/NOT FOR DISTRIBUTION TO U.S. NEWS WIRE
SERVICES OR DISSEMINATION IN THE UNITED
STATES/
TORONTO, March 20, 2017 /CNW/ - Inovalis Real Estate
Investment Trust (the "REIT") (TSX: INO.UN) today reported its
financial results for the fourth quarter and the year ended
December 31, 2016.
HIGHLIGHTS
- Occupancy rate on the REIT's portfolio was 95.9% as at
December 31, 2016 versus 91.4% one
year before, as a result of new leases signed on approximately
66,000 sq.ft in five of our properties (Bad Homburg, Baldi,
Courbevoie, Metropolitan and Sablière). This reflects the good
positioning of our properties in an improving letting market.
Weighted average lease term was 5.3 years as at December 31, 2016 compared to 6.3 years one year
before.
- Funds from operations (FFO) and Adjusted Funds from operations
(AFFO) for the three-month and twelve-month periods ended
December 31, 2016 shall be analyzed
in the context of the recent $46.0
million equity offering, the proceeds of which having been
partially invested in December 2016
and shall be put into prospective with the same periods in 2015.
Excluding the Units from the July
2016 equity offering, for the quarter ended December 31, 2016, FFO and AFFO payout ratios of
86.8% and 80.4% respectively are in line with the same period in
2015 (93.3% and 79.7% respectively). Excluding the Units from the
July 2016 equity offering, for the
twelve-month period ended December 31,
2016, FFO payout ratio of 95.7% is in line with previous
year (95.6%) and AFFO payout ratio has remained below 90% at
88.8%.
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Q4
2016
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Q4
2015
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FY
2016
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FY
2015
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Including Units part
of the July 2016 equity offering
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FFO per
unit
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0.19
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0.22
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0.77
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0.87
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FFO payout
ratio
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110.0%
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93.3%
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108.4%
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95.6%
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AFFO per
unit
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0.20
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0.26
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0.83
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0.98
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AFFO payout
ratio
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102.0%
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79.7%
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100.6%
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83.9%
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Excluding Units part
of the July 2016 equity offering
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FFO per
unit
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0.23
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0.22
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0.87
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0.87
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FFO payout
ratio
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86.8%
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93.3%
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95.7%
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95.6%
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AFFO per
unit
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0.25
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0.26
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0.94
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0.98
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AFFO payout
ratio
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80.4%
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79.7%
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88.8%
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83.9%
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- The 1.3% decrease in AFFO in 2016 compared to the previous year
($16,973 vs. $17,190) translated into a 4.1% decrease on a per
Unit basis ($0.94 vs. $0.98) due to the increase in the number of Units
(Units or Exchangeable securities issued further to the additional
investment from Inovalis SA as part of the Metropolitan
transaction, to the payment of the asset management fee and to the
DRIP program).
- FFO and AFFO per Unit and FFO and AFFO payout ratios for the
quarter ended December 31, 2016 have
all improved compared to the previous quarter ended September 30, 2016 (including and excluding the
Units part of the July 2016 equity
offering).
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Q4
2016
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Q3
2016
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Including Units part
of the July 2016 equity offering
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FFO per
unit
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0.19
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0.18
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FFO payout
ratio
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110.0%
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121.4%
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AFFO per
unit
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0.20
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0.19
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AFFO payout
ratio
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102.0%
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109.7%
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Excluding Units part
of the July 2016 equity offering
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FFO per
unit
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0.23
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0.22
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FFO payout
ratio
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86.8%
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92.8%
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AFFO per
unit
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0.25
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0.23
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AFFO payout
ratio
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80.4%
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89.7%
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- Debt to book value of the REIT was 51.3% as at December 31, 2016, i.e. significantly lower the
level of 53.0% one year ago. Net of the cash available, debt to
book value was 47.5% as at December 31,
2016 compared to 51.9% one year before.
- In November 2016, the REIT
announced the sale to the user of the main non-office component of
the Baldi property located in Saint-Ouen, in Paris Northern periphery. The Baldi property,
dedicated mainly to office (68%) and partly to light industrial
(18%) use, was acquired in November
2014 for a total purchase price of €22.0 million
($31.2 million). Upon acquisition,
the vacant industrial space, totalling 31,591 sq.ft, had no value
attributed to it. The REIT was able to successfully lease up the
vacant industrial space in March
2016, carve out the industrial portion of the property and
sell it to the tenant occupying the space for €2.7 million
($3.8 million).
- On November 10, 2016, the REIT
entered into an agreement for the forward purchase of a class-A
office property to be developed in Ingolstadt, Germany. Upon completion of its development in
the first quarter of 2018, the 103,000 sq.ft property will be fully
let as headquarters to a leading German automotive supplier under a
10-year firm lease. The net purchase price of the property of
approximately €23.9 million ($33.9
million) reflects a cap rate of 6.5%.
- On November 14, 2016, the REIT
has committed to fund a €21.7 million ($30.7
million) acquisition and redevelopment loan to a company
80%-owned by Inovalis SA, related to a property located in Rueil,
in Paris Western periphery. An
office-building complex will be re-developed with a total lettable
area of approximately 260,000 sq.ft. The facility amount will be
drawn in several instalments by the time of completion of the
project in 2019. The loan will generate interest income of 8.50%,
paid monthly, in addition to 20% of the profit generated upon the
sale of the property to a third party. As at December 31, 2016, the REIT had deployed €5.4
million ($7.7 million), amounting to
the first portion of this loan. Subsequent to the quarter, the REIT
has deployed another €7.3 million ($10.4
million), resulting in a total commitment of €12.7 million
($18.1 million) as at March 20, 2017. The final portion of the loan
commitment of €9.0 million ($12.8
million) is expected to be deployed during the third quarter
of 2017.
- Subsequent to the quarter, in February
2017, The REIT has entered into exclusivity on the
acquisition of two assets located in Pantin (Paris North-Eastern periphery) and Stuttgart (Germany). Both assets are office buildings,
with an average occupancy rate superior to 90%, a weighted average
lease term of approximately 7 years and located either in improving
areas or established office park with main transport access.
Tenancy is a mix of government related tenants, high-grade
automotive companies and other tenants with long standing relations
to the zones. The properties will be bought at a competitive cap
rate given the high prices witnessed over the past months in both
markets, and both acquisitions will be accretive to AFFO. The REIT
expects to close both acquisitions in the course of the second
quarter of 2017. Acquisitions will be done under the form of a
joint venture with investors from Inovalis S.A. relations. Once
these acquisitions close, the REIT will have deployed the total
amount raised during the bought deal of July
2016.
About Inovalis Real Estate Investment Trust
Inovalis Real Estate Investment Trust is an unincorporated,
open-ended real estate investment trust established pursuant to a
declaration of trust under the laws of the Province of Ontario. The REIT has been created for the
purpose of acquiring and owning office properties primarily located
in France and Germany but also opportunistically in other
European countries where assets meet the REIT's investment
criteria. The REIT currently owns an interest in eleven office
properties in France and
Germany, comprising approximately
1,050,000 square feet of gross leasable area (taking into account
the interests in the properties owned in joint-ventures).
Management's discussion and analysis
(Dollar amounts in the MD&A are presented in thousands of
Canadian dollars, except rental rates, Unit or as otherwise
stated)
OVERVIEW
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December 31,
2016
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December 31,
2015
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Operational
information (1)
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Number of
properties
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11
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10
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Gross leasable area
(sq.ft)
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1,050,336
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1,004,448
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Occupancy rate (end
of period) (2)
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95.9%
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91.9%
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Weighted average
lease term
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5.3 years
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6.3 years
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Average
capitalization rate (3)
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5.9%
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6.6%
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Financing
information (1)
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Level of debt
(debt-to-book value) (4)
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51.3%
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53.0%
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Level of debt
(debt-to-book value, net of cash) (4)
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47.5%
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51.9%
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Weighted average term
of principal repayments of debt
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7.2 years
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7.2 years
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Weighted average
interest rate (5)
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2.11%
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1.98%
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Interest coverage
ratio (6)
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4.4 x
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4.0 x
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Three months
ended
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Year
ended
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(thousands of
CAD$ except per Unit and other data)
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Dec 31,
2016
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Dec 31,
2015
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Dec 31,
2016
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Dec 31,
2015
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Operating
results
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Rental income
(1)
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8,188
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6,854
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31,036
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25,656
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Net rental earnings
(1)
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8,698
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6,975
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29,100
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25,392
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Earnings for the
period
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2,984
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6,641
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23,284
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30,800
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Funds from Operations
(FFO) (7) (8)
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4,302
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3,873
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15,757
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15,154
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Adjusted Funds from
Operations (AFFO) (7) (8)
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4,640
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4,535
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16,973
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17,190
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Including Units part
of the July 2016 equity offering
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FFO per Unit
(diluted) (7) (8)
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0.19
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0.22
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0.77
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0.87
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AFFO per Unit
(diluted) (7) (8)
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0.20
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0.26
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0.83
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0.98
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Excluding Units part
of the July 2016 equity offering
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FFO per Unit
(diluted) (7) (8)
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0.23
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0.22
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0.87
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0.87
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AFFO per Unit
(diluted) (7) (8)
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0.25
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0.26
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0.94
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0.98
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Distributions
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Declared
distributions on Units and Exchangeable sec.
