
50.7 |
|
|
185.0 |
|
|
235.7 |
|
|
2.44 |
% |
2019 |
|
53.0 |
|
|
— |
|
|
53.0 |
|
|
— |
% |
2020 and thereafter |
|
238.6 |
|
|
1,600.6 |
|
|
1,839.2 |
|
|
4.25 |
% |
Total |
|
$ |
456.6 |
|
|
$ |
2,298.5 |
|
|
$ |
2,755.1 |
|
|
3.86 |
% |
| (1) | Net of transaction costs. |
CONTRACTUAL OBLIGATIONS
The following table presents our contractual
obligations over the next five years and beyond:
|
Payments Due By Period |
(Millions) |
Total |
|
1 year |
|
2 – 3 years |
|
4 – 5 Years |
|
After 5 Years |
Investment property and corporate debt(1) |
$ |
2,755.1 |
|
|
$ |
278.7 |
|
|
$ |
373.4 |
|
|
$ |
734.8 |
|
|
$ |
1,368.2 |
|
Interest expense – investment property and corporate debt(2) |
643.0 |
|
|
88.6 |
|
|
170.3 |
|
|
159.1 |
|
|
225.0 |
|
Minimum rental payments - ground leases(3) |
482.3 |
|
|
7.1 |
|
|
14.3 |
|
|
14.3 |
|
|
446.6 |
|
|
$ |
3,880.4 |
|
|
$ |
374.4 |
|
|
$ |
558.0 |
|
|
$ |
908.2 |
|
|
$ |
2,039.8 |
|
| (1) | Net of transaction costs. |
| (2) | Represents aggregate interest expense expected to be
paid over the term of the debt, on an undiscounted basis, based at current interest rates. |
| (3) | Represents minimum rental payments, on an undiscounted
basis, on land leases or other agreements. |
CREDIT RATINGS
Our access to financing depends on, among
other things, suitable market conditions and the maintenance of suitable long-term credit ratings. Our credit ratings may be adversely
affected by various factors, including increased debt levels, decreased earnings, declines in tenant demand, increased competition,
a further deterioration in general economic and business conditions and adverse publicity. Any downgrades in our credit ratings
may impede our access to capital markets or raise our borrowing rates.
We are currently rated by Dominion Bond
Rating Service Inc. (“DBRS”) and Standard & Poor’s (“S&P”). Our credit ratings at June 30,
2015, and at the date of this report were:
|
|
DBRS |
S&P |
Issuer Rating |
|
BBB (stable) |
BBB- (stable) |
We are committed to arranging our affairs
to maintain these ratings and improve them over time.
Credit ratings are intended to provide
investors with an independent measure of the credit quality of an issue of securities. The credit ratings presented are not a recommendation
to purchase, hold or sell our Trust Units, as such ratings do not comment as to market price or suitability for a particular investor.
There is no assurance that any rating will remain in effect for any given period or that any rating will not be revised or withdrawn
entirely by the rating agency in the future if, in its judgment, circumstances so warrant.
CORPORATE GUARANTEES AND CONTINGENT
OBLIGATIONS
We and our operating subsidiaries may be
contingently liable with respect to litigation and claims that arise from time to time in the normal course of business or otherwise.
In addition, we may execute agreements that provide for indemnifications and guarantees to third parties. Disclosure of commitments,
guarantees, and contingencies can be found in Note 14 of the condensed consolidated interim financial statements.
INCOME TAXES
The Trust is a “mutual fund trust”
pursuant to the Income Tax Act (Canada). The Trust distributes or designates all taxable earnings to unitholders, and as
such, under current legislation, the obligation to pay tax rests with each unitholder. No current and deferred tax provisions are
required on the Trust’s income.
ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities
totaled $196.4 million at June 30, 2015 (compared to $196.9 million at December 31, 2014).
A summary of the components of accounts
payable and other liabilities is as follows:
(Millions) |
Jun. 30, 2015 |
|
Dec. 31, 2014 |
Accounts payable and accrued liabilities |
$ |
177.2 |
|
|
$ |
177.0 |
|
Accrued interest |
19.2 |
|
|
19.9 |
|
Total |
$ |
196.4 |
|
|
$ |
196.9 |
|
Brookfield Canada Office Properties | 15 |
EQUITY
The components of equity are as follows:
(Millions) |
Jun. 30, 2015 |
|
Dec. 31, 2014 |
Trust Units |
$ |
554.2 |
|
|
$ |
553.4 |
|
Contributed surplus |
3.1 |
|
|
3.1 |
|
Retained earnings |
323.9 |
|
|
300.2 |
|
Unitholders’ equity |
881.2 |
|
|
856.7 |
|
Non-controlling interest |
2,300.5 |
|
|
2,239.6 |
|
Total |
$ |
3,181.7 |
|
|
$ |
3,096.3 |
|
The following tables summarize the changes
in the units outstanding during the three and six months ended June 30, 2015 and June 30, 2014:
|
Three months ended Jun. 30, 2015 |
|
Six months ended Jun. 30, 2015 |
|
Trust Units |
|
Class B LP Units |
|
Trust Units |
|
Class B LP Units |
Units issued and outstanding at beginning of period |
26,232,007 |
|
|
67,088,022 |
|
|
26,218,183 |
|
|
67,088,022 |
|
Units issued pursuant to Distribution Reinvestment Plan |
15,767 |
|
|
— |
|
|
29,591 |
|
|
— |
|
Total units outstanding at June 30, 2015 |
26,247,774 |
|
|
67,088,022 |
|
|
26,247,774 |
|
|
67,088,022 |
|
|
Three months ended Jun. 30, 2014 |
|
Six months ended Jun. 30, 2014 |
|
Trust Units |
|
Class B LP Units |
|
Trust Units |
|
Class B LP Units |
Units issued and outstanding at beginning of period |
26,178,217 |
|
|
67,088,022 |
|
|
26,167,835 |
|
|
67,088,022 |
|
Units issued pursuant to Distribution Reinvestment Plan |
14,185 |
|
|
— |
|
|
24,567 |
|
|
— |
|
Total units outstanding at June 30, 2014 |
26,192,402 |
|
|
67,088,022 |
|
|
26,192,402 |
|
|
67,088,022 |
|
At June 30, 2015, the weighted average
number of Trust Units outstanding was 26,232,489 (compared to 26,191,933 at December 31, 2014).
Trust Units
Each Trust Unit is transferable and represents
an equal, undivided, beneficial interest in BOX and in any distributions, whether of net income, net realized capital gains, or
other amounts, and in the event of the termination or winding-up of the Trust, in the Trust’s net assets remaining after
satisfaction of all liabilities. All Trust Units rank among themselves equally and ratably without discrimination, preference,
or priority. Each Trust Unit entitles the holder thereof to one vote at all meetings of unitholders or with respect to any written
resolution of unitholders. The Trust Units have no conversion, retraction, or redemption rights.
Special Voting Units
Special Voting Units are only issued in
tandem with Class B limited partnership units (“Class B LP Units”) of Brookfield Office Properties Canada LP (“BOPC
LP”) and are not transferable separately from the Class B LP Units to which they relate and upon any transfer of
Class B LP Units, such Special Voting Units will automatically be transferred to the transferee of the Class B LP Units.
As Class B LP Units are exchanged for Trust Units or purchased for cancellation, the corresponding Special Voting Units
will be cancelled for no consideration.
Each Special Voting Unit entitles the holder
thereof to one vote at all meetings of unitholders or with respect to any resolution in writing of unitholders. Except for the
right to attend and vote at meetings of the unitholders or with respect to written resolutions of the unitholders, Special Voting
Units do not confer upon the holders thereof any other rights. A Special Voting Unit does not entitle its holder to any economic
interest in BOX, or to any interest or share in BOX, or to any interest in any distributions (whether of net income, net realized
capital gains, or other amounts), or to any interest in any net assets in the event of termination or winding-up.
Non-Controlling interest
We classify the outstanding Class B LP
Units as non-controlling interest for financial statement purposes in accordance with IFRS. The Class B LP Units are exchangeable
on a one-for-one basis (subject to customary anti-dilution provisions) for Trust Units at the option of the holder. Each Class
B LP Unit is accompanied by a Special Voting Unit that entitles the holder thereof to receive notice of, to attend, and to vote
at all meetings of unitholders of BOX. The holders of Class B LP Units are entitled to receive distributions when declared by BOPC
LP equal to the per-unit amount of distributions payable to each holder of Trust Units. However, the Class B LP Units have limited
voting rights over BOPC LP.
The following tables present distributions
declared to Trust unitholders and non-controlling interest for the three and six months ended June 30, 2015 and June 30,
2014.
|
Three months ended Jun. 30, 2015 |
|
Six months ended Jun. 30, 2015 |
(Millions, except per unit amounts) |
Trust Units |
|
Class B LP Units |
|
Trust Units |
|
Class B LP Units |
Paid in cash or DRIP |
$ |
5.3 |
|
|
$ |
13.9 |
|
|
$ |
13.4 |
|
|
$ |
34.7 |
|
Payable as of June 30, 2015 |
2.7 |
|
|
6.9 |
|
|
2.7 |
|
|
6.9 |
|
Total |
8.0 |
|
|
20.8 |
|
|
16.1 |
|
|
41.6 |
|
Per unit |
$ |
0.31 |
|
|
$ |
0.31 |
|
|
$ |
0.62 |
|
|
$ |
0.62 |
|
|
Three months ended Jun. 30, 2014 |
|
Six months ended Jun. 30, 2014 |
(Millions, except per unit amounts) |
Trust Units |
|
Class B LP Units |
|
Trust Units |
|
Class B LP Units |
Paid in cash or DRIP |
$ |
5.3 |
|
|
$ |
13.5 |
|
|
$ |
13.0 |
|
|
$ |
33.1 |
|
Payable as of June 30, 2014 |
2.7 |
|
|
6.9 |
|
|
2.7 |
|
|
6.9 |
|
Total |
8.0 |
|
|
20.4 |
|
|
15.7 |
|
|
40.0 |
|
Per unit |
$ |
0.30 |
|
|
$ |
0.30 |
|
|
$ |
0.59 |
|
|
$ |
0.59 |
|
We determine annual distributions to unitholders
by looking at forward-looking cash flow information, including forecasts and budgets and the future business prospects of the Trust.
We do not consider periodic cash flow fluctuations resulting from items such as the timing of property operating costs, property
tax installments, or semi-annual debenture and mortgage payable interest payments in determining the level of distributions to
unitholders. To determine the level of cash distributions made to unitholders, we consider the impact of, among other items, the
future growth in the income-producing portfolio, future acquisitions, and leasing related to the income-producing portfolio. Annual
distributions to unitholders are expected to continue to be funded by cash flows generated from our portfolio.
CAPITAL RESOURCES AND LIQUIDITY
We employ a broad range of financing strategies
to facilitate growth and manage financial risk, with particular emphasis on the overall reduction of the weighted-average cost
of capital, in order to enhance returns for unitholders. Our principal liquidity needs for the next twelve months are to:
| • | fund recurring expenses; |
| • | meet debt service requirements; |
| • | fund those capital expenditures deemed mandatory, including tenant improvements; |
| • | fund current development costs not covered by construction loans; and |
| • | fund investing activities, which could include: |
| ▪ | discretionary capital expenditures; |
| ▪ | property acquisitions; and |
| ▪ | repurchase of our units. |
We believe that our liquidity needs will
be satisfied using cash on hand and cash flows generated from operating and financing activities. Rental revenue, recoveries from
tenants, interest and other income, available cash balances, draws on our credit facilities and refinancings (including upward
refinancings) of maturing indebtedness are our principal sources of capital used to pay operating expenses, distributions, debt
service, capital expenditures, and leasing costs in our commercial-property portfolio. We seek to increase income from our existing
properties by controlling operating expenses and by maintaining quality standards for our properties that promote high occupancy
rates and support increases in rental rates while reducing tenant turnover. We believe our revenue, along with proceeds from financing
activities, will continue to provide the necessary funds for our short-term liquidity needs and to fund anticipated ongoing distributions.
However, material changes in these factors may adversely affect our net cash flows.
Our principal liquidity needs for periods
beyond the next year are for scheduled debt maturities, unit distributions, development costs and capital expenditures. We plan
to meet these needs with one or more of the following:
| • | cash flow from operating activities; |
| • | credit facilities and refinancing opportunities; and |
Our investment property and corporate debt
is primarily fixed-rate and non-recourse to the Trust. These investment-grade financings are typically structured on a loan-to-appraised-value
basis of between 50% and 65% as market conditions permit. In addition, in certain circumstances where a building is leased almost
exclusively to a high-credit-quality tenant, a higher loan-to-value financing, based on the tenant’s credit quality, is put
in place at rates commensurate with the cost of funds for the tenant. This reduces our equity requirements to finance investment
property and enhances equity returns.
Brookfield Canada Office Properties | 17 |
Most of our borrowings are in the form
of long-term property-specific financings with recourse only to the specific assets. Limiting recourse to specific assets ensures
that poor performance within one area does not compromise our ability to finance the balance of our operations. Our maturity schedule
is fairly diversified so that financing requirements in any given year are manageable.
Our focus on structuring financings with
investment-grade characteristics ensures that debt levels on any particular asset can typically be maintained throughout a business
cycle. This enables us to limit covenants and other performance requirements, thereby reducing the risk of early payment requirements
or restrictions on the distribution of cash from the assets being financed.
To help ensure we are able to react to
investment opportunities quickly and on a value basis, we attempt to maintain a high level of liquidity. Our primary sources of
liquidity consists of cash and undrawn committed credit facilities. In addition, we structure our affairs to facilitate monetization
of longer-duration assets through financings, co-investor participations, or refinancings.
At June 30, 2015, our available liquidity
consists of $59.2 million of cash on hand, and $165.0 million of undrawn capacity on our corporate credit facility.
Cost of Capital
We continually strive to reduce our weighted-average
cost of capital and improve unitholders’ equity returns through value-enhancement initiatives and the consistent monitoring
of the balance between debt and equity financing.
As of June 30, 2015, our weighted-average
cost of capital, assuming a long-term 9.0% return on equity, was 6.3%. Our cost of capital is lower than many of our peers because
of the greater amount of investment-grade financing that can be placed on our assets, which is a function of the high-quality nature
of both the assets and the tenant base that composes our portfolio. In determining the long-term 9.0% return on equity, management
considers various factors including a review of various financial models such as dividend growth model and capital asset pricing
model, as well as examination of market returns. Based on the calculations of the financial models, market returns and historic
returns achieved by the Trust, management believes that the long-term 9.0% return is an appropriate benchmark.
The following schedule details the capitalization
of the Trust and the related costs thereof:
|
Cost of Capital(1) |
|
Underlying Value(2) |
(Millions, except cost of capital data) |
Jun. 30, 2015 |
|
Dec. 31, 2014 |
|
Jun. 30, 2015 |
|
Dec. 31, 2014 |
Liabilities |
|
|
|
|
|
|
|
Investment property and corporate debt |
3.9 |
% |
|
4.0 |
% |
|
$ |
2,755.1 |
|
|
$ |
2,649.7 |
|
Unitholders’ equity |
|
|
|
|
|
|
|
Trust Units(3) |
9.0 |
% |
|
9.0 |
% |
|
708.2 |
|
|
706.4 |
|
Other equity |
|
|
|
|
|
|
|
Non-controlling interest(3) |
9.0 |
% |
|
9.0 |
% |
|
1,813.7 |
|
|
1,809.0 |
|
Total |
6.3 |
% |
|
6.4 |
% |
|
$ |
5,277.0 |
|
|
$ |
5,165.1 |
|
| (1) | Total weighted-average cost of capital is calculated
on the weighted average of underlying value. |
| (2) | Underlying value of liabilities presents the cost to
retire debt on maturity. Underlying value of unitholders’ equity and other equity is based on the closing unit price of
BOX on the Toronto Stock Exchange. |
| (3) | Assumes a long-term 9.0% return on equity for June 30,
2015 and December 31, 2014. |
OPERATING RESULTS
Included on the following pages is a discussion
of the various components of our operating results in accordance with IFRS followed by a discussion of non-IFRS measures and corresponding
reconciliations to comparable IFRS measures.
|
Three months ended Jun. 30 |
|
Six months ended Jun. 30 |
(Millions, except per unit amounts) |
2015 |
|
2014 |
|
2015 |
|
2014 |
Commercial property revenue |
$ |
126.3 |
|
|
$ |
124.9 |
|
|
$ |
253.9 |
|
|
$ |
250.5 |
|
Direct commercial property expense |
63.1 |
|
|
58.5 |
|
|
126.9 |
|
|
115.5 |
|
|
63.2 |
|
|
66.4 |
|
|
127.0 |
|
|
135.0 |
|
Investment and other income |
— |
|
|
0.2 |
|
|
— |
|
|
1.0 |
|
Interest expense |
20.8 |
|
|
23.3 |
|
|
41.9 |
|
|
46.4 |
|
General and administrative expense |
6.0 |
|
|
5.1 |
|
|
12.1 |
|
|
12.2 |
|
Income before fair value gains |
36.4 |
|
|
38.2 |
|
|
73.0 |
|
|
77.4 |
|
Fair value gains |
47.2 |
|
|
1.0 |
|
|
69.3 |
|
|
3.9 |
|
Net income and comprehensive income |
$ |
83.6 |
|
|
$ |
39.2 |
|
|
$ |
142.3 |
|
|
$ |
81.3 |
|
Net income and comprehensive income attributable to: |
|
|
|
|
|
|
|
Unitholders |
$ |
23.4 |
|
|
$ |
11.0 |
|
|
$ |
39.8 |
|
|
$ |
22.8 |
|
Non-controlling interest |
60.2 |
|
|
28.2 |
|
|
102.5 |
|
|
58.5 |
|
|
$ |
83.6 |
|
|
$ |
39.2 |
|
|
$ |
142.3 |
|
|
$ |
81.3 |
|
Net income per Trust unit |
$ |
0.90 |
|
|
$ |
0.42 |
|
|
$ |
1.53 |
|
|
$ |
0.87 |
|
COMMERCIAL PROPERTY REVENUE
Revenue from commercial properties includes
rental revenues earned from tenant leases, straight-line rent, percentage rent, and additional rent from the recovery of operating
costs and property taxes. Revenue from investment properties totaled $126.3 million and $253.9 million for the three and six months
ended June 30, 2015, respectively (compared to $124.9 million and $250.5 million during the same periods in 2014). The increase
is primarily due to one-time non-cash write-offs related to early lease terminations and dissolutions in the prior year, offset
by lower rental revenue due to increased vacancy at Royal Centre and Bankers Hall and lower lease termination and other income.
The components of revenue are as follows:
|
Three months ended Jun. 30 |
|
Six months ended Jun. 30 |
(Millions) |
2015 |
|
2014 |
|
2015 |
|
2014 |
Rental revenue |
$ |
125.0 |
|
|
$ |
124.1 |
|
|
$ |
251.7 |
|
|
$ |
252.1 |
|
Non-cash rental revenue (expense) |
0.7 |
|
|
0.2 |
|
|
1.2 |
|
|
(2.8 |
) |
Lease termination and other income |
0.6 |
|
|
0.6 |
|
|
1.0 |
|
|
1.2 |
|
Commercial property revenue |
$ |
126.3 |
|
|
$ |
124.9 |
|
|
$ |
253.9 |
|
|
$ |
250.5 |
|
Our strategy of owning premier properties
in high-growth, and in many instances supply-constrained markets with high barriers to entry, along with our focus on executing
long-term leases with strong credit-rated tenants, has created one of Canada’s most distinguished portfolios of office properties.
In the past, this strategy has reduced our exposure to the cyclical nature of the real estate business. We feel confident with
our current rollover exposure, which is the percentage of our total managed space currently scheduled to expire, and are focused
on working toward renewals on expiries in the upcoming months, as well as continuing to manage our rollover exposure in the future
years.
Our leases generally have clauses that
provide for the collection of rental revenues in amounts that increase every few years, with these increases negotiated at the
signing of the lease. During the six months ended June 30, 2015, approximately 66% of our leases executed had rent escalation
clauses. On average, these escalation clauses will increase rent annually by 0.9% over the terms of the respective leases. The
large number of high-credit-quality tenants in our portfolio lowers the risk of not realizing these increases. IFRS requires that
these increases be recorded on a straight-line basis over the life of the lease. For the three and six months ended June 30,
2015, we recognized $0.7 million and $1.2 million of non-cash rental revenue, respectively (compared to $0.2 million of non-cash
rental revenue and $2.8 million of non-cash rental expense during the same periods in 2014). Direct commercial property expenses,
which include real estate taxes, utilities, insurance, repairs and maintenance, cleaning, and other property-related expenses,
were $63.1 million and $126.9 million for the three and six months ended June 30, 2015, respectively (compared to $58.5 million
and $115.5 million during the same periods in 2014).
Substantially all of our leases are net
leases, in which the lessee is required to pay its proportionate share of the property’s operating expenses such as utilities,
repairs, insurance, and taxes. Consequently, leasing activity is the principal contributor to the change in same-property net operating
income. Our total portfolio occupancy rate ended the quarter at 95.0%. At June 30, 2015, average in-place net rent throughout
the portfolio was $29 per square foot, compared with an average market net rent of $30 per square foot.
Brookfield Canada Office Properties | 19 |
The following table shows the average lease
term, in-place rents, and estimated current market rents for similar space in each of our markets as of June 30, 2015:
|
|
|
Avg. |
|
Avg. In-Place(1) |
|
Avg. Market(2) |
|
Leasable Area |
|
Lease Term |
|
Net Rent |
|
Net Rent |
Region |
(000's Sq. Ft.) |
|
(Years) |
|
($ per Sq. Ft.) |
|
($ per Sq. Ft.) |
Toronto, Ontario |
8,434 |
|
|
6.6 |
|
|
29 |
|
|
32 |
|
Ottawa, Ontario |
1,730 |
|
|
8.2 |
|
|
21 |
|
|
18 |
|
Calgary, Alberta |
5,635 |
|
|
10.6 |
|
|
31 |
|
|
30 |
|
Vancouver, B.C. |
581 |
|
|
9.2 |
|
|
24 |
|
|
25 |
|
Other |
3 |
|
|
— |
|
|
— |
|
|
— |
|
Total |
16,383 |
|
|
8.3 |
|
|
29 |
|
|
30 |
|
| (1) | Average in-place net rent represents the annualized
cash amount on a per square foot basis collected from tenants plus tenant expense reimbursements less the operating expenses being
incurred for that space, excluding the impact of straight-lining rent escalations or amortizing free rent periods provided on
in-place leases. |
| (2) | Average market net rent represents management’s
estimate of average rent per square foot for buildings of similar quality to our portfolio. However, it may not necessarily be
representative of the specific space that is rolling in any specific year. |
A summary of current and historical occupancy
levels at June 30 for the past two years is as follows:
|
Jun. 30, 2015 |
|
Jun. 30, 2014 |
|
Leasable |
|
% |
|
Leasable |
|
% |
(000’s Sq. Ft., except % leased data) |
Area |
|
Leased |
|
Area |
|
Leased |
Toronto, Ontario |
8,434 |
|
|
93.4 |
|
|
8,747 |
|
|
91.7 |
|
Ottawa, Ontario |
1,730 |
|
|
95.3 |
|
|
1,743 |
|
|
93.6 |
|
Calgary, Alberta |
5,635 |
|
|
97.6 |
|
|
5,634 |
|
|
99.8 |
|
Vancouver, B.C. |
581 |
|
|
91.5 |
|
|
582 |
|
|
88.0 |
|
Other |
3 |
|
|
100.0 |
|
|
3 |
|
|
100.0 |
|
Total |
16,383 |
|
|
95.0 |
|
|
16,709 |
|
|
94.5 |
|
During the six months ended June 30, 2015,
we leased 1,215,000 square feet of space, which included 465,000 square feet of new leasing, and 750,000 square feet of renewals,
compared to expiries of 1,016,000 square feet and accelerated expiries of 294,000 square feet. The overall average leasing net
rent was $24 per square foot, compared to an average expiring net rent of $22 per square foot. At June 30, 2015, the average
leasing net rent related to new and renewed leases was $32 per square foot and $19 per square foot, respectively.
Leasing highlights from the second quarter
include:
| • | 562,000 square feet in Ottawa |
| - | An average nine-year, 544,000-square-foot renewal with Public Works and Government Services Canada
at Jean Edmonds Towers |
| • | 193,000 square feet in Toronto |
| - | A five-year, 42,000-square-foot renewal with TSX Inc. at Exchange Tower |
| - | A 10-year, 24,000-square-foot new lease with Willis Canada Inc. at First Canadian Place |
| • | 167,000 square feet in Calgary |
| - | An accelerated one-year, 136,000-square-foot lease extension with TransCanada Pipelines Ltd. at Fifth Avenue Place |
| - | A five-year, 26,000-square-foot renewal and expansion with PetroChina International at Suncor Energy Centre |
| • | 16,000 square feet in Vancouver |
| - | A 10-year, 13,000-square-foot new lease with Axim Georgia Inc. at Royal Centre |
The details of our leasing activity for
the six months ended June 30, 2015, are as follows:
|
|
|
Activities during the six months ended June 30, 2015 |
|
|
|
|
|
|
Average(2) |
|
|
|
|
Year One(3) |
|
Average(4) |
|
|
|
|
Dec. 31, 2014 |
|
|
|
Expiring |
|
Leasing |
|
Leasing |
|
Leasing |
|
Disposition/ |
Jun. 30, 2015 |
(000's Sq. Ft.) |
Leased(1) |
|
Expiries |
|
Net Rent |
|
New |
|
Renewal |
|
Net Rent |
|
Net Rent |
|
Other |
Leased |
Toronto, Ontario |
8,142 |
|
|
(395 |
) |
|
$ |
26 |
|
|
232 |
|
|
181 |
|
|
$ |
28 |
|
|
$ |
29 |
|
|
(285 |
) |
7,875 |
|
Ottawa, Ontario |
1,628 |
|
|
(563 |
) |
|
16 |
|
|
35 |
|
|
551 |
|
|
16 |
|
|
16 |
|
|
(2 |
) |
1,649 |
|
Calgary, Alberta |
5,603 |
|
|
(293 |
) |
|
28 |
|
|
182 |
|
|
8 |
|
|
36 |
|
|
36 |
|
|
— |
|
5,500 |
|
Vancouver, B.C. |
564 |
|
|
(59 |
) |
|
25 |
|
|
16 |
|
|
10 |
|
|
27 |
|
|
29 |
|
|
— |
|
531 |
|
Other |
3 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
3 |
|
Total Leasing |
15,940 |
|
|
(1,310 |
) |
|
$ |
22 |
|
|
465 |
|
|
750 |
|
|
23 |
|
|
24 |
|
|
(287 |
) |
15,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development |
1,676 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
1,676 |
|
| (1) | Restated for re-measurements |
| (2) | Represents net rent in the final year. |
| (3) | Year one leasing net rent is the rent at the commencement
of the lease term on a per square foot basis including tenant expense reimbursements, less operating expenses being incurred for
that space, but excluding the impact of straight-lining rent escalations or amortization of free rent periods. |
| (4) | Average leasing net rent is the average rent over the
lease term on a per square foot basis including tenant expense reimbursements, less operating expenses being incurred for that
space, but including the impact of straight-lining rent escalations or amortization of free rent periods. |
Additionally, during the six months ended
June 30, 2015, tenant improvements and leasing costs related to leasing activity that occurred averaged $2.89 per square foot,
of which $5.58 per square foot and $1.21 per square foot related to new and renewed leases, respectively, compared to $11.79 per
square foot during the same prior year period.