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4,732
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3,613
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17,078
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14,420
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Declared distribution
per Unit (diluted) (8)
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0.21
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0.21
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0.83
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0.83
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Including Units part
of the July 2016 equity offering
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FFO payout ratio
(7)
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110.0%
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93.3%
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108.4%
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95.6%
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AFFO payout ratio
(7)
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102.0%
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79.7%
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100.6%
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83.9%
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Excluding Units part
of the July 2016 equity offering
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FFO payout ratio
(7)
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86.8%
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93.3%
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95.7%
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95.6%
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AFFO payout ratio
(7)
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80.4%
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79.7%
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88.8%
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83.9%
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(1)
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Taking into account
the interest the REIT has in the properties held in
partnerships.
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(2)
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Calculated on
weighted areas (activity, storage and intercompany restaurant areas
being accounted for only a third of their effective
areas).
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(3)
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Calculated on
annualized net rental earnings (based on net rental earnings for
the year-to-date period).
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(4)
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The definition of
debt-to-book value and of debt-to-book value, net of
cash can be found under the section Non-IFRS Financial
Measures.
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(5)
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Calculated as the
weighted average interest rate paid on the finance leases and the
mortgage loans.
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(6)
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Calculated as net
rental earnings plus interest, less general and administrative
expenses, divided by interest expense on the financial leases and
mortgage financings.
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(7)
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The reconciliation of
FFO and AFFO to earnings can be found under the section Non-IFRS
Reconciliation (FFO and AFFO).
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(8)
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Based on the fully
diluted weighted average number of Units during the
period.
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BASIS OF PRESENTATION
The following management's discussion and analysis ("MD&A")
of the financial condition and results of operations of Inovalis
REIT should be read in conjunction with the REIT's audited
consolidated financial statements for the year ended December 31, 2016, and the notes thereto. This
MD&A has been prepared taking into account material
transactions and events up to and including March 20, 2017. Financial data provided in the
audited consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards. All
amounts in this MD&A are in thousands of Canadian dollars,
except per unit amounts and where otherwise stated. Historical
results, including trends which might appear, should not be taken
as indicative of future operations or results. Additional
information about Inovalis REIT has been filed with applicable
Canadian securities regulatory authorities and is available at
www.sedar.com. The exchange rate used throughout this MD&A for
statement of earnings items is the average rate during the said
period, i.e. 1.4660 Canadian dollars
per Euro for the three-month period ended December 31, 2016. For balance sheet items,
projections or market data, the exchange rate used is 1.4169
(exchange rate as at December 31,
2016).
FORWARD-LOOKING INFORMATION
Although we believe that the expectations reflected in the
forward-looking information are reasonable, we can give no
assurance that these expectations will prove to have been correct,
and since forward-looking information inherently involves risks and
uncertainties, undue reliance should not be placed on such
information. Certain material factors or assumptions are applied in
making forward-looking statements and actual results may differ
materially from those expressed or implied in such forward-looking
statements. The estimates and assumptions, which may prove to be
incorrect, include, but are not limited to, the various assumptions
set forth in this document as well as the following: (i) we
will continue to receive financing on acceptable terms;
(ii) our future level of indebtedness and our future growth
potential will remain consistent with our current expectations;
(iii) there will be no changes to tax laws adversely affecting
our financing capability, operations, activities, structure or
distributions; (iv) we will retain and continue to attract
qualified and knowledgeable personnel as we expand our portfolio
and business; (v) the impact of the current economic climate
and the current global financial conditions on our operations,
including our financing capability and asset value, will remain
consistent with our current expectations; (vi) there will be
no material changes to government and environmental regulations
adversely affecting our operations; (vii) conditions in the
international and, in particular, the French and German real estate
markets, including competition for acquisitions, will be consistent
with the current climate; and (viii) capital markets will
provide us with readily available access to equity and/or debt
financing.
The forward-looking statements are subject to inherent
uncertainties and risks, including, but not limited to, the factors
listed under the Risk and Uncertainties section of this
MD&A. Consequently, actual results and events may vary
significantly from those included in, contemplated or implied by
such statements.
MARKET AND INDUSTRY DATA
This MD&A includes market and industry data and forecasts
that were obtained from third-party sources, industry publications
and publicly available information as well as industry data
prepared by Inovalis SA on the basis of its knowledge of the
commercial real estate industry in which we operate (including
Inovalis SA estimates and assumptions relating to the industry
based on that knowledge). Inovalis SA's knowledge of the real
estate industry has been developed through its 20 years of
experience and participation in the industry. Inovalis SA believes
that its industry data is accurate and that its estimates and
assumptions are reasonable, but there can be no assurance as to the
accuracy or completeness of this data. Third-party sources
generally state that the information contained therein has been
obtained from sources believed to be reliable, but there can be no
assurance as to the accuracy or completeness of included
information. Although Inovalis SA believes it to be reliable,
Inovalis SA has not verified any of the data from third-party
sources referred to in this MD&A, or analyzed or verified the
underlying studies or surveys relied upon or referred to by such
sources, or ascertained the underlying assumptions relied upon by
such sources.
NON-IFRS FINANCIAL MEASURES
Funds from Operations and Adjusted Funds from
Operations
Funds from operations ("FFO") and adjusted funds from
operations ("AFFO") are not measures recognized under IFRS
and do not have standardized meanings prescribed by IFRS. FFO and
AFFO are supplemental measures of performance for real estate
businesses. We believe that AFFO is an important measure of
economic performance and is indicative of our ability to pay
distributions, while FFO is an important measure of operating
performance and the performance of real estate properties. The IFRS
measurement most directly comparable to FFO and AFFO is net
earnings. See the Non-IFRS Reconciliation (FFO and AFFO)
section for reconciliation of FFO and AFFO to net earnings.
FFO is defined as net earnings in accordance with IFRS,
excluding: (i) acquisition costs, (ii) gain on bargain purchase,
(iii) net change in fair value of investment properties, (iv) net
change in fair value of financial instruments at fair value through
profit and loss, (v) changes in fair value of Exchangeable
securities, (vi) adjustment for property taxes accounted for under
IFRIC 21 (if any), (vii) loss on exercise of lease option, (viii)
adjustment for foreign exchange gains or losses on monetary items
not forming part of an investment in a foreign operation, (ix) gain
on disposal of an interest in a subsidiary and the non-cash portion
of earnings from investments accounted for using the equity method,
* finance income earned from loans to joint-ventures, (xi)
non-recurring finance costs, (xii) deferred taxes and (xiii) gains
or losses from non-recurring items. It has also been adjusted to
exclude the distributions declared on Exchangeable securities.
These distributions are recognized in profit and loss consistent
with the classification of the Exchangeable securities as a
liability. However, they are not to be considered when determining
distributions for the Unitholders as indeed they are subordinated
to the distributions to the Unitholders.
AFFO is defined as FFO subject to certain adjustments, including
adjustments for: (i) the non-cash effect of straight line rents,
(ii) the cash effect of the lease equalization loans (equalizing
the rent payments, providing the REIT with stable and predictable
monthly cash flows over the term of the France Telecom leases in
the Vanves property, the Smart & Co. lease in the Courbevoie
property and the Rue du Commerce leases in the Baldi property),
(iii) amortization of fair value adjustment on assumed debt, (iv)
the non-cash portion of the asset management fees paid in
Exchangeable securities, (v) capital expenditures, including those
paid by the vendors of the leasehold interest in the properties
and/or tenants and (vi) amortization of transaction costs on
mortgage loans.
FFO and AFFO should not be construed as alternatives to net
earnings or cash flow from operating activities, determined in
accordance with IFRS, as indicators of our performance. Our method
of calculating FFO and AFFO may differ from other issuers' methods
and accordingly may not be comparable to measures used by them.
Debt-to-book value
Our debt-to-book value ratio is calculated on a look-through
basis and takes into account the REIT's apportioned amount of
indebtedness at the partnerships' level. Indebtedness at the REIT's
level, as well as at the different partnerships' levels is
calculated as the sum of (i) finance lease liabilities, (ii)
mortgage loans, (iii) lease equalization loans, (iv) other
long-term liabilities and (v) deferred tax liabilities.
Indebtedness does not take into account the contribution from
shareholders that are recorded as a liability, as is the case at
the REIT's level for the Exchangeable securities and at the
partnerships' level for the contribution from the REIT and its
partners.
BUSINESS OVERVIEW AND STRATEGY
Inovalis REIT is an unincorporated open-ended real estate
investment trust governed by the laws of the Province of
Ontario. Inovalis REIT was founded
and sponsored by Inovalis SA, our asset manager. Our Units have
been listed on the Toronto Stock Exchange under the trading symbol
INO.UN since April 10, 2013. Our head
and registered office is located at 151 Yonge Street,
11th floor, Toronto,
Ontario, M5C 2W7.
Our long-term objectives are to:
(1)
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generate predictable
and growing cash distributions on a tax-efficient basis from
investments in income-producing office properties
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(2)
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maximize the
long-term value of both our properties and Units through active and
efficient management
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(3)
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grow our asset base,
primarily in France and Germany, but also opportunistically in
other European countries where assets meet our investment
criteria
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(4)
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increase the cash
available for distribution to holders of Units ("Unitholders"),
through an accretive acquisition program that successfully
leverages Inovalis SA's extensive relationships and depth of
commercial property and financing.
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The REIT's Investment criteria encompasses office properties
outside of Canada with an
occupancy level above 80% (unless AFFO accretive), secured rental
cash flows, a property value between €20 million ($28 million) to €60 million ($85 million) (unless AFFO accretive) and a
potential future upside with respect to matters including rent and
area development. According to management, this target investment
size falls within a very liquid segment of the real estate market
in Europe, and debt financing for
such acquisitions is readily available from local lenders.