INVESTMENT AND OTHER INCOME
Investment and other income totaled $nil
during the three and six months ended June 30, 2015 (compared to $0.2 million and $1.0 million during the same periods in
2014). The prior year amounts primarily include interest earned on cash balances and cash settlements on legal matters.
INTEREST EXPENSE
Interest expense totaled $20.8 million
and $41.9 million during the three and six months ended June 30, 2015, respectively (compared to $23.3 million and $46.4 million
during the same periods in 2014). The decrease is due to the lower average costs of borrowing of 3.86%, compared to 4.22% during
the same period in 2014, coupled with an increase in capitalized imputed interest on our development properties, offset by higher
debt balances.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were
$6.0 million and $12.1 million during the three and six months ended June 30, 2015, respectively (compared to $5.1 million
and $12.2 million during the same periods in 2014). The decrease is primarily due to foreign exchange loss relating to legal fees
in 2014.
INCOME TAX EXPENSE
The Trust is a “mutual fund trust”
pursuant to the Income Tax Act (Canada). The Trust distributes or designates all taxable earnings to unitholders, and as
such, under current legislation, the obligation to pay tax rests with each unitholder. No current and deferred tax provisions are
required on the Trust’s income.
FAIR VALUE GAINS
During the three and six months ended June 30,
2015, the Trust recognized fair value gains of $47.2 million and $69.3 million, respectively (compared to $1.0 million and $3.9
million of fair value gains during the same periods in 2014). Fair value adjustments are determined based on the movement of various
parameters on a quarterly basis, including changes in projected cash flows as a result of leasing and timing, discount rates, and
terminal capitalization rates. Our investment property valuations have increased from December 31, 2014 due to improved tenant
profiles and higher rental rates and decreases in downtime as a result of new leases and renewals.
TOTAL EQUITY PER UNIT
Total equity per unit represents the book
value of our total equity divided by total units outstanding. We believe that total equity per unit is the best indicator of our
current financial position because it reflects our total equity adjusted for all inflows and outflows, including FFO and changes
in the value of our investment properties.
Brookfield Canada Office Properties | 21 |
NON-IFRS MEASURES
Although we monitor and analyze our financial
performance using a number of indicators, our primary business objective of generating reliable and growing cash flow is monitored
and analyzed using net income, commercial property net operating income, funds from operations, and adjusted funds from operations.
Although net income is calculated in accordance with IFRS, IFRS does not prescribe standardized meanings for commercial property
net operating income, funds from operations, and adjusted funds from operations; therefore, they are unlikely to be comparable
to similar measures presented by other entities.
Commercial property net operating income
Commercial property net operating income
is defined by us as income from commercial property operations after direct property operating expenses, including property administration
costs, have been deducted but prior to deducting interest expense, general and administrative expenses, and fair value gains (losses).
Commercial property net operating income is used as a key indicator of performance, as it represents a measure over which management
of our commercial property operations has control.
Funds from Operations
Our definition of funds from operations
or “FFO” includes all of the adjustments that are outlined in the National Association of Real Estate Investment Trusts
(“NAREIT”) definition of FFO including the exclusion of gains (or losses) from the sale of real estate property and
the add back of any depreciation and amortization related to real estate assets. In addition to the adjustments prescribed by NAREIT,
we also make adjustments to exclude any unrealized fair value gains (or losses) that arise as a result of reporting under IFRS.
These additional adjustments result in an FFO measure that would be similar to that which would result if the Trust determined
net income in accordance with U.S. GAAP and is also consistent with the Real Property Association of Canada (“REALPAC”)
white paper on funds from operations for IFRS issued November 2012. Our FFO measure will differ from other organizations applying
the NAREIT definition to the extent of certain differences between the IFRS and U.S. GAAP reporting frameworks, principally related
to the recognition of lease termination income and fair value gains (or losses), which does not have a significant impact on the
FFO measure reported.
Adjusted Funds from Operations
Adjusted funds from operations or “AFFO”
is defined by us as FFO net of actual second-generation leasing commissions and tenant improvements, actual maintaining value capital
expenditures, and straight-line rental income. AFFO is a widely used measure used to assess an entity’s ability to pay distributions.
COMMERCIAL PROPERTY NET OPERATING INCOME |
|
|
Commercial Property NOI by City |
for the period ending June 30, 2015 (in $millions) |
Commercial property net operating income
includes commercial property revenue less direct commercial property expense and is a key indicator of performance as it represents
a measure over which management of the commercial property operations has control. One of the ways in which we evaluate performance
is by comparing the performance of the commercial property portfolio on a same property basis. Same property commercial property
net operating income is defined as properties included in our consolidated results that we own and operate throughout both the
current and prior period. Accordingly, same property results would exclude properties acquired or sold during each period, as well
as significant lease termination and other income (charges) amounts that are non-recurring.
Our commercial property net operating income
for the three and six months ended June 30, 2015, was $63.2 million and $127.0 million, respectively (compared to $66.4 million
and $135.0 million during the same periods in 2014). The decrease is primarily due to realty tax recoveries at Bay Adelaide West
in the prior year, lower base rent and recoveries primarily related to expiries at Bankers Hall and Royal Centre; offset by one-time
non-cash write-offs related to early lease terminations and dissolutions in the prior year and higher base rent and recoveries
related to new deals at Bay Adelaide West and 105 Adelaide St. West.
The components of commercial property net
operating income are as follows:
|
Three months ended Jun. 30 |
|
Six months ended Jun. 30 |
(Millions) |
2015 |
|
2014 |
|
2015 |
|
2014 |
Commercial property revenue |
$ |
126.3 |
|
|
$ |
124.9 |
|
|
$ |
253.9 |
|
|
$ |
250.5 |
|
Direct commercial property expense |
63.1 |
|
|
58.5 |
|
|
126.9 |
|
|
115.5 |
|
Total |
$ |
63.2 |
|
|
$ |
66.4 |
|
|
$ |
127.0 |
|
|
$ |
135.0 |
|
Same commercial property operation highlights are as follows:
|
Three months ended Jun. 30 |
|
Six months ended Jun. 30 |
(Millions) |
2015 |
|
2014 |
|
2015 |
|
2014 |
Commercial property net operating income – same property |
$ |
63.1 |
|
|
$ |
64.4 |
|
|
$ |
127.2 |
|
|
$ |
130.7 |
|
Property sold during period (1) |
— |
|
|
0.4 |
|
|
0.1 |
|
|
0.8 |
|
Lease termination and other (charges) income |
0.1 |
|
|
1.6 |
|
|
(0.3 |
) |
|
3.5 |
|
Total |
$ |
63.2 |
|
|
$ |
66.4 |
|
|
$ |
127.0 |
|
|
$ |
135.0 |
|
(1)151 Yonge St. in Toronto
sold in Q1 2015.
RECONCILIATION OF COMMERCIAL PROPERTY
NET OPERATING INCOME TO NET INCOME
|
Three months ended Jun. 30 |
|
Six months ended Jun. 30 |
(Millions, except per unit amounts) |
2015 |
|
2014 |
|
2015 |
|
2014 |
Commercial property net operating income |
$ |
63.2 |
|
|
$ |
66.4 |
|
|
$ |
127.0 |
|
|
$ |
135.0 |
|
Add (deduct): |
|
|
|
|
|
|
|
Fair value gains |
47.2 |
|
|
1.0 |
|
|
69.3 |
|
|
3.9 |
|
General and administrative expense |
(6.0 |
) |
|
(5.1 |
) |
|
(12.1 |
) |
|
(12.2 |
) |
Interest expense |
(20.8 |
) |
|
(23.3 |
) |
|
(41.9 |
) |
|
(46.4 |
) |
Investment and other income |
— |
|
|
0.2 |
|
|
— |
|
|
1.0 |
|
Net income |
$ |
83.6 |
|
|
$ |
39.2 |
|
|
$ |
142.3 |
|
|
$ |
81.3 |
|
RECONCILIATION OF NET INCOME TO FUNDS
FROM OPERATIONS
Funds from operations was $0.39 and $0.79
per unit during the three and six months ended June 30, 2015, respectively (compared to $0.41 and $0.85 per unit during the
same periods in 2014).
|
Three months ended Jun. 30 |
|
Six months ended Jun. 30 |
(Millions, except per unit amounts) |
2015 |
|
2014 |
|
2015 |
|
2014 |
Net income |
$ |
83.6 |
|
|
$ |
39.2 |
|
|
$ |
142.3 |
|
|
$ |
81.3 |
|
Add (deduct): |
|
|
|
|
|
|
|
Fair value gains |
(47.2 |
) |
|
(1.0 |
) |
|
(69.3 |
) |
|
(3.9 |
) |
Amortization of lease incentives |
0.4 |
|
|
0.6 |
|
|
0.9 |
|
|
1.0 |
|
Foreign exchange losses |
— |
|
|
(0.2 |
) |
|
— |
|
|
1.1 |
|
Funds from operations |
$ |
36.8 |
|
|
$ |
38.6 |
|
|
$ |
73.9 |
|
|
$ |
79.5 |
|
Funds from operations attributable to unitholders |
10.3 |
|
|
10.8 |
|
|
20.7 |
|
|
22.3 |
|
Funds from operations attributable to non-controlling interest |
26.5 |
|
|
27.8 |
|
|
53.2 |
|
|
57.2 |
|
|
$ |
36.8 |
|
|
$ |
38.6 |
|
|
$ |
73.9 |
|
|
$ |
79.5 |
|
Weighted average Trust Units outstanding |
26.2 |
|
|
26.2 |
|
|
26.2 |
|
|
26.2 |
|
Funds from operations per Trust unit |
$ |
0.39 |
|
|
$ |
0.41 |
|
|
$ |
0.79 |
|
|
$ |
0.85 |
|
Brookfield Canada Office Properties | 23 |
RECONCILIATION OF FUNDS FROM OPERATIONS
TO ADJUSTED FUNDS FROM OPERATIONS
Adjusted funds from operations totaled
$0.23 and $0.54 per unit during the three and six months ended June 30, 2015, respectively (compared to $0.34 and $0.76 per
unit during the same periods in 2014).
|
Three months ended Jun. 30 |
|
Six months ended Jun. 30 |
(Millions, except per unit amounts) |
2015 |
|
2014 |
|
2015 |
|
2014 |
Funds from operations |
$ |
36.8 |
|
|
$ |
38.6 |
|
|
$ |
73.9 |
|
|
$ |
79.5 |
|
Deduct: |
|
|
|
|
|
|
|
Straight-line rental (income) expense |
(1.1 |
) |
|
(0.8 |
) |
|
(2.1 |
) |
|
1.8 |
|
Second-generation leasing commissions and tenant improvements |
(11.4 |
) |
|
(5.1 |
) |
|
(17.9 |
) |
|
(8.6 |
) |
Maintaining value capital expenditures |
(2.9 |
) |
|
(1.2 |
) |
|
(3.9 |
) |
|
(1.5 |
) |
Adjusted funds from operations |
$ |
21.4 |
|
|
$ |
31.5 |
|
|
$ |
50.0 |
|
|
$ |
71.2 |
|
Adjusted funds from operations attributable to unitholders |
6.0 |
|
|
8.8 |
|
|
14.0 |
|
|
19.9 |
|
Adjusted funds from operations attributable to non-controlling interest |
15.4 |
|
|
22.7 |
|
|
36.0 |
|
|
51.3 |
|
|
$ |
21.4 |
|
|
$ |
31.5 |
|
|
$ |
50.0 |
|
|
$ |
71.2 |
|
Weighted average Trust Units outstanding |
26.2 |
|
|
26.2 |
|
|
26.2 |
|
|
26.2 |
|
Adjusted funds from operations per Trust Unit |
$ |
0.23 |
|
|
$ |
0.34 |
|
|
$ |
0.54 |
|
|
$ |
0.76 |
|
Trust unit distribution declared |
$ |
0.31 |
|
|
$ |
0.30 |
|
|
$ |
0.62 |
|
|
$ |
0.59 |
|
Distribution ratio |
135% |
|
88% |
|
115% |
|
78% |
AFFO is calculated by adjusting FFO for
straight-line rental income, actual second-generation leasing commissions and tenant improvements, and actual maintaining value
capital expenditures for maintaining the infrastructure and current rental revenues of our properties. Actual expenditures will
vary from period to period and at times could be materially different depending on the timing of leasing activities and capital
plans. As a result, AFFO will experience volatility when comparing period-over-period results. Due to the volatile nature of AFFO,
we believe that it is important to compare the actual results with historic and projected averages of leasing costs and maintaining
value capital expenditures in order to determine the effects of a full office leasing cycle. Our 5-year historic average reflects
the actual leasing activities completed, while the 10-year average projections reflect our leasing expiry profile. We also believe
that these averages will provide insight to determining the normalized distribution payout ratio and growth in adjusted funds from
operations.
The historic and projected averages are
as follows:
|
|
Annual amount |
|
|
5-year |
|
|
10-year |
(Millions) |
historic coverage |
|
average plan |
Second generation |
|
|
|
|
|
Leasing commissions |
|
$ |
8.0 |
|
|
|
$ |
6.5 |
|
Tenant improvements |
|
16.0 |
|
|
|
16.3 |
|
Maintaining value capital expenditures |
|
5.6 |
|
|
|
7.9 |
|
There is no standard industry defined measure
of AFFO; therefore, our methodology of calculating AFFO will differ from other entities and may not be comparable to similar measures
presented by other entities.
RECONCILIATION OF CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
TO ADJUSTED FUNDS FROM OPERATIONS
|
Three months ended Jun. 30 |
|
Six months ended Jun. 30 |
(Millions) |
2015 |
|
2014 |
|
2015 |
|
2014 |
Cash flows provided by operating activities |
$ |
38.5 |
|
|
$ |
40.2 |
|
|
$ |
72.7 |
|
|
$ |
73.8 |
|
Add (deduct): |
|
|
|
|
|
|
|
Working capital and other |
(3.5 |
) |
|
(3.8 |
) |
|
(3.2 |
) |
|
4.8 |
|
Leasing commissions and tenant inducements |
1.4 |
|
|
2.4 |
|
|
3.8 |
|
|
3.2 |
|
Foreign exchange losses |
— |
|
|
(0.2 |
) |
|
— |
|
|
1.1 |
|
Amortization of deferred financing costs |
(0.7 |
) |
|
(0.8 |
) |
|
(1.5 |
) |
|
(1.6 |
) |
Second-generation leasing commissions and tenant improvements |
(11.4 |
) |
|
(5.1 |
) |
|
(17.9 |
) |
|
(8.6 |
) |
Maintaining value capital expenditures |
(2.9 |
) |
|
(1.2 |
) |
|
(3.9 |
) |
|
(1.5 |
) |
Adjusted funds from operations |
$ |
21.4 |
|
|
$ |
31.5 |
|
|
$ |
50.0 |
|
|
$ |
71.2 |
|
QUARTERLY RESULTS
The results by quarter are as follows:
|
|
2015 |
|
2014 |
|
2013 |
(Millions, except per unit amounts) |
|
Q2 |
|
Q1 |
|
Q4 |
|
Q3 |
|
Q2 |
|
Q1 |
|
Q4 |
|
Q3 |
Revenue |
|
$ |
126.3 |
|
|
127.6 |
|
|
$ |
134.8 |
|
|
$ |
131.9 |
|
|
$ |
124.9 |
|
|
$ |
125.6 |
|
|
$ |
132.7 |
|
|
$ |
130.0 |
|
Commercial property net operating income |
|
63.2 |
|
|
63.8 |
|
|
67.9 |
|
|
66.4 |
|
|
66.4 |
|
|
68.6 |
|
|
67.2 |
|
|
67.5 |
|
Interest expense |
|
20.8 |
|
|
21.1 |
|
|
22.0 |
|
|
23.5 |
|
|
23.3 |
|
|
23.1 |
|
|
23.3 |
|
|
30.5 |
|
Funds from operations |
|
36.8 |
|
|
37.1 |
|
|
40.6 |
|
|
38.1 |
|
|
38.6 |
|
|
40.9 |
|
|
37.8 |
|
|
33.3 |
|
Adjusted funds from operations (1) |
|
21.4 |
|
|
28.6 |
|
|
21.7 |
|
|
28.6 |
|
|
31.5 |
|
|
39.7 |
|
|
22.4 |
|
|
25.8 |
|
Net income |
|
83.6 |
|
|
58.7 |
|
|
25.8 |
|
|
9.0 |
|
|
39.2 |
|
|
42.1 |
|
|
50.5 |
|
|
32.6 |
|
Net income per Trust unit |
|
$ |
0.90 |
|
|
0.63 |
|
|
$ |
0.28 |
|
|
$ |
0.10 |
|
|
$ |
0.42 |
|
|
$ |
0.44 |
|
|
$ |
0.54 |
|
|
$ |
0.35 |
|
| (1) | 2015, 2014 and Q4 2013 amounts reflect actual leasing
commissions, tenant improvements and maintaining value capital expenditures incurred. Q3 2013 amounts were calculated based on
historical spend levels as well as projected spend levels over the next 10 years as described on page 24. |
Brookfield Canada Office Properties | 25 |
PART III – RISKS AND UNCERTAINTIES
BOX’s financial results are affected
by the performance of our operations and various external factors influencing the specific sectors and geographic locations in
which we operate, as well as macroeconomic factors such as economic growth, inflation, interest rates, regulatory requirements
and initiatives, and litigation and claims that arise in the normal course of business.
Our strategy is to invest in premier assets
that generate sustainable streams of cash flow. Although high-quality assets may initially generate lower returns on capital, we
believe that the sustainability and future growth of their cash flows is more assured over the long term and, as a result, warrant
higher valuation levels. We also believe that the high quality of our asset base protects the Trust against future uncertainty
and enables us to invest with confidence when opportunities arise.
The following is a review of the material
factors and the potential impact these factors may have on our business operations. A more detailed description of our business
environment and risks is contained in our Annual Information Form, which is posted on our web site at www.brookfieldcanadareit.com
or at www.sedar.com or www.sec.gov.
PROPERTY-RELATED RISKS
Our strategy is to invest in high-quality
office properties as defined by the physical characteristics of the asset and, more important, the certainty of receiving rental
payments from large corporate tenants (with investment-grade credit ratings – see “Credit Risk” on page 27) that
these properties attract. Nonetheless, we remain exposed to certain risks inherent in the core office-property business.
Commercial property investments are generally
subject to varying degrees of risk depending on the nature of the property. These risks include changes in general economic conditions
(such as the availability and costs of mortgage funds), local conditions (such as an oversupply of space or a reduction in demand
for real estate in the markets in which we operate), the attractiveness of the properties to tenants, competition from other landlords
with competitive space, and our ability to provide adequate maintenance at an economical cost.
Certain significant expenditures, including
property taxes, maintenance costs, mortgage payments, insurance costs, and related charges, must be made regardless of whether
a property is producing sufficient income to service these expenses. Our office properties are subject to mortgages that require
substantial debt service payments. If we become unable or unwilling to meet mortgage payments on any property, losses could be
sustained as a result of the mortgagee’s exercise of its rights of foreclosure or of sale. We believe the stability and long-term
nature of our contractual revenues effectively mitigates these risks.
As owners of premier office properties,
lease rollovers also present a risk, as continued growth of rental income is dependent on strong leasing markets to ensure expiring
leases are renewed and new tenants are found promptly to fill vacancies. Refer to “Lease Rollover Risk” on page 27
of this MD&A for further details.
INTEREST RATE AND FINANCING RISK
We attempt to stagger the maturities of
our mortgage portfolio evenly over a 10-year time horizon. We believe that this strategy will most effectively manage interest
rate risk.
As outlined under “Capital Resources
and Liquidity,” beginning on page 17 of this MD&A, we have an ongoing need to access debt markets to refinance maturing
debt as it comes due. There is a risk that lenders will not refinance such maturing debt on terms and conditions acceptable to
us or on any terms at all. Our strategy to stagger the maturities of our mortgage portfolio attempts to mitigate our exposure to
excessive amounts of debt maturing in any one year.
Approximately 24.2% of our outstanding
investment property and corporate debt at June 30, 2015 is floating-rate debt (December 31, 2014 – 13.1%) and subject
to fluctuations in interest rates. The effect of a 100-basis point increase in interest rates on interest expense relating to our
floating-rate debt, all else being equal, is an increase in interest expense of $6.7 million on an annual basis or $0.07 per unit.
In addition, there is interest rate risk associated with the Trust’s fixed rate debt due to the expected requirement to refinance
such debt in the year of maturity. The effect of a 100 basis-point increase in interest rates on interest expense relating to fixed
rate debt maturing within one year, all else being equal, is an increase in interest expense of $nil on an annual basis.
The analysis does not reflect the impact
a changing interest rate environment could have on our overall performance and, as a result, it does not reflect the actions management
may take in such an environment.
We currently have a level of indebtedness
for the Trust of 45.6% of the fair market value of our commercial and development properties. This level of indebtedness is considered
by the Trust to be conservative and, based on this, the Trust believes that all debts will be financed or refinanced as they come
due in the foreseeable future.
CREDIT RISK
Credit risk arises from the possibility
that tenants may be unable to fulfill their lease commitments. We mitigate this risk by ensuring that our tenant mix is diversified
and by limiting our exposure to any one tenant. We also maintain a portfolio that is diversified by industry type so that exposure
to a business sector is lessened. Currently, no single tenant represents more than 11.3% of total leasable area and 7.1% of commercial
property revenue.
We attempt to mitigate our credit risk
by signing long-term leases with tenants who have investment-grade credit ratings. The Trust directs special attention to the credit
quality of our tenants in order to ensure the long-term sustainability of rental revenues through economic cycles. Once a lease
has been signed, the Trust proactively monitors the financial performance of significant tenants on a regular basis and reviews
the status of arrears. The Trust regularly monitors indicators of increased risk within its tenant portfolio and maintains a formalized
tenant credit report to identify natural changes in credit quality.
The following list shows our top 20 largest
tenants by leasable area in our commercial properties portfolio and their respective lease commitments:
|
|
|
|
000’s Sq. Ft.(2) |
|
|
|
|
Tenant |
Primary Location |
Credit
Rating(1) |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2015 |
Year of
Expiry(2) |
Total |
% of
Sq. Ft.(3) |
1 |
Government and Related
Agencies |
Toronto, Ottawa |
AAA |
|
39 |
|
|
264 |
|
89 |
|
|
1,465 |
|
2023/2029 |
1,857 |
|
11.3 |
% |
2 |
Suncor Energy Inc. |
Calgary |
A- |
|
|
|
|
|
|
1,332 |
|
2028 |
1,332 |
|
8.1 |
% |
3 |
Bank of Montreal |
Toronto, Calgary |
A+ |
|
27 |
|
|
27 |
|
|
|
1,076 |
|
2023/2024 |
1,130 |
|
6.9 |
% |
4 |
Imperial Oil |
Calgary |
AAA |
136 |
|
514 |
|
|
|
|
|
|
|
650 |
|
4.0 |
% |
5 |
Canadian Natural Resources |
Calgary |
BBB+ |
|
|
|
|
|
|
531 |
|
2026 |
531 |
|
3.3 |
% |
6 |
Royal Bank |
Toronto, Calgary,
Vancouver |
AA- |
|
12 |
|
52 |
|
1 |
|
17 |
|
3 |
|
364 |
|
Various |
449 |
|
2.8 |
% |
7 |
Talisman Energy |
Calgary |
BBB- |
|
|
|
|
|
|
446 |
|
2025 |
446 |
|
2.7 |
% |
8 |
Enbridge Inc. |
Calgary |
BBB+ |
|
|
|
|
|
|
378 |
|
2028 |
378 |
|
2.3 |
% |
9 |
Deloitte LLP |
Toronto, Calgary |
Not Rated |
122 |
|
49 |
|
|
|
|
|
153 |
|
2022/2026 |
324 |
|
2.0 |
% |
10 |
Bennett Jones |
Toronto, Calgary |
Not Rated |
|
|
|
|
|
|
319 |
|
2021/2027 |
319 |
|
2.0 |
% |
11 |
KPMG Management Services
LP |
Toronto |
Not Rated |
|
|
|
|
|
|
297 |
|
2025 |
297 |
|
1.8 |
% |
12 |
CIBC |
Toronto, Calgary |
A+ |
|
|
|
|
|
160 |
|
127 |
|
2053 |
287 |
|
1.8 |
% |
13 |
Osler, Hoskin &
Harcourt |
Toronto |
Not Rated |
|
|
|
|
|
|
199 |
|
2030 |
199 |
|
1.2 |
% |
14 |
Toronto Stock Exchange |
Toronto |
Not Rated |
|
|
|
143 |
|
|
|
42 |
|
2023 |
185 |
|
1.1 |
% |
15 |
Goodmans LLP |
Toronto |
Not Rated |
|
|
|
|
|
|
182 |
|
2026 |
182 |
|
1.1 |
% |
16 |
The Bay |
Toronto |
B+ |
|
|
|
|
164 |
|
15 |
|
|
|
179 |
|
1.1 |
% |
17 |
Gowlings Canada Inc. |
Toronto |
Not Rated |
|
|
|
|
|
170 |
|
|
|
170 |
|
1.0 |
% |
18 |
The Manufacturers
Life Insurance |
Toronto |
AA- |
|
|
|
|
|
|
169 |
|
2022 |
169 |
|
1.0 |
% |
19 |
McMillan LLP |
Toronto, Vancouver |
Not Rated |
1 |
|
|
|
|
109 |
|
|
56 |
|
2022 |
166 |
|
1.0 |
% |
20 |
Fasken
Marteneau DuMoulin LLP |
Toronto |
Not Rated |
|
|
|
|
|
|
165 |
|
2030 |
165 |
|
1.0 |
% |
|
Total |
|
|
259 |
|
641 |
|
52 |
|
435 |
|
379 |
|
348 |
|
7,301 |
|
|
9,415 |
|
57.5 |
% |
|
Total
% |
|
|
2.8 |
% |
6.8 |
% |
0.6 |
% |
4.6 |
% |
4.0 |
% |
3.7 |
% |
77.5 |
% |
|
100.0 |
% |
|
| (2) | Reflects the year of maturity related to lease(s) included
in the ‘Beyond’ column. |
| (3) | Percentage of total leasable area of commercial properties,
prior to considering partnership interests in partially owned properties; excludes parking. |
LEASE ROLLOVER RISK
Lease roll-over risk arises from the possibility
that we may experience difficulty renewing leases as they expire or in re-leasing space vacated by tenants upon early lease expiry.