BUSINESS ENVIRONMENT
French commercial real estate investment market
Investment in commercial real estate in France reached €31.0 BN ($43.9 BN) in 2016, in line with 2015 figure,
evidencing that, despite its slow economic growth, France is still much sought after. The
Greater Paris region accounted for
the largest share of acquisitions (75%). Offices are still
investors' favorite, attracting 62% of investment or €19.1 BN
($27.1 BN).
According to BNP Paribas Real Estate, the prime yield in the
Central Business District compressed down to 3.15% as at Q4 2016
(from 3.25% as at Q4 2015) and the prime yield in the Inner Rim
further down to 4.35% (from 4.50% as at Q4 2015). Investors have
increasingly bought properties beyond Paris business districts,
which are structurally incapable of supplying demand and which
offer low yields. Non-prime office yields have also declined in the
majority of markets in the Greater Paris Region and are
increasingly sought after.
As at December 31, 2016, the
vacancy rate in the Greater Paris Region declined to 6.2% (compared
to 6.9% as at December 31, 2015), a
lowest since 2009 and inside Paris was below 4.0%. This figure is
mainly comprised of lower quality properties as, according to CBRE,
new and redeveloped properties only accounted for 15% of the
immediate supply.
German commercial real estate investment market
Investment in commercial real estate in Germany reached €52.6 BN ($74.5 BN) in 2016, just 6% lower than 2015's
exceptional figure. The slight decline is due entirely to an
insufficient scale of supply. Offices are still investors'
favorite, attracting 42% of investment or €23.0 BN ($32.6 BN) in 2016.
The strong scale of investor interest coupled with restricted
asset availability has prompted a further fall in yields. In the
past twelve months, prime yields in the major cities (Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, Munich) have eased by an average of nearly 55
basis points and prime office properties today trade at cap rates
ranging between 3.30% and 3.85%.
For investors, Germany
continues to offer an extremely attractive and stable environment
with interest rates still low, active consumers, upward-trending
early indicators and a labour market that remains robust. BNP
Paribas Real Estate expects another very strong investment year and
in view of the considerable number of deals already close to
conclusion, the first quarter is likely to be one of the best in
the past ten years. The uncertainties in the global context
actually tend to reinforce this tendency, because international
players above all appreciate Germany as a safe haven.
REAL ESTATE MANAGEMENT AND ADVISORY SERVICES
Pursuant to a management agreement, Inovalis SA is the manager
of the REIT and provides the strategic, advisory, asset management,
project management, construction management, property management
and administrative services necessary to manage the operations of
the REIT.
Upon the earlier of (i) the REIT achieving a market
capitalization of $750 million
(including any Exchangeable securities held by Inovalis SA) based
on the volume weighted average price (VWAP) over a 20-day trading
period and (ii) April 10, 2018, the
Management Agreement will terminate and the management of the REIT
will be internalized at no additional cost.
OUR OPERATIONS
Performance indicators(1)
As
at
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December 31,
2016
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December 31,
2015
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Gross leasable area
(sq.ft)
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1,050,336
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1,004,448
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Number of
properties
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11
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10
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Number of
tenants
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42
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31
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Occupancy rate
(2)
|
95.9%
|
91.4%
|
Weighted average
lease term (3)
|
5.3 years
|
6.3 years
|
|
|
(1)
|
Taking into account
the interest the REIT has in the properties held in
partnerships.
|
(2)
|
Calculated on
weighted areas (activity, storage and intercompany restaurant areas
being accounted only for a third of their effective
areas).
|
(3)
|
Excluding early
termination rights. Taking into account early termination rights,
the weighted average lease term is 3.5 years as at December 31,
2016 compared to 4.6 years as at December 31, 2015.
|
Portfolio
The REIT has an interest in 11 properties, of which 7 are
entirely owned by the REIT (Baldi, Courbevoie, Jeuneurs,
Metropolitan, Sablière and Vanves in France, Hanover in Germany) and 4 are held through partnerships
with various global institutional funds (Arcueil in France, Bad Homburg, Cologne and Duisburg in Germany). 7 properties are in France and 4 properties are in Germany.
These metrics include neither the forward purchased property in
Ingolstadt (expected to be delivered in the first quarter of 2018)
nor the redevelopment loan granted to the property in Rueil
(Paris Western periphery).
In November 2016, the REIT
announced the sale to the user of the main non-office component
of the Baldi property located in Saint-Ouen, in Paris Northern periphery. The Baldi property,
dedicated mainly to office (68%) and partly to light industrial
(18%) use, was acquired in November
2014 for a total purchase price of €22.0 million
($31.2 million). Upon acquisition,
the vacant industrial space, totaling 31,591 sq.ft, had no value
attributed to it. The REIT was able to successfully lease up the
vacant industrial space in March
2016, carve out the industrial portion of the property and
sell it to the tenant occupying the space for €2.7 million
($3.8 million).
Occupancy
The overall weighted average occupancy rate across our portfolio
was 95.9% at December 31, 2016. New
leases were signed on approximately 66,000 sq.ft in five of our
properties (Bad Homburg, Baldi, Courbevoie, Metropolitan and
Sablière) in 2016. This reflects the good positioning of our
properties in an improving letting market and shows an
outperformance of the market that has a vacancy rate of 6.2% in the
Greater Paris Region and in the vicinity of 5% in the German
markets in which the REIT is invested. Weighted average lease term
was 5.3 years as at December 31,
2016.
Tenants
The tenant base in the portfolio is well diversified from an
industry segment standpoint, with many tenants having large
national or multinational footprints. As at December 31, 2016, the REIT had 42 different
tenants. 72% of 2017 estimated gross rental income come from French
public agencies, are guaranteed by large German or international
banks, or are signed with investment grade corporates or are
affiliates of investment grade corporates.
The following table shows our five largest tenants, sorted out
by contribution to gross leasable area (GLA). The GLA shown for
these tenants reflects the percentage of ownership the REIT has in
the underlying property.
Tenant
|
|
Tenant
Sector
|
|
GLA
(sq.ft.) (1)
|
Weighted Areas
(sq.ft) (1) (2)
|
% of
Weighted
Areas
|
Orange (formerly
France Telecom)
|
|
Telecommunications
|
|
268,740
|
253,652
|
25.9%
|
Facility Services
Hannover GmbH
|
|
Banking / Real
estate
|
|
124,076
|
124,076
|
12.7%
|
Mitsubishi Hitachi
Power Systems Europe GmbH
|
|
Manufacturer
|
|
108,959
|
104,046
|
10.6%
|
Rue du
Commerce
|
|
E-commerce
|
|
51,926
|
51,926
|
5.3%
|
National Conservatory
of Arts and Crafts
|
|
Education and
training
|
|
50,407
|
49,543
|
5.1%
|
Top 5
tenants
|
|
|
|
604,108
|
583,243
|
59.5%
|
Other
tenants
|
|
Diversified
|
|
386,146
|
356,909
|
36.4%
|
Vacant
|
|
|
|
60,082
|
40,249
|
4.1%
|
Total
|
|
|
|
1,050,336
|
980,401
|
100.0%
|
(1)
|
Taking into account
the interest the REIT has in the properties held in
partnerships
|
(2)
|
Weighted areas are
calculated with activity, storage and intercompany restaurant areas
being accounted only for a third of their effective
areas.
|
Our largest tenant Orange is rated BBB+/Baa1/BBB+ by
S&P/Moody's/Fitch and has leases in two of our properties, the
Vanves property and the Arcueil property (held in partnership).
Leasing profile
Rental indexation
All
leases have rental indexation based on either the French ICC
(construction cost index) or ILAT (index averaging construction
costs and CPI indexes) or the German Consumer Price Index, as
applicable.
Lease rollover profile
The REIT has an average
remaining lease term of 5.3 years (not including tenant early
termination rights). Assuming all tenants leave at the earliest
possible early termination rights, which is a highly improbable
scenario, the average remaining lease term in our portfolio is 3.5
years. The following graph sets out the amount of GLA and
percentage of total GLA of the properties subject to leases
expiring during the periods shown (excluding early lease
terminations).
Lease Maturity
Profile as at December 31, 2016
|
(% of total
GLA)
|
|
|
|
|
|
Implicit
Renewal
|
1.6%
|
|
2023
|
10.1%
|
2017
|
0.0%
|
|
2024
|
19.0%
|
2018
|
5.0%
|
|
2025
|
7.0%
|
2019
|
6.2%
|
|
2026
|
0.4%
|
2020
|
17.6%
|
|
Total
|
95.9%
|
2021
|
27.6%
|
|
Vacant
areas
|
4.1%
|
2022
|
1.3%
|
|
Total
|
100.0%
|
CONSOLIDATED FINANCIAL INFORMATION
Our discussion of results of operations includes our
proportionate share of income from investments in joint ventures.