We attempt to stagger our lease-expiry profile so that we are not faced with disproportionate amounts of space expiring in any
one year. Approximately 4.4% of our leases mature annually up to and including 2019. Our portfolio has a weighted-average lease
life of eight years. We further mitigate this risk by maintaining a diversified portfolio mix by geographic location and by proactively
leasing space in advance of its contractual expiry.
The following table sets out lease expiries, by square footage,
for our portfolio at June 30, 2015.
(000’s
Sq. Ft.) |
Currently
Available |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
2022
& Beyond |
Leasable |
Parking |
Total |
Toronto,
Ontario |
559 |
|
188 |
|
318 |
|
493 |
|
577 |
|
707 |
|
1,167 |
|
525 |
|
3,900 |
|
8,434 |
|
1,743 |
|
10,177 |
|
Ottawa,
Ontario |
81 |
|
2 |
|
50 |
|
6 |
|
3 |
|
86 |
|
9 |
|
566 |
|
927 |
|
1,730 |
|
802 |
|
2,532 |
|
Calgary,
Alberta |
135 |
|
24 |
|
360 |
|
63 |
|
142 |
|
79 |
|
271 |
|
105 |
|
4,456 |
|
5,635 |
|
1,194 |
|
6,829 |
|
Vancouver,
B.C. |
50 |
|
3 |
|
45 |
|
13 |
|
30 |
|
41 |
|
65 |
|
25 |
|
309 |
|
581 |
|
260 |
|
841 |
|
Other |
— |
|
— |
|
— |
|
— |
|
— |
|
1 |
|
— |
|
— |
|
2 |
|
3 |
|
— |
|
3 |
|
Total |
825 |
|
217 |
|
773 |
|
575 |
|
752 |
|
914 |
|
1,512 |
|
1,221 |
|
9,594 |
|
16,383 |
|
3,999 |
|
20,382 |
|
%
of total |
5.0 |
% |
1.3 |
% |
4.7 |
% |
3.5 |
% |
4.6 |
% |
5.6 |
% |
9.2 |
% |
7.5 |
% |
58.6 |
% |
100.0 |
% |
— |
% |
100.0 |
% |
Brookfield Canada Office Properties | 27 |
ENVIRONMENTAL RISKS
As an owner of real property, we are subject
to various laws relating to environmental matters. These laws could hold us liable for the costs of removal and remediation of
certain hazardous substances or waste present in our buildings, released or deposited on or in our properties or disposed of at
other locations. These costs could be significant and would reduce cash available for our business. The failure to remove or remediate
such substances could adversely affect our ability to sell or our ability to borrow using such real estate as collateral and could
potentially result in claims against us. We are not aware of any material non-compliance with environmental laws at any of our
properties nor are we aware of any pending or threatened investigations or actions by environmental regulatory authorities in connection
with any of our properties or any pending or threatened claims relating to environmental conditions at our properties.
We will continue to make the necessary
capital and operating expenditures to ensure that we are compliant with environmental laws and regulations. Although there can
be no assurances, we do not believe that costs relating to environmental matters will have a material effect on our business, financial
condition or results of operations. However, environmental laws and regulations can change rapidly and we may become subject to
more stringent environmental laws and regulations in the future. Compliance with more stringent environmental laws and regulations
could have an adverse effect on our business, financial condition, or results of operations.
OTHER RISKS AND UNCERTAINTIES
Real estate is relatively illiquid. Such
illiquidity may limit our ability to vary our portfolio promptly in response to changing economic or investment conditions. Also,
financial difficulties of other property owners resulting in distressed sales could depress real estate values in the markets in
which we operate.
Our investment properties generate a relatively
stable source of income from contractual tenant rent payments. Continued growth of rental income is dependent on strong leasing
markets to ensure expiring leases are renewed and new tenants are found promptly to fill vacancies at attractive rental rates.
With leasing markets performance being impacted by the strength of the economies in which we operate, it is possible we could see
downward pressure on overall occupancy levels and net effective rents if economic recovery slows or stalls. We are, however, substantially
protected against short-term market conditions, as most of our leases are long-term in nature with an average term of eight years.
INSURANCE RISKS
We maintain insurance on our commercial
properties in amounts and with deductibles that we believe are in line with what owners of similar properties carry. We maintain
all risk property insurance and rental value coverage (including coverage for the perils of flood, earthquake and windstorm). Our
all risk policy limit is $1.5 billion per occurrence. Our earthquake limit is $500 million per occurrence and in the annual aggregate.
This coverage is subject to a $100,000 (dollars) deductible for all locations except for British Columbia where the deductible
is 3% of the values for all locations where the physical loss, damage or destruction occurred. The flood limit is $500 million
per occurrence and in the annual aggregate, and is subject to a deductible of $25,000 (dollars) for all losses arising from the
same occurrence. Windstorm is included under the all risk coverage limit of $1.5 billion.
With respect to our commercial properties, we purchase an insurance
policy that covers acts of terrorism for limits up to $1.5 billion.
PART IV – CRITICAL ACCOUNTING
POLICIES AND ESTIMATES
CRITICAL ACCOUNTING POLICIES
The financial statements have been prepared
using the same accounting policies and methods as those used in the consolidated financial statements for the year ended December 31,
2014.
FUTURE ACCOUNTING POLICY CHANGES
The following are the accounting policies
that the Trust expects to adopt in the future:
Financial Instruments
On July 25, 2014, the IASB issued its final
version of IFRS 9, “Financial Instruments”. IFRS 9, as amended, introduces a logical approach for the classification
of financial assets, which is driven by cash flow characteristics and the business model in which an asset is held. This single,
principle-based approach replaces existing rule-based requirements that are generally considered to be overly complex and difficult
to apply. The new model results in a single impairment model being applied to all financial instruments, thereby removing a source
of complexity associated with previous accounting requirements. It also introduces a new, expected-loss impairment model that will
require more timely recognition of expected credit losses. IFRS 9 is effective for annual periods beginning on or after January
1, 2018 and should be applied retrospectively. The Trust is currently evaluating the impact to the condensed consolidated interim
financial statements.
Joint Arrangements
In May 2014, the IASB issued Amendments
to IFRS 11, “Joint Arrangements: Accounting for Acquisitions of Interests in Joint Operations”. The objective
of the amendments is to add new guidance to IFRS 11 on accounting for the acquisition of an interest in a joint operation in which
the activity of the joint operation constitutes a business, as defined in IFRS 3, “Business Combinations”. Acquirers
of such interests are to apply the relevant principles on business combination accounting in IFRS 3 and other standards, as well
as disclosing the relevant information specified in these standards for business combinations. This amendment to IFRS 11 is effective
for annual periods beginning on or after January 1, 2016 and should be applied prospectively. The Trust is currently evaluating
the impact to the condensed consolidated interim financial statements.
Revenue from Contracts with Customers
In May 2014, the IASB issued its new revenue
standard, IFRS 15, “Revenue from Contracts with Customers”. IFRS 15 specifies how and when revenue should be recognized
as well as requiring more informative and relevant disclosures. IFRS 15 supersedes IAS 18, “Revenue Recognition”, IAS
11, “Construction Contracts” and a number of revenue-related interpretations. Application of the standard is mandatory
and it applies to nearly all contracts with customers: the main exceptions are leases, financial instruments and insurance contracts.
IFRS 15 is effective for annual periods on or after January 1, 2017 and should be applied retrospectively. The Trust is currently
evaluating the impact to the condensed consolidated interim financial statements.
USE OF ESTIMATES
The preparation of our condensed consolidated
interim financial statements requires management to make judgments, estimates, and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated interim financial
statements, and the reported amounts of revenues and expenses during the reporting period. Our estimates are based on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of our ongoing
evaluation of these estimates forms the basis for making judgments about the carrying values of assets and liabilities and the
reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions.
RELATED-PARTY TRANSACTIONS
In the normal course of operations, the
Trust enters into various transactions on market terms with related parties that have been measured at exchange value and are recognized
in the condensed consolidated interim financial statements.
The Trust has entered into two service-support
agreements with BOPM LP, dated May 1, 2010, for the provision of property management, leasing, construction, and asset management
services. The purpose of the agreements is to provide the services of certain personnel and consultants as are necessary to help
the Trust operate and manage its assets and tenant base; it also includes a cost-recovery for administrative and regulatory compliance
services provided. The fees paid to BOPM LP are calculated in accordance with the terms of the agreements. Included in direct commercial
property expense during the three and six months ended June 30, 2015, are amounts paid to BOPM LP for property management
services of $3.4 million and $6.8 million, respectively (compared to $3.4 million and $6.9 million during the same periods in 2014).
Included in investment properties during the three and six months ended June 30, 2015, are amounts paid to BOPM LP for leasing
and construction services of $2.1 million and $3.8 million, respectively (compared to $0.3 million and $0.6 million during the
same periods in 2014). Included in general and administrative expenses during the three and six months ended June 30, 2015,
are amounts paid to BOPM LP for asset management and administrative and regulatory compliance services of $4.9 million and $10.0
million, respectively (compared to $4.5 million and $9.4 million during the same periods in 2014).
Brookfield Canada Office Properties | 29 |
Included in rental revenues during the
three and six months ended June 30, 2015, are amounts received from Brookfield Asset Management Inc., the ultimate parent
of BPO, and its affiliates of $2.4 million and $4.5 million, respectively (compared to $1.6 million and $3.3 million during the
same periods in 2014). Included in commercial developments during the three and six months ended June 30, 2015, are amounts
paid to a subsidiary of Brookfield Asset Management Inc. of $18.1 million and $52.0 million, respectively (compared to $43.0 million
and $71.3 million during the same periods in 2014) pursuant to a contract to construct Bay Adelaide East.
Condensed Consolidated Interim
Balance Sheet
(Unaudited) |
|
|
|
|
|
|
(Millions) (CDN$) |
|
Note |
Jun 30, 2015 |
Dec 31, 2014 |
Assets |
|
|
|
|
|
|
Non-current assets |
|
|
|
|
|
|
Investment properties |
|
|
|
|
|
|
Commercial properties |
|
4 |
|
|
$ |
5,229.4 |
|
|
$ |
5,131.7 |
|
Commercial developments |
|
4 |
|
|
812.5 |
|
|
670.7 |
|
|
|
|
|
6,041.9 |
|
|
5,802.4 |
|
Current assets |
|
|
|
|
|
|
Tenant and other receivables |
|
5 |
|
|
20.2 |
|
|
34.3 |
|
Other assets |
|
6 |
|
|
11.9 |
|
|
8.9 |
|
Cash and cash equivalents |
|
7 |
|
|
59.2 |
|
|
58.9 |
|
|
|
|
|
91.3 |
|
|
102.1 |
|
Assets held for sale |
|
8 |
|
— |
|
|
38.9 |
|
Total assets |
|
|
|
$ |
6,133.2 |
|
|
$ |
5,943.4 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
|
|
Investment property and corporate debt |
|
9 |
|
|
$ |
2,476.4 |
|
|
$ |
2,368.4 |
|
Current liabilities |
|
|
|
|
|
|
Investment property and corporate debt |
|
9 |
|
|
278.7 |
|
|
281.3 |
|
Accounts payable and other liabilities |
|
10 |
|
|
196.4 |
|
|
196.9 |
|
|
|
|
|
475.1 |
|
|
478.2 |
|
Liabilities associated with assets held for sale |
|
8 |
|
— |
|
|
0.5 |
|
Total liabilities |
|
|
|
2,951.5 |
|
|
2,847.1 |
|
|
|
|
|
|
|
|
Equity |
|
12 |
|
|
|
|
|
Unitholders’ equity |
|
|
|
881.2 |
|
|
856.7 |
|
Non-controlling interest |
|
|
|
2,300.5 |
|
|
2,239.6 |
|
Total equity |
|
|
|
3,181.7 |
|
|
3,096.3 |
|
Total liabilities and equity |
|
|
|
$ |
6,133.2 |
|
|
$ |
5,943.4 |
|
See accompanying notes to the condensed consolidated interim
financial statements.
Condensed Consolidated Interim
Statement of Income and Comprehensive Income
(Unaudited) |
|
|
Three months ended Jun. 30 |
|
Six months ended Jun. 30 |
(Millions, except per unit amounts) (CDN$) |
Note |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
Commercial property revenue |
13 (a) |
|
$ |
126.3 |
|
|
$ |
124.9 |
|
|
$ |
253.9 |
|
|
$ |
250.5 |
|
Direct commercial property expense |
13 (b) |
|
63.1 |
|
|
58.5 |
|
|
126.9 |
|
|
115.5 |
|
Investment and other income |
13 (c) |
|
— |
|
|
0.2 |
|
|
— |
|
|
1.0 |
|
Interest expense |
13 (b) |
|
20.8 |
|
|
23.3 |
|
|
41.9 |
|
|
46.4 |
|
General and administrative expense |
13 (b), 16 |
|
6.0 |
|
|
5.1 |
|
|
12.1 |
|
|
12.2 |
|
Income before fair value gains |
|
|
36.4 |
|
|
38.2 |
|
|
73.0 |
|
|
77.4 |
|
Fair value gains |
4, 8 |
|
47.2 |
|
|
1.0 |
|
|
69.3 |
|
|
3.9 |
|
Net income and comprehensive income |
|
|
$ |
83.6 |
|
|
$ |
39.2 |
|
|
$ |
142.3 |
|
|
$ |
81.3 |
|
|
|
|
|
|
|
|
|
|
|
Net income and comprehensive income attributable to: |
|
|
|
|
|
|
|
|
|
Unitholders |
|
|
$ |
23.4 |
|
|
$ |
11.0 |
|
|
$ |
39.8 |
|
|
$ |
22.8 |
|
Non-controlling interest |
|
|
60.2 |
|
|
28.2 |
|
|
102.5 |
|
|
58.5 |
|
|
|
|
$ |
83.6 |
|
|
$ |
39.2 |
|
|
$ |
142.3 |
|
|
$ |
81.3 |
|
Net income per Trust unit – basic and diluted |
|
|
$ |
0.90 |
|
|
$ |
0.42 |
|
|
$ |
1.53 |
|
|
$ |
0.87 |
|
See accompanying notes to the condensed consolidated interim
financial statements.
Brookfield Canada Office Properties | 31 |
Condensed Consolidated Interim
Statement of Changes in Equity
(Unaudited) |
|
|
Six months ended Jun. 30 |
(Millions) (CDN$) |
Note |
|
2015 |
|
2014 |
Trust Units |
|
|
|
|
|
Balance at beginning of period |
|
|
$ |
553.4 |
|
|
$ |
552.1 |
|
Issuance of Trust Units under Distribution Reinvestment Plan (“DRIP”) |
11 |
|
|
0.8 |
|
|
0.6 |
|
Balance at end of period |
|
|
554.2 |
|
|
552.7 |
|
Contributed surplus |
|
|
|
|
|
Balance at beginning and end of period |
|
|
3.1 |
|
|
3.1 |
|
Retained earnings |
|
|
|
|
|
Balance at beginning of period |
|
|
300.2 |
|
|
299.5 |
|
Net income |
|
|
39.8 |
|
|
22.8 |
|
Distributions |
11 |
|
|
(16.1 |
) |
|
(15.7 |
) |
Balance at end of period |
|
|
323.9 |
|
|
306.6 |
|
Total unitholders’ equity |
|
|
$ |
881.2 |
|
|
$ |
862.4 |
|
|
|
|
|
|
|
Non-controlling interest |
|
|
|
|
|
Balance at beginning of period |
|
|
$ |
2,239.6 |
|
|
$ |
2,237.6 |
|
Net income |
|
|
102.5 |
|
|
58.5 |
|
Distributions |
11 |
|
|
(41.6 |
) |
|
(40.0 |
) |
Balance at end of period |
|
|
2,300.5 |
|
|
2,256.1 |
|
Total equity |
|
|
$ |
3,181.7 |
|
|
$ |
3,118.5 |
|
See accompanying notes to the condensed consolidated interim
financial statements.
Condensed
Consolidated Interim Statement of Cash Flows
(Unaudited) |
|
|
Six months ended Jun. 30 |
(Millions) (CDN$) |
Note |
|
2015 |
|
2014 |
Operating activities |
|
|
|
|
|
Net income |
|
|
$ |
142.3 |
|
|
$ |
81.3 |
|
Add (deduct): |
|
|
|
|
|
Non-cash rental (revenue) expense |
13 (a) |
|
(1.2 |
) |
|
2.8 |
|
Amortization of deferred financing costs |
|
|
1.5 |
|
|
1.6 |
|
Leasing commissions and tenant inducements |
|
|
(3.8 |
) |
|
(3.2 |
) |
Fair value gains |
4, 8 |
|
(69.3 |
) |
|
(3.9 |
) |
Interest expense |
|
|
41.9 |
|
|
46.4 |
|
Interest paid |
|
|
(54.2 |
) |
|
(50.7 |
) |
Other working capital |
|
|
15.5 |
|
|
(0.5 |
) |
Cash flows provided by operating activities |
|
|
72.7 |
|
|
73.8 |
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
Disposition of commercial property |
8 |
|
38.4 |
|
|
— |
|
Capital expenditures – commercial properties |
|
|
(26.5 |
) |
|
(17.5 |
) |
Capital expenditures – commercial developments |
|
|
(131.2 |
) |
|
(72.7 |
) |
Cash flows used in investing activities |
|
|
(119.3 |
) |
|
(90.2 |
) |
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
Investment property debt arranged |
|
|
129.9 |
|
|
— |
|
Investment property debt amortization |
|
|
(26.1 |
) |
|
(25.3 |
) |
Corporate debt arranged |
|
|
45.0 |
|
|
— |
|
Corporate debt repayments |
|
|
(45.0 |
) |
|
— |
|
Trust unit distributions paid |
17 |
|
|
(15.3 |
) |
|
(15.0 |
) |
Class B LP unit distributions paid |
17 |
|
|
(41.6 |
) |
|
(39.6 |
) |
Cash flows provided by (used in) financing activities |
|
|
46.9 |
|
|
(79.9 |
) |
Increase (decrease) in cash and cash equivalents |
|
|
0.3 |
|
|
(96.3 |
) |
Cash and cash equivalents, beginning of period |
|
|
58.9 |
|
|
194.8 |
|
Cash and cash equivalents, end of period |
|
|
$ |
59.2 |
|
|
$ |
98.5 |
|
See accompanying notes to the condensed consolidated interim
financial statements.
Brookfield Canada Office Properties | 33 |
Notes to the Condensed Consolidated
Interim Financial Statements
NOTE 1: NATURE AND DESCRIPTION OF THE
TRUST
Brookfield Canada Office Properties (the
“Trust” or “BOX”) is an unincorporated, closed-end real estate investment trust (“REIT”) established
under and governed by the laws of the Province of Ontario, Canada and created pursuant to a declaration of trust dated March 19,
2010 and amended and restated February 24, 2012. Although it is intended that BOX qualifies as a “mutual fund trust”
pursuant to the Income Tax Act (Canada), BOX is not a mutual fund under applicable securities laws.
The Trust is a subsidiary of Brookfield
Office Properties Inc. (“BPO”), which owns an aggregate equity interest in the Trust of 62.0% as of June 30, 2015
consisting of 86.3% of the issued and outstanding Class B limited partnership units (“Class B LP Units”) of Brookfield
Office Properties Canada LP (“BOPC LP”), a subsidiary of BOX that owns direct interests in the Trust’s investment
properties. In addition, BPO’s parent company, Brookfield Property Partners LP (“BPY”), directly owns an aggregate
equity interest in the Trust of 21.2% consisting of 40.3% of the issued and outstanding units of BOX (“Trust Units”)
and 13.7% of the Class B LP Units. BOX primarily invests in and operates commercial office properties in Toronto, Ottawa, Calgary,
and Vancouver. The registered and operating office of the Trust is Brookfield Place Toronto, 181 Bay Street, Suite 330, Toronto,
Ontario, M5J 2T3.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated interim financial
statements have been prepared in accordance with International Accounting Standard (“IAS”) 34, “Interim Financial
Reporting”, as issued by the International Accounting Standards Board (“IASB”). Accordingly, certain information
and footnote disclosure normally included in annual financial statements prepared in accordance with International Financial Reporting
Standards (“IFRS”), as issued by the IASB, have been omitted or condensed.
The financial statements have been prepared
using the same accounting policies and methods as those used in the consolidated financial statements for the year ended December 31,
2014. The financial statements have been presented in Canadian dollars rounded to the nearest million unless otherwise indicated.
These interim financial statements should be read in conjunction with the Trust’s consolidated financial statements for the
year ended December 31, 2014.
The preparation of the financial statements in accordance with
IAS 34 requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying
the Trust’s accounting policies. The critical accounting estimates and judgments have been set out in Note 2 to the Trust’s
consolidated financial statements for the year ended December 31, 2014.
NOTE 3: FUTURE ACCOUNTING POLICY CHANGES
On July 25, 2014, the IASB issued its final
version of IFRS 9, “Financial Instruments”. IFRS 9, as amended, introduces a logical approach for the classification
of financial assets, which is driven by cash flow characteristics and the business model in which an asset is held. This single,
principle-based approach replaces existing rule-based requirements that are generally considered to be overly complex and difficult
to apply. The new model results in a single impairment model being applied to all financial instruments, thereby removing a source
of complexity associated with previous accounting requirements. It also introduces a new, expected-loss impairment model that will
require more timely recognition of expected credit losses. IFRS 9 is effective for annual periods beginning on or after January
1, 2018 and should be applied retrospectively. The Trust is currently evaluating the impact to the condensed consolidated interim
financial statements.
In May 2014, the IASB issued Amendments
to IFRS 11, “Joint Arrangements: Accounting for Acquisitions of Interests in Joint Operations”. The objective
of the amendments is to add new guidance to IFRS 11 on accounting for the acquisition of an interest in a joint operation in which
the activity of the joint operation constitutes a business, as defined in IFRS 3, “Business Combinations”. Acquirers
of such interests are to apply the relevant principles on business combination accounting in IFRS 3 and other standards, as well
as disclosing the relevant information specified in these standards for business combinations. This amendment to IFRS 11 is effective
for annual periods beginning on or after January 1, 2016 and should be applied prospectively. The Trust is currently evaluating
the impact to the condensed consolidated interim financial statements.
| (c) | Revenue from Contracts with Customers |
In May 2014, the IASB issued its new revenue
standard, IFRS 15, “Revenue from Contracts with Customers”. IFRS 15 specifies how and when revenue should be recognized
as well as requiring more informative and relevant disclosures. IFRS 15 supersedes IAS 18, “Revenue Recognition”, IAS
11, “Construction Contracts” and a number of revenue-related interpretations. Application of the standard applies to
nearly all contracts with customers: the main exceptions are leases, financial instruments and insurance contracts. IFRS 15 is
effective for annual periods on or after January 1, 2017 and should be applied retrospectively. The Trust is currently evaluating
the impact to the condensed consolidated interim financial statements.
NOTE 4: INVESTMENT PROPERTIES
|
Six months ended |
|
Year ended |
|
June 30, 2015 |
|
December 31, 2014 |
(Millions) |
Commercial
properties |
Commercial
developments |
Commercial
properties |
Commercial
developments |
Balance at beginning of period |
$ |
5,131.7 |
|
|
$ |
670.7 |
|
|
$ |
5,158.2 |
|
|
$ |
232.0 |
|
Additions: |
|
|
|
|
|
|
|
Acquisition |
— |
|
|
— |
|
|
— |
|
|
245.5 |
|
Capital expenditures and tenant improvements |
22.5 |
|
|
141.2 |
|
|
45.4 |
|
|
193.0 |
|
Leasing commissions |
4.1 |
|
|
0.6 |
|
|
6.2 |
|
|
0.2 |
|
Tenant inducements |
0.2 |
|
|
— |
|
|
0.9 |
|
|
— |
|
Reclassification of assets held for sale |
— |
|
|
— |
|
|
(38.8 |
) |
|
— |
|
Fair value gains (losses) |
69.7 |
|
|
— |
|
|
(38.8 |
) |
|
— |
|
Other changes |
1.2 |
|
|
— |
|
|
(1.4 |
) |
|
— |
|
Balance at end of period |
$ |
5,229.4 |
|
|
$ |
812.5 |
|
|
$ |
5,131.7 |
|
|
$ |
670.7 |
|
During the third quarter of 2013 and the
fourth quarter of 2014, the Trust acquired Bay Adelaide East and Brookfield Place Calgary East, respectively, from its parent company,
BPO, for an aggregate total investment of $601.9 million and $966.3 million, respectively. The buildings were purchased on an “as-if-completed-and-stabilized
basis,” and as such, BPO retains the development obligations including construction, lease-up and financing. As part of the
acquisitions, the Trust formed an independent committee and engaged third-party advisors to evaluate the fairness of the transactions.
The assets, liabilities and earnings from Bay Adelaide East and Brookfield Place Calgary East have been included in the condensed
consolidated interim financial statements commencing from July 11, 2013, and October 14, 2014, respectively.
The following table summarizes the details
of the transactions:
(Millions) |
|
Bay Adelaide East |
|
Brookfield Place
Calgary East |
Initial acquisition price |
|
|
$ |
169.9 |
|
|
|
$ |
245.5 |
|
Up-front equity commitment |
|
|
26.0 |
|
|
|
81.8 |
|
First mortgage construction loan |
|
|
350.0 |
|
|
|
575.0 |
|
Final payment due to BPO on stabilization(1) |
|
|
56.0 |
|
|
|
64.0 |
|
Aggregate total investment |
|
|
$ |
601.9 |
|
|
|
$ |
966.3 |
|
| (1) | Subject to achieving stabilized net operating income
and targeted permanent financing, which is expected to occur in 2017 for Bay Adelaide East and 2018 for Brookfield Place Calgary
East. |
As part of the Brookfield Place Calgary
East acquisition, the title to Brookfield Place Calgary West ("BPCW") was also transferred to the Trust because the development
site is currently under one legal title. However, the agreements provide that all economic benefits and obligations of BPCW remain
with BPO. BPO has also agreed to indemnify the Trust for all current liabilities, future costs and obligations in respect of BPCW.