Please refer to "Non IFRS section" for a reconciliation to
our condensed interim consolidated financial statements.
|
|
Three months ended
December 31
|
|
Twelve months
ended December 31
|
(in thousands
of CAD$)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Rental
income
|
|
8,188
|
|
6,854
|
|
31,036
|
|
25,656
|
Service charge
income
|
|
2,427
|
|
2,168
|
|
7,823
|
|
8,097
|
Service charge
expenses
|
|
(1,884)
|
|
(1,841)
|
|
(9,753)
|
|
(9,335)
|
Other
revenues
|
|
54
|
|
-
|
|
208
|
|
1,240
|
Other property
operating expenses
|
|
(88)
|
|
(206)
|
|
(214)
|
|
(266)
|
Net rental
earnings
|
|
8,698
|
|
6,975
|
|
29,100
|
|
25,392
|
|
|
|
|
|
|
|
|
|
Administration
expenses
|
|
(1,407)
|
|
(1,525)
|
|
(6,001)
|
|
(5,013)
|
Foreign exchange
(loss) gain
|
|
579
|
|
79
|
|
640
|
|
130
|
Net change in fair
value of investment properties
|
|
(2,417)
|
|
9,154
|
|
4,013
|
|
22,719
|
Gain on bargain
purchase
|
|
-
|
|
(621)
|
|
-
|
|
750
|
Gain resulting from
exercice of the purchase option
|
|
-
|
|
-
|
|
9,213
|
|
-
|
Acquisition
costs
|
|
185
|
|
163
|
|
(553)
|
|
(1,015)
|
Operating
earnings
|
|
5,638
|
|
14,225
|
|
36,414
|
|
42,963
|
|
|
|
|
|
|
|
|
|
Gain (loss) on
financial instruments at fair value through P&L
|
|
1,149
|
|
53
|
|
(1,320)
|
|
(1,113)
|
Loss on exercise of
early payment option on finance leases
|
|
-
|
|
-
|
|
(1,242)
|
|
-
|
Loss on refinancing
of a debt
|
|
-
|
|
(1,077)
|
|
(605)
|
|
(1,077)
|
Finance
income
|
|
82
|
|
402
|
|
1,254
|
|
1,557
|
Finance
costs
|
|
(2,197)
|
|
(4,495)
|
|
(7,984)
|
|
(7,577)
|
Additionnal income
(loss) from Arcueil's JV
|
|
(1,762)
|
|
-
|
|
(481)
|
|
-
|
Distributions on
Exchangeable securities
|
|
(363)
|
|
(423)
|
|
(1,890)
|
|
(1,688)
|
Net change in fair
value of Exchangeable securities
|
|
1,427
|
|
(1,189)
|
|
589
|
|
(1,118)
|
Earnings before
income taxes
|
|
3,974
|
|
7,496
|
|
24,735
|
|
31,947
|
|
|
|
|
|
|
|
|
|
Current income tax
expense
|
|
(237)
|
|
(11)
|
|
(367)
|
|
(74)
|
Deferred income tax
expense
|
|
(587)
|
|
(844)
|
|
(963)
|
|
(1,073)
|
|
|
|
|
|
|
|
|
|
Earnings for the
period
|
|
3,150
|
|
6,641
|
|
23,406
|
|
30,800
|
Non-controlling
interest
|
|
165
|
|
-
|
|
121
|
|
-
|
Earnings for the
period (part attributable to the Trust)
|
|
2,984
|
|
6,641
|
|
23,284
|
|
30,800
|
As there has been no significant change in the exchange rate for
the conversion of Euros into Canadian dollars for the three-month
period ended December 31, 2016
compared to the same period in 2015 (1.4660 vs. 1.4609) and that
these rates were also used for the twelve-month periods, no
explicit foreign exchange impact will be discussed in the following
comments for the statement of earnings items.
Net rental earnings
Net rental earnings for the three-month period ended
December 31, 2016 reached
$8,698 compared to $6,975 in 2015, amounting to an increase of 24.3%
year on year. Out of the $1,723
increase, $1,239 was coming from the
properties wholly owned by the REIT (accounted for by the
Metropolitan acquisition for approximately $950 and the signature of new leases in the
Baldi, Courbevoie and Sablière properties) and $484 from the properties held in partnership (due
to the addition of the Cologne
property and to a higher recovery rate of operating expenses).
For the year ended December 31,
2016, net rental earnings increased by $3,708 compared to the previous year, amounting
to a 14.2% year on year increase. Excluding a one-off gain of
$1,240 in 2015 on the recovery of an
indemnity, the year-on-year increase is $4,948 or 23.0%. $2,032 was coming from the properties wholly
owned by the REIT (accounted for by the combination of an increase
due to the Metropolitan acquisition for approximately $2,700, the net addition of new tenants despite
some departures generating approximately $280 of new rental income, partially offset by an
increase of non recoverable charges on properties for approximately
$950). $2,916 was coming from the properties held in
partnership, mainly due to an increase of rental income of
approximately $2,500 coming from the
addition to the portfolio of the Arcueil, Bad Homburg and
Cologne properties in 2015.
Administration expenses
Administration expenses are primarily comprised of asset
management fees paid to Inovalis SA and of other general
administrative expenses such as trustee fees, directors' and
officers' liability insurance, professional fees (including
accounting fees), legal fees, filing fees, shareholders related
expenses and other expenses. Administration expenses for the
quarter ended December 31, 2016
amounted to $1,407 vs. $1,525 for the quarter ended December 31, 2015. $837 is related to the asset management fees paid
to Inovalis SA (vs. $774 for the
quarter ended December 31, 2015) and
$570 to other expenses (vs.
$751 for the quarter ended
December 31, 2015). The significant
decrease in other expenses is the result of recent measures taken
so as to reduce the REIT's expenses.
Administration expenses for the year ended December 31, 2016 amounted to $6,001 vs. $5,013
for the year ended December 31, 2015.
$3,380 is related to the asset
management fees paid to Inovalis SA (vs. $2,666 for the year ended December 31, 2015) and $2,621 to other general administrative expenses
(vs. $2,347 for the year ended
December 31, 2015). The year-on-year
increase of 19.3% is in line with the increase of net rental
earnings for the same period (23.0% excluding 2015 non-recurring
income). The increases in these expenses are partly accounted for
by the increased complexity associated with the higher number of
buildings, rapid growth and regulatory and corporate
compliance.
Net change in fair value of investment properties
During the quarter ended December 31,
2016, the net change in fair value of investment properties
recognized in earnings was a loss of $2,417 accounted for by an increase in the value
of the properties for $1,409 and a
$3,826 decrease due to the sale of
the studio areas in the Baldi property. The Company had recognized
a net increase in fair value of $9,154 during the corresponding quarter ended
December 31, 2015.
For the year ended December 31,
2016, excluding the impact of the sale of the studio areas
in the Baldi property, the value of the properties increased by
$7,839 compared to a gain of
$22,719 in 2015. This continued
increase is accounted for by the cap rate compression witnessed in
the European real estate office markets.
Gain on the option related to the acquisition of the
Metropolitan property
For the year ended December 31,
2016, the total gain in fair value of the purchase option
was $9,213. As per the Acquisition
loan that the REIT granted to Inovalis SA in 2014, the REIT was
entitled to receive a portion of the profit generated on the
stabilization of the property that would translate into a discount
to the purchase price in the event the REIT elected to exercise its
right of first offer for the purchase of the property once the
latter met the investment criteria of the REIT.
Acquisition costs
The positive acquisition costs of $185 recorded in the three-month period ended
December 31, 2016 were an adjustment
to costs previously recorded by the REIT in the context of previous
acquisitions.
For the year ended December 31,
2016, the acquisition costs stood at $553, mainly due to the Metropolitan acquisition
(notary and transfer taxes).
Gain (loss) on financial instruments at fair value through
profit and loss
The REIT recognized a gain on financial instruments at fair
value through profit and loss for the quarter ended December 31, 2016 of $1,149. For the year ended December 31, 2016, the REIT recognized a loss of
$1,320. These gains and losses are
mostly the result of the variation in value realized on the foreign
exchange ("FX") contracts.
Loss on exercise of early payment option on finance
leases
This element appears only in the year ended December 31, 2016 and has no impact on the
three-month period ended December 31,
2016. A loss of $1,242 was
recorded in the year ended December 31,
2016 further to the exercise by the REIT of its option to
purchase the Metropolitan property that was financed under a
finance lease. Concomitantly with the transaction, the REIT closed
a new finance lease contract to replace the finance lease assumed
as part of the transaction.
Loss on debt refinancing
This element appears only in the year ended December 31, 2016 and has no impact on the
three-month period ended December 31,
2016. During the quarter ended March
31, 2016, the REIT refinanced its debt on the Hanover property. The finance lease in place
was terminated and replaced with a mortgage financing. The impact
of de-recognition of the finance lease amounted to $605.
Finance income
Until March 21, 2016, finance
income was almost entirely comprised of the interests perceived by
the REIT on the Acquisition loan (Metropolitan transaction). The
REIT stopped receiving such interests on March 21, 2016 when it completed the acquisition
of the Metropolitan property.
Finance costs
For the three-month period ended December
31, 2016, the finance costs amounted to $2,197 including $1,692 for interests costs related to finance
leases, mortgage loans and the lease equalization loans,
$505 of other finance costs
(including amortization of fair value adjustment on finance leases
assumed at a discount at the time of a business acquisition,
amortization of transaction costs on mortgage loans and other
miscellaneous costs).
For the year ended December 31,
2016, the finance costs amounted to $7,984 including $6,659 for interests costs related to finance
leases, mortgage loans, the lease equalization loans and the loan
granted by the partner on the Cologne transaction, $1,325 of other finance costs (including
amortization of fair value adjustment on finance leases assumed at
a discount at the time of a business acquisition, amortization of
transaction costs on mortgage loans and other miscellaneous
costs).