As part of the transaction, the Trust entered into a separate agreement to sell BPCW back to BPO upon the City of Calgary approving
the severance of the east and west parcels, which is anticipated to occur by the end of 2015. Accordingly, the Trust has not reflected
the value of the BPCW site and related debt of the same amount in the financial statements.
The Trust determined the fair value of
each investment property based upon, among other things, rental income from current leases and assumptions about rental income
from future leases reflecting market conditions at the applicable balance sheet dates, less future cash outflows with respect to
such leases. Fair values were primarily determined by discounting the expected future cash flows, generally over a weighted-average
term of 11 years, including a terminal value based on the application of a capitalization rate to estimated year 12 cash flows.
Commercial developments under active development are measured using a discounted cash flow model, net of costs to complete, as
of the balance sheet date. In accordance with its policy, the Trust measures its investment properties using valuations prepared
by management. The Trust does not measure its investment properties based on valuations prepared by external valuation professionals.
Brookfield Canada Office Properties | 35 |
The key valuation metrics for the Trust’s
investment properties are set out in the following tables:
|
June 30, 2015 |
|
December 31, 2014 |
|
Maximum |
|
Minimum |
|
Weighted
Average |
|
Maximum |
|
Minimum |
|
Weighted
Average |
Eastern region |
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
7.00 |
% |
|
5.85 |
% |
|
6.24 |
% |
|
7.00 |
% |
|
6.00 |
% |
|
6.34 |
% |
Terminal cap rate |
6.50 |
% |
|
5.25 |
% |
|
5.61 |
% |
|
6.50 |
% |
|
5.25 |
% |
|
5.63 |
% |
Hold period (yrs) |
15 |
|
|
10 |
|
|
11 |
|
|
15 |
|
|
10 |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Western region |
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
6.75 |
% |
|
5.85 |
% |
|
6.23 |
% |
|
6.75 |
% |
|
6.00 |
% |
|
6.32 |
% |
Terminal cap rate |
6.00 |
% |
|
5.00 |
% |
|
5.55 |
% |
|
6.00 |
% |
|
5.50 |
% |
|
5.63 |
% |
Hold period (yrs) |
10 |
|
|
10 |
|
|
10 |
|
|
11 |
|
|
10 |
|
|
10 |
|
A 25 basis-point decrease in the discount
and terminal capitalization rates will impact the fair value of commercial properties by $97.1 million and $142.0 million or 1.9%
and 2.7%, respectively at June 30, 2015.
During the three and six months ended June 30,
2015, the Trust capitalized a total of $64.4 million and $141.8 million, respectively (compared to $46.8 million and $79.8 million
during the same periods in 2014) of costs related to commercial developments. Included in this amount during the three and six
months ended June 30, 2015, is $3.0 million and $6.3 million, respectively (compared to $1.0 million and $2.5 million during
the same periods in 2014) of property taxes and other related costs and $7.1 million and $13.4 million, respectively (compared
to $2.8 million and $5.5 million during the same periods in 2014) of capitalized borrowing costs. The weighted average capitalization
rate used for capitalization of borrowing costs on commercial developments was 4.0%. Included in construction and related costs
for the three and six months ended June 30, 2015, are amounts paid to a subsidiary of Brookfield Asset Management Inc. (“BAM”),
the ultimate parent of BPO, of $18.1 million and $52.0 million, respectively (compared to $43.0 million and $71.3 million during
the same periods in 2014) pursuant to a contract to construct Bay Adelaide East.
NOTE 5: TENANT AND OTHER RECEIVABLES
As of June 30, 2015, $0.1 million
of the Trust’s balance of accounts receivables is over 90 days past due (compared to $0.7 million at December 31, 2014).
The Trust’s maximum exposure to credit
risk associated with tenant and other receivables is equivalent to its carrying value. Credit risk related to tenant receivables
arises from the possibility that tenants may be unable to fulfill their lease commitments. The Trust manages this risk by attempting
to ensure that its tenant mix is diversified and by limiting its exposure to any one tenant. The Trust maintains a portfolio that
is diversified by industry type so that exposure to a particular sector is lessened. Currently no one tenant represents more than
7.1% of commercial property revenue. This risk is further managed by attempting to sign long-term leases with tenants who have
investment grade credit ratings.
NOTE 6: OTHER ASSETS
At June 30, 2015, the Trust’s
balance of other assets is comprised of prepaid expenses and other assets of $11.9 million (compared to $8.9 million at December 31,
2014).
NOTE 7: CASH AND CASH EQUIVALENTS
At June 30, 2015, the Trust had $nil
of cash placed in term deposits, which is consistent with the amount at December 31, 2014. For the three and six months ended
June 30, 2015, interest income of $nil was recorded on cash and cash equivalents (compared to $0.2 million and $1.0 million
during the same periods in 2014).
NOTE 8: ASSETS AND ASSOCIATED LIABILITIES
HELD FOR SALE
During the fourth quarter of 2014, the Trust reclassified its
25% interest in 151 Yonge St. in Toronto to assets held for sale upon entering into an agreement to sell the commercial property.
On January 22, 2015, the Trust closed on the sale of the property generating net proceeds of $38.4 million at ownership and recognized
a fair value loss of $0.4 million during the period.
(Millions) |
Jun. 30, 2015 |
Dec. 31, 2014 |
Assets |
|
|
|
|
Commercial property |
|
$ |
— |
|
|
$ |
38.8 |
|
Tenant and other receivables |
|
— |
|
|
0.1 |
|
Assets held for sale |
|
$ |
— |
|
|
$ |
38.9 |
|
Liabilities |
|
|
|
|
Accounts payable and other liabilities |
|
$ |
— |
|
|
$ |
0.5 |
|
Liabilities associated with assets held for sale |
|
$ |
— |
|
|
$ |
0.5 |
|
NOTE 9: INVESTMENT PROPERTY AND CORPORATE DEBT
|
|
Jun. 30, 2015 |
|
Dec. 31, 2014 |
|
|
Weighted |
|
|
|
Weighted |
|
|
(Millions) |
Average Rate |
Debt Balance |
Average Rate |
Debt Balance |
Investment property debt – fixed rate |
|
4.27 |
% |
|
$ |
2,087.4 |
|
|
4.17 |
% |
|
$ |
2,303.7 |
|
Investment property and corporate debt – floating rate |
|
2.59 |
% |
|
667.7 |
|
|
2.93 |
% |
|
346.0 |
|
Total investment property and corporate debt |
|
3.86 |
% |
|
$ |
2,755.1 |
|
|
4.01 |
% |
|
$ |
2,649.7 |
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
$ |
278.7 |
|
|
|
|
$ |
281.3 |
|
Non-current |
|
|
|
2,476.4 |
|
|
|
|
2,368.4 |
|
Total debt |
|
|
|
$ |
2,755.1 |
|
|
|
|
$ |
2,649.7 |
|
The Trust’s secured investment property
and corporate debt is non-recourse to the Trust with the exception of $97.2 million at June 30, 2015 (compared to $98.5 million
at December 31, 2014) which has limited recourse to the Trust and guarantees as discussed in Note 14(c).
The fair value of investment property and
corporate debt is determined by discounting contractual principal and interest payments at estimated current market interest rates
for the instrument. Current market interest rates are determined with reference to current benchmark rates for a similar term and
current credit spreads for debt with similar terms and risks. As of June 30, 2015, the fair value of investment property and
corporate debt exceeds the principal loan value of these obligations by $145.4 million (compared to an excess of $114.3 million
at December 31, 2014).
The details of the financing transactions
completed during the six months ended June 30, 2015 are as follows.
(Millions) |
|
|
New
Proceeds(1) |
Net
Proceeds
Generated(1) |
Interest
Rate
(%) |
Mortgage
Detail |
Maturity |
Hudson's
Bay Centre |
Q2 |
Extension |
|
$ |
— |
|
|
$ |
— |
|
BA
+ 140 bps |
Limited
recourse |
May
2016 |
Royal
Centre |
Q2 |
Extension |
|
— |
|
|
— |
|
BA
+ 150 bps |
Non-recourse |
June
2016 |
Place
de Ville I |
Q2 |
New |
|
21.0 |
|
|
21.0 |
|
|
3.752% |
Non-recourse |
June
2025 |
Place
de Ville II |
Q2 |
New |
|
22.8 |
|
|
22.8 |
|
|
3.752% |
Non-recourse |
June
2025 |
| (1) | Excludes financing costs. |
During the second quarter of 2015, the
Trust upsized its revolving corporate credit facility by $70.0 million to $350.0 million. As of June 30, 2015, $185.0 million was
drawn on the revolving corporate credit facility.
NOTE 10: ACCOUNTS PAYABLE AND OTHER LIABILITIES
The components of the Trust’s accounts
payable and other liabilities are as follows:
(Millions) |
Jun. 30, 2015 |
Dec. 31, 2014 |
Accounts payable and accrued liabilities |
|
$ |
177.2 |
|
|
$ |
177.0 |
|
Accrued interest |
|
19.2 |
|
|
19.9 |
|
Total |
|
$ |
196.4 |
|
|
$ |
196.9 |
|
NOTE 11: DISTRIBUTIONS
The following tables present distributions
declared for the six months ended June 30, 2015 and June 30, 2014:
|
Six months ended Jun. 30, 2015 |
(Millions, except per unit amounts) |
|
Trust Units |
Class B LP Units |
Paid in cash or DRIP |
|
$ |
13.4 |
|
|
$ |
34.7 |
|
Payable as of June 30, 2015 |
|
2.7 |
|
|
6.9 |
|
Total |
|
$ |
16.1 |
|
|
$ |
41.6 |
|
Per unit |
|
$ |
0.62 |
|
|
$ |
0.62 |
|
|
Six months ended Jun. 30, 2014 |
(Millions, except per unit amounts) |
|
Trust Units |
Class B LP Units |
Paid in cash or DRIP |
|
$ |
13.0 |
|
|
$ |
33.1 |
|
Payable as of June 30, 2014 |
|
2.7 |
|
|
6.9 |
|
Total |
|
$ |
15.7 |
|
|
$ |
40.0 |
|
Per unit |
|
$ |
0.59 |
|
|
$ |
0.59 |
|
The Trust has implemented a distribution
reinvestment plan (“DRIP”), which allows certain Canadian resident unitholders to elect to have their distributions
reinvested in additional Trust Units. No brokerage commissions or service charges are payable in connection with the purchase of
Trust Units under the DRIP and the Trust will pay all administrative costs. The automatic reinvestment of distributions under the
DRIP does not relieve holders of Trust Units of any income tax applicable to such distributions. For the six months ended June 30,
2015, $831,866 (dollars) or 29,591 Trust Units were issued through the DRIP, compared to $653,810 (dollars), or 24,567 Trust Units
during the same period in 2014.
Brookfield Canada Office Properties | 37 |
NOTE 12: EQUITY
The components of equity are as follows:
(Millions) |
Jun. 30, 2015 |
Dec. 31, 2014 |
Trust Units |
|
$ |
554.2 |
|
|
$ |
553.4 |
|
Contributed surplus |
|
3.1 |
|
|
3.1 |
|
Retained earnings |
|
323.9 |
|
|
300.2 |
|
Unitholders’ equity |
|
881.2 |
|
|
856.7 |
|
Non-controlling interest |
|
2,300.5 |
|
|
2,239.6 |
|
Total |
|
$ |
3,181.7 |
|
|
$ |
3,096.3 |
|
Authorized Capital and Outstanding Securities
The Trust is authorized to issue an unlimited
number of two classes of units: Trust Units and Special Voting Units. Special Voting Units are only issued in tandem with
the issuance of Class B LP Units. As of June 30, 2015, the Trust had a total of 26,247,774 Trust Units outstanding
and 67,088,022 Class B LP Units outstanding (and a corresponding number of Special Voting Units).
The following tables summarize the changes in the units outstanding
during the six months ended June 30, 2015 and June 30, 2014:
|
Six months ended Jun. 30, 2015 |
|
Trust Units |
Class B LP Units |
Units issued and outstanding at beginning of period |
26,218,183 |
|
67,088,022 |
|
Units issued pursuant to DRIP |
29,591 |
|
— |
|
Total units outstanding at June 30, 2015 |
26,247,774 |
|
67,088,022 |
|
|
Six months ended Jun. 30, 2014 |
|
Trust Units |
Class B LP Units |
Units issued and outstanding at beginning of period |
26,167,835 |
|
67,088,022 |
|
Units issued pursuant to DRIP |
24,567 |
|
— |
|
Total units outstanding at June 30, 2014 |
26,192,402 |
|
67,088,022 |
|
For the six months ended June 30,
2015, the weighted average number of Trust Units outstanding was 26,232,489 (compared to 26,191,933 at December 31, 2014).
NOTE 13: REVENUE AND EXPENSES
| (a) | Commercial property revenue |
The components of revenue are as follows:
|
Three months ended Jun. 30 |
Six months ended Jun. 30 |
(Millions) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
Rental revenue |
|
$ |
125.0 |
|
|
$ |
124.1 |
|
|
$ |
251.7 |
|
|
$ |
252.1 |
|
Non-cash rental revenue (expense) |
|
0.7 |
|
|
0.2 |
|
|
1.2 |
|
|
(2.8 |
) |
Lease termination and other income |
|
0.6 |
|
|
0.6 |
|
|
1.0 |
|
|
1.2 |
|
Commercial property revenue |
|
$ |
126.3 |
|
|
$ |
124.9 |
|
|
$ |
253.9 |
|
|
$ |
250.5 |
|
The Trust generally leases investment properties
under operating leases with lease terms between five and 10 years, with options to extend up to five additional years.