Additional income (loss) from Arcueil's JV
For the Arcueil joint venture, an interest of 25% in the
partnership was taken into account in the proportionate
consolidation presentation, in line with the apportioned investment
in the transaction by the REIT of 25% while, as per the joint
venture agreement and as reflected in the condensed interim
consolidated financial statements, is entitled to receive a 25%
share of the net earnings and, upon asset disposal, 75% of the
variance of fair value of investment properties, reduced by 100% of
FX derivative costs. This additional loss from Arcueil's joint
venture is $1,762 for the three-month
and $481 for the twelve-month periods
ended December 31, 2016.
Distributions on Exchangeable securities
Distributions to the holders of Exchangeable securities are
calculated in a manner to provide a return that is economically
equivalent to the distributions received by the Unitholders. During
the three-month period ended December 31,
2016 the distribution recognized on Exchangeable securities
was $363 while it was $423 for the same period in 2015. The decrease is
accounted for by the conversion by Inovalis of 920,000 Exchangeable
securities into Units during the year. During the year ended
December 31, 2016 the distribution
recognized on exchangeable securities was $1,890 while it was $1,688 for the same period in 2015. The increase
for the year is the result of the additional Exchangeable
securities received by Inovalis SA in lieu of asset management fees
partially offset by the conversion of 920,000 Exchangeable
securities into Units.
Net change in fair value of Exchangeable securities
The net change in value of the Exchangeable securities, as well
as the cost of distributions recognized on Exchangeable securities,
are recognized in profit and loss because, for financial reporting
purposes, the Exchangeable securities have been classified as a
liability at fair value through profit or loss.
For the three-month period ended December
31, 2016, the REIT reported a gain of $1,427 which is the result of the decrease in the
amount of the debt following the conversion of 500,000 of
Exchangeable securities into Units of the REIT in December 2016 combined with the change in the
closing price of Units on the TSX which was $9.04 on December 31,
2016 compared to $9.84 as at
September 30, 2016. During the year
ended December 31, 2016, Inovalis SA
converted 920,000 Exchangeable securities into Units. The net gain
resulting from the change in fair value of the exchangeable
securities was $589 for the year
ended December 31, 2016. The closing
price on the TSX was $9.04 on
December 31, 2016 and $9.37 on December 31,
2015.
Current income tax expense
The current income tax expense incurred of $237 for the quarter ended December 31, 2016 and of $367 for the year ended December 31, 2016 amounts to a withholding tax
paid by the REIT's Luxemburg
holding company on the dividends it received from affiliates and a
tax payable on foreign exchange gain on the funds coming from the
recent equity offering.
Last 24 Months Key Financial Information
The information provided in this section includes our
proportionate share of income from investments in joint ventures.
Please refer to "Non IFRS section" for reconciliation to our
condensed interim consolidated financial statements.
|
|
|
|
|
3-month period
ended
|
(in thousands
of CAD$)
|
|
|
Dec. 31,
2016
|
Sept.
30,
2016
|
June 30,
2016
|
March
31,
2016
|
Dec. 31,
2015
|
Sept.
30,
2015
|
June 30,
2015
|
March
31,
2015
|
Rental
income
|
|
|
8,188
|
7,617
|
7,797
|
7,431
|
8,423
|
7,710
|
6,006
|
5,866
|
Net rental
earnings
|
|
|
8,698
|
7,902
|
8,349
|
4,135
|
8,690
|
7,321
|
8,047
|
3,731
|
Earnings for the
period
|
|
|
2,984
|
11,833
|
5,839
|
2,628
|
6,641
|
4,479
|
16,615
|
3,065
|
Earnings per Unit
(CAD$)
|
|
|
0.14
|
0.60
|
0.37
|
0.15
|
0.43
|
0.29
|
1.08
|
0.20
|
NON-IFRS RECONCILIATION
Investments in joint ventures
The REIT's proportionate share of the financial position and
results of operation of its investment in joint ventures, which are
accounted for using the equity method under IFRS in the condensed
interim consolidated financial statements, are presented below
using the proportionate consolidation method (with the exception of
Arcueil), which is a non-GAAP measure. For the purpose of the
proportionate consolidation, the initial investment of both
partners in the joint ventures were considered as being equity
investments as opposed to a combination of equity and loans and
accordingly, the related proportionate consolidation balance sheet
items were eliminated as well as the associated finance income and
finance costs. Due to the specificity of the Arcueil joint venture,
some figures of the periods ended December
31, 2015 have been reclassified in order to ensure
comparability with the figures for the periods ended December 31, 2016.
For the Arcueil joint venture, an interest of 25% in the
partnership was taken into account in the proportionate
consolidation presentation, in line with the apportioned investment
in the transaction by the REIT of 25% while, as per the joint
venture agreement and as reflected in the condensed interim
consolidated financial statements, the REIT is entitled to receive
a 75% share of the net profit. A line entitled "additional gain or
loss from Arcueil's joint venture" in the Consolidated statement of
earnings reconciliation to consolidated financial statements
bridges both presentations. A reconciliation of the financial
position and results of operations to the condensed interim balance
sheets and consolidated statements of earnings is included in the
tables showed in the Non-IFRS Reconciliation section.
For the three-month period and year ended December 31, 2016, the proportional financial
results include the following proportion of the revenues and
expenses of each one of the joint ventures: 50% for Duisburg and
Walpur (Bad Homburg), 49% for Cologne and 25% for Arcueil. The figures of
the period ended December 31, 2015
have been reclassified in order to ensure comparability with the
figures for the period ended December 31,
2016.
FFO and AFFO
|
|
Three months ended
December 31
|
|
Year ended
December 31
|
(in thousands
of CAD$)
|
|
2016
|
2015
|
|
2016
|
2015
|
|
|
|
|
|
|
|
Earnings for the
period
|
|
2,985
|
6,641
|
|
23,284
|
30,800
|
|
|
-
|
-
|
|
-
|
-
|
Add/(Deduct):
|
|
-
|
-
|
|
-
|
-
|
Adjustment to related
acquisition costs
|
|
(185)
|
(127)
|
|
553
|
113
|
Less other revenues
(recovery indemnity)
|
|
-
|
-
|
|
-
|
(1,240)
|
Gain resulting from
exercice of the purchase option
|
|
-
|
-
|
|
(9,213)
|
-
|
Loss recognized on
exercise of early payment option on finance leases
|
|
(0)
|
1,077
|
|
1,242
|
1,077
|
Loss on refinancing
of a debt
|
|
-
|
-
|
|
605
|
-
|
Net change in fair
value of investment properties
|
|
2,417
|
(8,800)
|
|
(4,013)
|
(21,523)
|
(Gain) loss on
financial instruments at fair value through profit and
loss
|
|
(1,149)
|
(77)
|
|
1,320
|
951
|
Gain on disposal of a
50% interest in a subsidiary
|
|
-
|
-
|
|
-
|
-
|
Adjustment for
property taxes accounted for under IFRIC 21
|
|
(872)
|
(620)
|
|
-
|
-
|
Share of net earnings
of investments (equity method)
|
|
-
|
123
|
|
-
|
(517)
|
Additional income
(loss from Arcueil's JV)
|
|
1,762
|
-
|
|
481
|
-
|
Net finance costs
(income) from joint venture investments
|
|
-
|
2,712
|
|
-
|
(558)
|
Distributions on
Exchangeable securities
|
|
363
|
423
|
|
1,890
|
1,688
|
Change in fair value
of Exchangeable securities
|
|
(1,427)
|
1,189
|
|
(589)
|
1,118
|
Foreign exchange
(loss) gain
|
|
(579)
|
(79)
|
|
(640)
|
(130)
|
Non-recurring finance
income from Inovalis relating to Metropolitan
|
|
-
|
5
|
|
(797)
|
51
|
Other non-recurring
finance costs
|
|
235
|
-
|
|
551
|
-
|
Deferred income tax
expense
|
|
587
|
634
|
|
963
|
655
|
FFO from Joint
Ventures
|
|
-
|
772
|
|
-
|
2,669
|
Minority
interest
|
|
165
|
-
|
|
122
|
-
|
|
|
|
|
|
|
|
FFO
|
|
4,302
|
3,873
|
|
15,757
|
15,154
|
|
|
-
|
-
|
|
-
|
-
|
Add/(Deduct):
|
|
|
|
|
|
|
Non-cash effect of
straight line rents
|
|
57
|
(97)
|
|
182
|
(2,281)
|
Cash effect of the
lease equalization loans
|
|
(166)
|
321
|
|
(851)
|
2,678
|
Amortization of fair
value adjustment on assumed debt
|
|
94
|
109
|
|
239
|
433
|
Amortization of
transaction costs on mortgage loans
|
|
68
|
92
|
|
302
|
394
|
Non-cash part of
asset management fees paid
in Exchangeable securities (1)
|
|
385
|
288
|
|
1,690
|
1,090
|
Capex net of cash
subsidy
|
|
(100)
|
(100)
|
|
(400)
|
(400)
|
Adjustement from
investment
|
|
0
|
49
|
|
54
|
122
|
|
|
0
|
-
|
|
0
|
-
|
AFFO
|
|
4,640
|
4,535
|
|
16,973
|
17,190
|
|
|
|
|
|
|
|
FFO / Units (diluted)
(in CAD$) (2)
|
|
0.19
|
0.22
|
|
0.77
|
0.87
|
AFFO / Units
(diluted) (in CAD$) (2)
|
|
0.20
|
0.26
|
|
0.83
|
0.98
|
|
|
|
|
|
|
|
Excluding Units part
of the July 2016 equity offering
|
|
|
|
|
|
|
FFO / Units (diluted)
(in CAD$) (3)
|
|
0.23
|
0.22
|
|
0.87
|
0.87
|
AFFO / Units
(diluted) (in CAD$) (3)
|
|
0.25
|
0.26
|
|
0.94
|
0.98
|
(1)
|
For purposes of this
presentation, 50% of non-cash part of the asset management fee is
included in the AFFO reconciliation. Notwithstanding, 100% of the
asset management fee is paid in Exchangeable securities
|
(2)
|
Based on the weighted
average number of Units (fully diluted), i.e. 23,221,198 and
17,612,256 for the 3-month periods ended December 31, 2016 and
December 31, 2015 and 20,361,577 and 17,471,542 for the years ended
December 31, 2016 and December 31, 2015.
|
(3)
|
Based on the weighted
average number of Units (fully diluted), i.e. 18,379,008 and
17,612,256 for the 3-month periods ended December 31, 2016 and
December 31, 2015 and 18,125,703 and 17,471,542 for the years ended
December 31, 2016 and December 31, 2015.
|
Management believes FFO is an important measure of our operating
performance and is indicative of our ability to pay distributions.
However, it does not represent cash flow from operating activities
as defined by IFRS and is not necessarily indicative of cash
available to fund Inovalis REIT's needs. This non-IFRS measurement
is commonly used for assessing real estate performance. However, it
does not represent cash flow from operating activities as defined
by IFRS and is not necessarily indicative of cash available to fund
Inovalis REIT's needs. Our FFO and AFFO calculations are based on
the average foreign exchange rate for the period (1.4660 Canadian dollars per Euro for the year
ended December 31, 2016) and does not
take into account our foreign currency hedging arrangements (more
than 95% of our monthly cash distributions are covered until
April 2019 at an average rate of
1.4776).
Balance sheet reconciliation to consolidated financial
statements
|
|
As at December 31,
2016
|
|
As at December 31,
2015
|
Assets
|
|
As per
REIT's
financial
statements
(1)
|
|
Share from
investments in joint-ventures
|
|
Proportionate
Consolidation
|
|
As per REIT's
financial
statements (1)
|
|
Share from
investments in joint-ventures
|
|
Proportionate
Consolidation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets
|
|
|
|
|
|
|
|
|
|
|
|
Investment
properties
|
412,231
|
|
97,401
|
|
509,633
|
|
355,704
|
|
100,359
|
|
456,063
|
Investments accounted
for using the equity method
|
|
43,887
|
|
(43,887)
|
|
-
|
|
40,337
|
|
(40,337)
|
|
-
|
Acquisition loans and
deposit
|
|
8,906
|
|
-
|
|
8,906
|
|
18,786
|
|
-
|
|
18,786
|
Derivative financial
instruments
|
590
|
|
-
|
|
590
|
|
92
|
|
-
|
|
92
|
Restricted cash and
other financial assets
|
-
|
|
-
|
|
-
|
|
1,375
|
|
-
|
|
1,375
|
Total non-current
assets
|
465,615
|
|
53,515
|
|
519,129
|
|
416,294
|
|
60,022
|
|
476,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other
receivables
|
3,368
|
|
(35)
|
|
3,333
|
|
4,803
|
|
816
|
|
5,619
|
Derivative financial
instruments
|
520
|
|
152
|
|
672
|
|
197
|
|
159
|
|
356
|
Other current
assets
|
|
1,638
|
|
375
|
|
2,013
|
|
1,333
|
|
39
|
|
1,372
|
Financial current
assets
|
|
27,910
|
|
-
|
|
27,910
|
|
-
|
|
-
|
|
-
|
Restricted
cash
|
-
|
|
-
|
|
-
|
|
305
|
|
-
|
|
305
|
Cash and cash
equivalents
|
11,074
|
|
2,446
|
|
13,520
|
|
6,895
|
|
3,958
|
|
10,853
|
Total current
assets
|
44,510
|
|
2,938
|
|
47,448
|
|
13,533
|
|
4,972
|
|
18,505
|
Total
assets
|
|
510,125
|
|
56,452
|
|
566,577
|
|
429,827
|
|
64,994
|
|
494,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Unitholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Loans from
joint-venture partners
|
-
|
|
-
|
|
-
|
|
-
|
|
6,480
|
|
6,480
|
Mortgage
loans
|
83,998
|
|
34,547
|
|
118,545
|
|
70,779
|
|
36,133
|
|
106,912
|
Finance lease
liabilities
|
120,891
|
|
16,389
|
|
137,279
|
|
120,285
|
|
17,192
|
|
137,477
|
Other long-term
liabilities
|
-
|
|
947
|
|
947
|
|
-
|
|
1,171
|
|
1,171
|
Lease equalization
loans
|
4,051
|
|
-
|
|
4,051
|
|
5,090
|
|
-
|
|
5,090
|
Tenant
deposits
|
2,178
|
|
-
|
|
2,178
|
|
1,746
|
|
-
|
|
1,746
|
Exchangeable
securities
|
4,603
|
|
-
|
|
4,603
|
|
18,034
|
|
-
|
|
18,034
|
Provision on
investment (equity method)
|
-
|
|
-
|
|
-
|
|
925
|
|
(925)
|
|
-
|
Derivative financial
instruments
|
1,616
|
|
206
|
|
1,822
|
|
2,698
|
|
158
|
|
2,856
|
Deferred tax
liabilities
|
2,236
|
|
1,273
|
|
3,509
|
|
1,651
|
|
1,332
|
|
2,983
|
Total non-current
liabilities
|
219,573
|
|
53,361
|
|
272,934
|
|
221,208
|
|
61,541
|
|
282,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans
|
541
|
|
-
|
|
541
|
|
415
|
|
-
|
|
415
|
Finance lease
liabilities
|
24,179
|
|
637
|
|
24,816
|
|
6,217
|
|
582
|
|
6,799
|
Lease equalization
loans
|
1,184
|
|
-
|
|
1,184
|
|
1,335
|
|
-
|
|
1,335
|
Tenant
deposits
|
198
|
|
-
|
|
198
|
|
116
|
|
-
|
|
116
|
Exchangeable
securities
|
11,995
|
|
-
|
|
11,995
|
|
1,366
|
|
-
|
|
1,366
|
Derivative financial
instruments
|
1,225
|
|
6
|
|
1,231
|
|
878
|
|
-
|
|
878
|
Trade and other
payables
|
7,392
|
|
2,142
|
|
9,534
|
|
6,174
|
|
2,129
|
|
8,303
|
Other current
liabilities
|
|
734
|
|
277
|
|
1,011
|
|
469
|
|
742
|
|
1,211
|
Deffered
income
|
|
1,975
|
|
29
|
|
2,004
|
|
-
|
|
-
|
|
-
|
Total current
liabilities
|
49,423
|
|
3,091
|
|
52,514
|
|
16,970
|
|
3,453
|
|
20,423
|
Total
liabilities
|
|
268,996
|
|
56,452
|
|
325,448
|
|
238,178
|
|
64,994
|
|
303,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
Trust
units
|
189,158
|
|
-
|
|
189,158
|
|
136,365
|
|
-
|
|
136,365
|
Retained
earnings
|
43,455
|
|
-
|
|
43,455
|
|
35,359
|
|
-
|
|
35,359
|
Accumulated other
comprehensive income
|
|
8,395
|
|
-
|
|
8,395
|
|
19,925
|
|
-
|
|
19,925
|
|
|
241,008
|
|
-
|
|
241,008
|
|
191,649
|
|
-
|
|
191,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
interest
|
|
121
|
|
-
|
|
121
|
|
|
|
|
|
|
Total liabilities
and equity
|
|
510,125
|
|
56,452
|
|
566,577
|
|
429,827
|
|
64,994
|
|
494,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Balance
sheet amounts presented for the REIT were taken from the interim
consolidated financial statements as at December 31, 2016 and
December 31, 2015.