The following represents an analysis of
the nature of the expense included in direct commercial property expense, interest expense, and general and administrative expense:
|
Three months ended Jun. 30 |
Six months ended Jun. 30 |
(Millions) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
Employee benefits |
|
$ |
4.6 |
|
|
$ |
4.6 |
|
|
$ |
9.5 |
|
|
$ |
9.3 |
|
Interest expense |
|
20.8 |
|
|
23.3 |
|
|
41.9 |
|
|
46.4 |
|
Property maintenance |
|
29.0 |
|
|
28.0 |
|
|
58.7 |
|
|
57.3 |
|
Real estate taxes |
|
26.5 |
|
|
24.5 |
|
|
53.7 |
|
|
46.1 |
|
Ground rents |
|
3.4 |
|
|
1.7 |
|
|
5.7 |
|
|
3.4 |
|
Asset management fees and other |
|
5.6 |
|
|
4.8 |
|
|
11.4 |
|
|
11.6 |
|
Total expenses |
|
$ |
89.9 |
|
|
$ |
86.9 |
|
|
$ |
180.9 |
|
|
$ |
174.1 |
|
| (c) | Investment and other income |
Investment and other income was $nil for the three and six months
ended June 30, 2015 (compared to $0.2 million and $1.0 million during the same periods in 2014). The prior year amounts primarily
include interest earned on cash balances and cash settlements on legal matters.
NOTE 14: GUARANTEES, CONTINGENCIES,
AND OTHER
(a) In the normal course of operations,
the Trust and its consolidated subsidiaries execute agreements that provide for indemnification and guarantees to third parties
in transactions such as business dispositions, business acquisitions, lease-up of development properties, sales of assets, and
sales of services.
(b) As of June 30, 2015, the Trust
had commitments totaling $326.9 million for Brookfield Place Calgary East costs to third parties and $61.1 million for Bay Adelaide
East in Toronto for development costs, of which $54.9 million were with third parties.
(c) As of June 30, 2015, the Trust
has guaranteed up to $350.0 million related to its revolving corporate credit facility, up to $75.0 million related to the construction
loan on Bay Adelaide East and up to $80.0 million related to the construction loan on Brookfield Place Calgary East. As of June 30,
2015, the Trust has issued letters of credit of $0.5 million related to its revolving corporate credit facility.
(d) The Trust maintains insurance on its
commercial properties in amounts and with deductibles that the Trust believes are in line with what owners of similar properties
carry. The Trust maintains all risk property insurance and rental value coverage (including coverage for the perils of flood, earthquake
and windstorm). The Trust’s all risk policy limit is $1.5 billion per occurrence. The Trust’s earthquake limit is $500
million per occurrence and in the annual aggregate. This coverage is subject to a $100,000 (dollars) deductible for all locations
except for British Columbia where the deductible is 3% of the values for all locations where the physical loss, damage or destruction
occurred. The flood limit is $500 million per occurrence and in the annual aggregate, and is subject to a deductible of $25,000
(dollars) for all losses arising from the same occurrence. Windstorm is included under the all risk coverage limit of $1.5 billion.
With respect to its commercial properties, the Trust purchases an insurance policy that covers acts of terrorism for limits up
to $1.5 billion.
NOTE 15: SEGMENTED INFORMATION
The Trust has only one business segment:
the ownership and operation of investment properties in Canada.
NOTE 16: RELATED-PARTY TRANSACTIONS
In the normal course of operations, the
Trust enters into various transactions on market terms with related parties that have been measured at exchange value and are recognized
in the condensed consolidated interim financial statements.
The Trust has entered into two service-support
agreements with Brookfield Office Properties Management LP (“BOPM LP”), a subsidiary of BPO, for the provision of property
management, leasing, construction, and asset management services. The purpose of the agreements is to provide the services of certain
personnel and consultants as are necessary to help the Trust operate and manage its assets and tenant base; it also includes a
cost-recovery for administrative and regulatory compliance services provided. The fees paid to BOPM LP are calculated in accordance
with the terms of the agreements. Included in direct commercial property expense during the three and six months ended June 30,
2015, are amounts paid to BOPM LP for property management services of $3.4 million and $6.8 million, respectively (compared to
$3.4 million and $6.9 million during the same periods in 2014). Included in investment properties during the three and six months
ended June 30, 2015, are amounts paid to BOPM LP for leasing and construction services of $2.1 million and $3.8 million, respectively
(compared to $0.3 million and $0.6 million during the same periods in 2014). Included in general and administrative expenses during
the three and six months ended June 30, 2015, are amounts paid to BOPM LP for asset management and administrative and regulatory
compliance services of $4.9 million and $10.0 million, respectively (compared to $4.5 million and $9.4 million during the same
periods in 2014).
Included in rental revenues during the
three and six months ended June 30, 2015, are amounts received from BAM and its affiliates of $2.4 million and $4.5 million,
respectively (compared to $1.6 million and $3.3 million during the same periods in 2014).
Brookfield Canada Office Properties | 39 |
Refer to Note 4, Investment Properties,
for information on the acquisition of the Bay Adelaide East and Brookfield Place Calgary East developments from BPO as well as
details of construction and related costs paid to a subsidiary of BAM pursuant to a contract to construct Bay Adelaide East.
NOTE 17: OTHER INFORMATION
Supplemental cash flow information:
|
Six months ended Jun. 30, 2015 |
Six months ended Jun. 30, 2014 |
(Millions) |
|
Trust Units |
Class B LP Units |
|
Trust Units |
Class B LP Units |
Distributions declared to unitholders |
|
$ |
16.1 |
|
|
$ |
41.6 |
|
|
$ |
15.7 |
|
|
$ |
40.0 |
|
Add: Distributions payable at the beginning of the period |
|
2.7 |
|
|
6.9 |
|
|
2.6 |
|
|
6.5 |
|
Less: Distributions payable at the end of the period |
|
(2.7 |
) |
|
(6.9 |
) |
|
(2.7 |
) |
|
(6.9 |
) |
Less: Distributions to participants in DRIP |
|
(0.8 |
) |
|
— |
|
|
(0.6 |
) |
|
— |
|
Cash distributions paid |
|
$ |
15.3 |
|
|
$ |
41.6 |
|
|
$ |
15.0 |
|
|
$ |
39.6 |
|
NOTE 18: APPROVAL OF INTERIM FINANCIAL
STATEMENTS
The interim financial statements were approved
by the Trust’s Board of Trustees and authorized for issue on July 20, 2015.
Unitholder Information
DISTRIBUTION PAYMENT DATES
|
|
2015 |
|
2014 |
|
2013 |
|
(Dollars) |
|
Trust Units |
Class B LP Units |
|
Trust Units |
Class B LP Units |
|
Trust Units |
Class B LP Units |
|
January 15 |
|
$ |
0.1033 |
|
|
$ |
0.1033 |
|
|
$ |
0.0975 |
|
|
$ |
0.0975 |
|
|
$ |
0.0975 |
|
|
$ |
0.0975 |
|
|
February 15 |
|
0.1033 |
|
|
0.1033 |
|
|
0.0975 |
|
|
0.0975 |
|
|
0.0975 |
|
|
0.0975 |
|
|
March 15 |
|
0.1033 |
|
|
0.1033 |
|
|
0.0975 |
|
|
0.0975 |
|
|
0.0975 |
|
|
0.0975 |
|
|
April 15 |
|
0.1033 |
|
|
0.1033 |
|
|
0.0975 |
|
|
0.0975 |
|
|
0.0975 |
|
|
0.0975 |
|
|
May 15 |
|
0.1033 |
|
|
0.1033 |
|
|
0.0975 |
|
|
0.0975 |
|
|
0.0975 |
|
|
0.0975 |
|
|
June 15 |
|
0.1033 |
|
|
0.1033 |
|
|
0.1033 |
|
|
0.1033 |
|
|
0.0975 |
|
|
0.0975 |
|
|
July 15 |
|
0.1033 |
|
|
0.1033 |
|
|
0.1033 |
|
|
0.1033 |
|
|
0.0975 |
|
|
0.0975 |
|
|
August 15 |
|
0.1033 |
|
|
0.1033 |
|
|
0.1033 |
|
|
0.1033 |
|
|
0.0975 |
|
|
0.0975 |
|
|
September 15 |
|
|
|
|
|
0.1033 |
|
|
0.1033 |
|
|
0.0975 |
|
|
0.0975 |
|
|
October 15 |
|
|
|
|
|
0.1033 |
|
|
0.1033 |
|
|
0.0975 |
|
|
0.0975 |
|
|
November 15 |
|
|
|
|
|
0.1033 |
|
|
0.1033 |
|
|
0.0975 |
|
|
0.0975 |
|
|
December 15 |
|
|
|
|
|
0.1033 |
|
|
0.1033 |
|
|
0.0975 |
|
|
0.0975 |
|
|
Brookfield Canada Office Properties | 41 |
Information
PROFILE
Brookfield Canada Office Properties is
a Canadian real estate investment trust, focusing on the ownership and value enhancement of premier office properties. The current
property portfolio is comprised of interests in 27 premier office properties totaling 20.4 million square feet and two development
properties totaling 2.4 million square feet. Landmark properties include Brookfield Place Toronto and First Canadian Place in Toronto
and Bankers Hall in Calgary.
BROOKFIELD CANADA OFFICE PROPERTIES
Brookfield Place, Bay Wellington Tower
181 Bay Street, Suite 330
Toronto, Ontario M5J 2T3
Tel: 416.359.8555
Fax: 416.359.8596
www.brookfieldcanadareit.com
UNITHOLDER INQUIRIES
Brookfield Canada Office Properties welcomes
inquiries from unitholders, analysts, media representatives and other interested parties. Questions relating to investor relations
or media inquiries can be directed to Matthew Cherry, Vice President, Investor Relations and Communications at 416.359.8593 or
via e-mail at matthew.cherry@brookfield.com. Inquiries regarding financial results should be directed to Bryan Davis, Chief Financial
Officer at 416.359.8612 or via e-mail at bryan.davis@brookfield.com.
Unitholder questions relating to distributions,
address changes and unit certificates should be directed to the Trust’s Transfer Agent:
CST TRUST COMPANY
P.O. Box 700
Station B
Montreal, Quebec H3B 3K3
Tel: 416.682.3860 / 800.387.0825
Fax: 888.249.6189
Website: www.canstockta.com
E-mail: inquiries@canstockta.com
COMMUNICATIONS
We strive to keep our unitholders updated
on our progress through a comprehensive annual report, quarterly interim reports, periodic press releases and quarterly conference
calls.
Brookfield Canada Office Properties maintains
a Web site, www.brookfieldcanadareit.com, which provides access to our published reports, press releases, statutory filings, supplementary
information and trust and distribution information as well as summary information on the Trust.
![](tex99-1pg44.jpg)
www.brookfieldcanadareit.com
Exhibit 99.2
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS –
FULL CERTIFICATE
I, T. Jan Sucharda, Chief Executive Officer of Brookfield Canada
Office Properties, certify the following:
1. Review: I have reviewed the interim financial report
and interim MD&A (together, the “interim filings”) of Brookfield Canada Office Properties (the “issuer”)
for the interim period ended June 30, 2015.
2. No misrepresentations: Based on my knowledge, having
exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material
fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it
was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised
reasonable diligence, the interim financial report together with the other financial information included in the interim filings
fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the
date of and for the periods presented in the interim filings.
4. Responsibility: The issuer’s other certifying
officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control
over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’
Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described
in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the
interim filings
| (a) | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that |
| (i) | material information relating to the issuer is made known to us by others, particularly during the period in which the interim
filings are being prepared; and |
| (ii) | information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted
by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities
legislation; and |
| (b) | designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s
GAAP. |
5.1 Control framework: The control framework the
issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control – Integrated
Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
5.2 ICFR – material weakness relating to design: N/A
5.3 Limitation on scope of design: N/A
6. Reporting changes in ICFR: The issuer has disclosed
in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2015 and ended
on June 30, 2015 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
Date: August 11, 2015.
“T. Jan Sucharda” |
|
T. Jan Sucharda |
|
Chief Executive Officer |
|
Exhibit 99.3
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS –
FULL CERTIFICATE
I, Bryan K. Davis, Chief Financial Officer of Brookfield Canada
Office Properties, certify the following:
1. Review: I have reviewed the interim financial report
and interim MD&A (together, the “interim filings”) of Brookfield Canada Office Properties (the “issuer”)
for the interim period ended June 30, 2015.
2. No misrepresentations: Based on my knowledge, having
exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material
fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it
was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised
reasonable diligence, the interim financial report together with the other financial information included in the interim filings
fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the
date of and for the periods presented in the interim filings.
4. Responsibility: The issuer’s other certifying
officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control
over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’
Annual and Interim Filings, for the issuer.
5. Design: Subject to the limitations, if any, described
in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the
interim filings
| (a) | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that |
| (i) | material information relating to the issuer is made known to us by others, particularly during the period in which the interim
filings are being prepared; and |
| (ii) | information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted
by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities
legislation; and |
| (b) | designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s
GAAP. |
5.1 Control framework: The control framework the
issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control – Integrated
Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
5.2 ICFR – material weakness relating to design: N/A
5.3 Limitation on scope of design: N/A
6. Reporting changes in ICFR: The issuer has disclosed
in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2015 and ended
on June 30, 2015 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.
Date: August 11, 2015.
“Bryan K. Davis” |
|
Bryan K. Davis |
|
Chief Financial Officer |
|
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