|
Consolidated statement of earnings reconciliation to
consolidated financial statements
|
|
Three months
ended
|
|
|
December 31,
2016
|
|
December 31,
2015
|
(in thousands
of CAD$)
|
|
Amounts
per REIT's financial statements(1)
|
|
Share of net
earnings from
investments
in joint ventures
|
|
Total
|
|
Amounts
per REIT's
financial statements(1)
|
|
Share of
earnings from
investments
in joint ventures
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
income
|
|
6,706
|
|
1,482
|
|
8,188
|
|
5,340
|
|
1,514
|
|
6,854
|
Service charge
income
|
|
1,951
|
|
476
|
|
2,427
|
|
1,898
|
|
270
|
|
2,168
|
Service charge
expenses
|
|
(1,545)
|
|
(339)
|
|
(1,884)
|
|
(1,427)
|
|
(414)
|
|
(1,841)
|
Other
revenues
|
|
(1)
|
|
55
|
|
54
|
|
-
|
|
-
|
|
-
|
Other property
operating expenses
|
|
(88)
|
|
-
|
|
(88)
|
|
(27)
|
|
(179)
|
|
(206)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net rental
earnings
|
|
7,023
|
|
1,674
|
|
8,698
|
|
5,784
|
|
1,191
|
|
6,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administration
expenses
|
|
(1,199)
|
|
(208)
|
|
(1,407)
|
|
(1,207)
|
|
(318)
|
|
(1,525)
|
Foreign exchange
gain
|
|
579
|
|
-
|
|
579
|
|
79
|
|
-
|
|
79
|
Net change in fair
value of investment properties
|
|
(3,570)
|
|
1,153
|
|
(2,417)
|
|
8,800
|
|
354
|
|
9,154
|
Gain on bargain
purchase
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(621)
|
|
(621)
|
Acquisition
costs
|
|
163
|
|
22
|
|
185
|
|
127
|
|
36
|
|
163
|
Share of profit of an
investment (equity method)
|
|
1,247
|
|
(1,247)
|
|
-
|
|
(123)
|
|
123
|
|
-
|
Operating
earnings
|
|
4,244
|
|
1,394
|
|
5,638
|
|
13,460
|
|
765
|
|
14,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on
financial instruments at fair value through P&L
|
|
1,078
|
|
72
|
|
1,149
|
|
77
|
|
(24)
|
|
53
|
Loss on exercise of
early payment option on finance leases
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Loss on refinancing
of a debt
|
|
-
|
|
-
|
|
-
|
|
(1,077)
|
|
-
|
|
(1,077)
|
Finance
income
|
|
(710)
|
|
792
|
|
82
|
|
(2,309)
|
|
2,711
|
|
402
|
Finance
costs
|
|
(1,680)
|
|
(517)
|
(2)
|
(2,197)
|
|
(1,253)
|
|
(3,242)
|
(2)
|
(4,495)
|
Additionnal income
(loss) from Arcueil's JV (3)
|
|
-
|
|
(1,762)
|
|
(1,762)
|
|
|
|
|
|
-
|
Distributions on
Exchangeable securities
|
|
(363)
|
|
-
|
|
(363)
|
|
(423)
|
|
-
|
|
(423)
|
Net change in fair
value of Exchangeable securities
|
|
1,427
|
|
-
|
|
1,427
|
|
(1,189)
|
|
-
|
|
(1,189)
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
Earnings before
income taxes
|
|
3,995
|
|
(21)
|
|
3,974
|
|
7,286
|
|
210
|
|
7,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax
expense
|
|
(232)
|
|
(6)
|
|
(237)
|
|
(11)
|
|
-
|
|
(11)
|
Deferred income tax
expense
|
|
(614)
|
|
27
|
|
(587)
|
|
(634)
|
|
(210)
|
|
(844)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings for the
period
|
|
3,150
|
|
-
|
|
3,149
|
|
6,641
|
|
-
|
|
6,641
|
Non-controlling
interest
|
|
165
|
|
|
|
165
|
|
-
|
|
|
|
-
|
Earnings for the
period (part attributable to the Trust)
|
|
2,984
|
|
-
|
|
2,984
|
|
6,641
|
|
-
|
|
6,641
|
(1)
|
Income statement
amounts presented for the REIT were taken from the internal
consolidated financial statements as at December 31,
2016
|
(2)
|
Includes the REIT's
share of the hedging cost of Arcueil's partner
|
(3)
|
Reflects the
additional loss assumed by the REIT's in reference with its actual
75% rights to the net profit of the Arcueil joint
venture.
|
|
|
Twelve months
ended
|
|
|
December 31,
2016
|
|
December 31,
2015
|
(in thousands
of CAD$)
|
|
Amounts
per REIT's
financial statements(1)
|
|
Share of net
earnings from
investments
in joint ventures
|
|
Total
|
|
Amounts
per REIT's
financial
statements(1)
|
|
Share of net
earnings from
investments
in joint
ventures
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
income
|
|
24,404
|
|
6,633
|
|
31,036
|
|
21,473
|
|
4,183
|
|
25,656
|
Service charge
income
|
|
6,546
|
|
1,278
|
|
7,823
|
|
7,222
|
|
875
|
|
8,097
|
Service charge
expenses
|
|
(8,525)
|
|
(1,228)
|
|
(9,753)
|
|
(8,040)
|
|
(1,295)
|
|
(9,335)
|
Other
revenues
|
|
171
|
|
38
|
|
208
|
|
1,240
|
|
-
|
|
1,240
|
Other property
operating expenses
|
|
(214)
|
|
-
|
|
(214)
|
|
(306)
|
|
40
|
|
(266)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net rental
earnings
|
|
22,381
|
|
6,720
|
|
29,100
|
|
21,589
|
|
3,803
|
|
25,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administration
expenses
|
|
(5,152)
|
|
(848)
|
|
(6,001)
|
|
(4,266)
|
|
(747)
|
|
(5,013)
|
Foreign exchange
gain
|
|
640
|
|
-
|
|
640
|
|
130
|
|
-
|
|
130
|
Net change in fair
value of investment properties
|
|
3,632
|
|
381
|
|
4,013
|
|
21,523
|
|
1,196
|
|
22,719
|
Gain on bargain
purchase
|
|
-
|
|
-
|
|
-
|
|
-
|
|
750
|
|
750
|
Gain resulting from
exercice of the purchase option
|
|
9,213
|
|
-
|
|
9,213
|
|
-
|
|
-
|
|
-
|
Acquisition
costs
|
|
(575)
|
|
22
|
|
(553)
|
|
(329)
|
|
(686)
|
|
(1,015)
|
Share of profit of an
investment (equity method)
|
|
1,107
|
|
(1,106)
|
|
1
|
|
517
|
|
(517)
|
|
-
|
Operating
earnings
|
|
31,246
|
|
5,168
|
|
36,414
|
|
39,164
|
|
3,799
|
|
42,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on financial
instruments at fair value through P&L
|
|
(1,269)
|
|
(51)
|
|
(1,320)
|
|
(951)
|
|
(162)
|
|
(1,113)
|
Loss on exercise of
early payment option on finance leases
|
|
(1,242)
|
|
-
|
|
(1,242)
|
|
|
|
|
|
|
Loss on refinancing
of a debt
|
|
(605)
|
|
-
|
|
(605)
|
|
(1,077)
|
|
-
|
|
(1,077)
|
Finance
income
|
|
4,344
|
|
(3,090)
|
|
1,253
|
|
2,115
|
|
(558)
|
|
1,557
|
Finance
costs
|
|
(6,488)
|
|
(1,495)
|
(2)
|
(7,984)
|
|
(4,919)
|
|
(2,658)
|
(2)
|
(7,577)
|
Additionnal income
(loss) from Arcueil's JV (3)
|
|
|
|
(481)
|
|
(481)
|
|
-
|
|
-
|
|
-
|
Distributions on
Exchangeable securities
|
|
(1,890)
|
|
-
|
|
(1,890)
|
|
(1,688)
|
|
-
|
|
(1,688)
|
Net change in fair
value of Exchangeable securities
|
|
589
|
|
-
|
|
589
|
|
(1,118)
|
|
-
|
|
(1,118)
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
Earnings before
income taxes
|
|
24,685
|
|
50
|
|
24,735
|
|
31,526
|
|
421
|
|
31,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax
expense
|
|
(336)
|
|
(31)
|
|
(367)
|
|
(71)
|
|
(3)
|
|
(74)
|
Deferred income tax
expense
|
|
(944)
|
|
(18)
|
|
(963)
|
|
(655)
|
|
(418)
|
|
(1,073)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings for the
period
|
|
23,405
|
|
-
|
|
23,405
|
|
30,800
|
|
-
|
|
30,800
|
Non-controlling
interest
|
|
121
|
|
|
|
121
|
|
-
|
|
-
|
|
-
|
Earnings for the
period (part attributable to the Trust)
|
|
23,284
|
|
-
|
|
23,284
|
|
30,800
|
|
-
|
|
30,800
|
(1)
|
Income statement
amounts presented for the REIT were taken from the internal
consolidated financial statements as at December 31,
2016
|
(2)
|
Includes the REIT's
share of the hedging cost of Arcueil's partner
|
(3)
|
Reflects the
additional loss assumed by the REIT's in reference with its actual
75% rights to the net profit of the Arcueil joint
venture.
|
PROPERTY CAPITAL
INVESTMENTS
Fair value
The fair value of our investment property portfolio as at
December 31, 2016 was $509.6 million including the REIT's interests in
the properties held in partnerships (vs. $456.1 million as at December 31, 2015). The fair value of the French
properties was $409.7 million (80.4%
of total value) and the fair value of the German properties was
$99.9 million (19.6% of total
value).
On a same store basis (i.e. excluding the 2016 Metropolitan
acquisition), the fair value of our investment property portfolio
as at December 31, 2016, including
the REIT's interests in the properties held in partnerships, was
$434.4 million vs. $456.1 million as at December 31, 2015. The $21.7 million decrease is accounted for by a
$4.4 million increase in value of the
properties (including the impact on Baldi further to the partial
sale of the property) and a $26.1
million decrease due to foreign exchange movements.
Management principally uses discounted cash flows to determine
the fair value of the investment properties. These values are
supported by third party appraisals in conformity with the
requirements of the Royal Institution of Chartered Surveyors
Standards, and for the French properties also in conformity
with the Charte de l'expertise immobilière, European
Valuation Standards of TEGoVA (the European Group of Valuers'
Association) and IFRS 13.
Please refer to note 7 of the audited consolidated financial
statements for a more complete discussion on our investment
properties and valuation rates used by the evaluators.
Building improvements
The REIT is committed to improving its operating performance by
incurring appropriate capital expenditures in order to replace and
maintain the productive capacity of its property portfolio so as to
sustain its rental income generating potential over the portfolio's
useful life.
Since the IPO in April 2013, a
total of $1.7 million has been spent
on the properties, funded by a reserve that was set aside by the
vendors of the four initial properties.
Guarantees, commitments and contingencies
The REIT and its subsidiaries have provided guarantees in
connection with the finance lease liabilities and the mortgage
loans, including pledge of affiliates of the REIT, first mortgages
and assignment of receivables and future receivables. As at
December 31, 2016, guarantees
provided by the REIT with respect to its long-term debts include a
preferential claim held by mortgage lenders on the Jeuneurs,
Veronese, Sablière and Hanover
properties in the amount of $84.0
million. Including the REIT's interest in the properties
held in partnerships, preferential claim held by mortgage lenders
on the properties totals $118.5
million.
Further to the reimbursement by the REIT of the $6.4 million equity bridge granted by the partner
on the Cologne transaction, the
pledge granted by the REIT on its 49% equity commitment to the
partner as guarantee was also released in the course of the second
quarter of 2016.
OTHER SIGNIFICANT ASSETS
Investments accounted for using the equity method
This section encompasses the 50% interest the REIT (through its
subsidiaries) has in the Duisburg property, the 50% interest in the
Walpur property, the 25% interest in the Arcueil property and the
49% interest in the Cologne
property. Our share of fair value of the investment properties
accounted for using the equity method was $44,703 as at December 31,
2016 compared to $40,337 as at
December 31, 2015.
Acquisition loans and deposit
As at December 31, 2016, Acquisition loans and deposit
of $8.9 million consisted of the
$7.7 million loan commitment for the
Rueil project and of the $1.2 million
deposit for the Ingolstadt forward purchase.
The Acquisition loan on the Metropolitan property ($18,786 as at December 31,
2015) was repaid by Inovalis SA to Inovalis REIT when the
latter purchased the property on March 21,
2016. There was no cash payment, as compensation was made
with other amounts due by the REIT to Inovalis SA for the purchase
of the Metropolitan property.
Trade and other receivables
Trade and other
receivables as at December 31, 2016
amounted to $4,032 taking into
account the REIT's interests in the properties held in partnerships
compared to $5,619 as at December 31, 2015.
Other current Assets
Other current assets as at
December 31, 2016 amounted to
$2,402 compared to $1,372 as at December 31,
2015. This includes the 50% share of the deposit pertaining
to the Ingolstadt forward purchase that will be borne by the
yet-to-be chosen partner on this transaction. The balance of other
current assets consists mainly of sales tax receivables.
PRESENTATION OF OUR CAPITAL
Liquidity and capital resources
Inovalis REIT's primary sources of capital are cash generated
from operating activities, credit facilities, sharing the ownership
of actual assets owned entirely and equity issues. Our primary uses
of capital include property acquisitions, payment of distributions,
costs of attracting and retaining tenants, recurring property
maintenance, major property improvements and debt interest
payments. We expect to meet all of our ongoing obligations through
current cash, cash flows from operations, debt refinancing and, as
growth requires and when appropriate, new equity or debt issues. We
can also sell some portion of assets owned in order to get access
to capital but also in the perspective of diversification of our
portfolio.
The REIT's cash available reached $11.1
million as at December 31,
2016 compared to $6.9 million
as at December 31, 2015. Including
the REIT's interest in the joint ventures, cash available totals
$13.5 million as at December 31, 2016, compared to $10.9 million as at December 31, 2015. This includes the proceeds of
the equity offering closed on July 25,
2016, the proceeds of which having not been entirely
invested yet. Gross proceeds of $46.0
million resulted into net proceeds of $43.1 million after deduction of $2.9 million of offering costs.
Financing activities
Our debt strategy is to have secured mortgage financing with a
term to maturity that is appropriate in relation to the lease
maturity profile of our portfolio and then to put in place, when
appropriate, interest-only financings. We intend to search for
fixed rate financings or floating rate financings with a cap. As
such, 93.2% of the REIT's senior debt benefits from an interest
rate protection (76.1% in the form of a swap and 17.1% in the form
a cap). Our preference is to have staggered debt maturities to
mitigate interest rate risk and limit refinancing exposure in any
particular period. With no financial institution representing more
than 30% of our senior debt commitment, we also make sure that the
REIT has a diversified base of senior debt providers. Our debt to
book value stands at 51.3% and net of the $13.5 million of cash available as at
December 31, 2016 (including the
REIT's interest in the joint ventures), this debt to book value
stands at 47.5%.
Key performance indicators in the management of our debt are
summarized in the following table, which also takes into account
the interests the REIT has in all assets held in partnerships.
|
|
As at December 31,
2016
|
|
As at December 31,
2015
|
|
|
|
|
|
Weighted average
interest rate (1)
|
|
2.11%
|
|
1.98%
|
Debt-to-book value
(2)
|
|
51.3%
|
|
52.8%
|
Debt-to-book value,
net of cash(2)
|
|
47.5%
|
|
51.8%
|
Interest coverage
ratio (3)
|
|
4.4 x
|
|
4.0 x
|
Debt due in next 12
months in thousand of CAD$
|
|
25,357
|
|
12,232
|
Weighted average term
to maturity of debt (4)
|
|
7.2 years
|
|
7.2 years
|
|
|
|
|
|
(1)
|
Calculated as the
weighted average interest rate paid on the finance leases and the
mortgage financing.
|
(2)
|
The definition of
debt-to-book value and of debt-to-book value, net of
cash can be found under the section Non-IFRS Financial
Measures
|
(3)
|
Calculated as net
rental earnings plus interest, less general and administrative
expenses, divided by interest expense on the financial leases and
mortgage financings.
|
(4)
|
Calculated as the
weighted average term on all the financial leases and mortgage
financings.
|
Leasehold and
Mortgage Financing Maturity Profile
|
(% of amount
outstanding as at December 31, 2016)
|
|
2017
|
7%
|
|
2024
|
3%
|
2018
|
0%
|
|
2025
|
7%
|
2019
|
23%
|
|
2026
|
27%
|
2020
|
0%
|
|
2027
|
6%
|
2021
|
0%
|
|
2028
|
18%
|
2022
|
9%
|
|
|
|
2023
|
0%
|
|
Total
|
100%
|
Equity
Our discussion about equity is inclusive of Exchangeable
securities, which are economically equivalent to the REIT's Units.
In our consolidated financial statements, the Exchangeable
securities are classified as a combination of current and
non-current liabilities under IFRS because of the conversion
feature that can be exercised by the holder of those
securities.
|
|
3-month period
ended
December 31, 2016
|
|
Year ended
December 31,
2016
|
|
|
|
|
|
Units
|
|
|
|
|
Number at beginning
of period
|
|
20,989,816
|
|
15,637,019
|
Increase/(Decrease)
in number during the period
|
|
500,000
|
|
5,762,190
|
Units issued pursuant
to the DRIP
|
|
35,959
|
|
126,566
|
Number at end of
period
|
|
21,525,775
|
|
21,525,775
|
Weighted average
number during the period
|
|
21,172,261
|
|
18,194,558
|
|
|
|
|
|
Exchangeable
securities
|
|
|
|
|
Number at beginning
of period
|
|
2,216,419
|
|
2,070,398
|
Increase/(Decrease)
in number during the period
|
|
(408,368)
|
|
(262,347)
|
Number at end of
period
|
|
1,808,051
|
|
1,808,051
|
Weighted average
number during the period
|
|
2,048,937
|
|
2,167,019
|
|
|
|
|
|
Units and
Exchangeable securities
|
|
|
|
|
Number at beginning
of period
|
|
23,206,235
|
|
17,707,417
|
Increase/(Decrease)
in number during the period
|
|
127,591
|
|
5,626,409
|
Number at end of
period
|
|
23,333,826
|
|
23,333,826
|
Weighted average
number during the period
|
|
23,221,198
|
|
20,361,577
|
|
|
|
|
|
On July 25, 2016, the REIT closed
a $46.0 million equity offering
(including the over-allotment, which was fully exercised) aimed at
being used as an available source of funding for potential future
acquisitions of office properties located in France and Germany and for potential capital expenditures
relating to the re-positioning and/or re- development of currently
owned properties. With this equity offering 4,842,190 Units were
issued, including 631,590 Units issued pursuant to the exercise in
full of the over-allotment option.
Inovalis SA converted 500,000 Exchangeable securities into Units
during the three-month period ended December
31, 2016 and a total of 920,000 in the year ended
December 31, 2016.
Further to the Distribution Reinvestment Plan ("DRIP") in place,
a total of 35,959 Units were issued to Unitholders during the
quarter ended December 31, 2016 and
126,566 were issued during the year ended December 31, 2016. As at December 31, 2016, 7.9% of the Units were
enrolled in the DRIP.
A total of 91,632 Exchangeable securities were issued during the
three-month period ended December 31,
2016 in favour of Inovalis SA as payment of the asset
management fees for the fourth quarter of 2016.
For the year ended December 31,
2016, a total of 361,617 Exchangeable securities were issued
in favour of Inovalis SA as payment of the asset management fees.
296,036 Exchangeable securities were also issued in favour of
Inovalis SA as a further investment into the REIT by Inovalis SA.
Both elements combined with a conversion of 920,000 Exchangeable
securities into Units on June 22,
2016 resulted in a 262,347 decrease in the number of
Exchangeable securities in the year ended December 31, 2016.
Distribution and management of foreign exchange
risk
Our Declaration of Trust provides our trustees with
the discretion to determine the percentage payout of income that
would be in the best interests of the REIT. Given that the level of
working capital tends to fluctuate over time and should not affect
our distribution policy, we do not consider it when determining our
distributions.
In order to ensure the predictability of distributions to our
Unitholders, we have established an active foreign exchange hedging
program. As at December 31, 2016, the
REIT was committed to sell €880 (on the average) at an average rate
of 1.4776 and to receive $1,300 on a
monthly basis until April 2019
(included).
|
|
Three months ended
December 31
|
|
Year ended December
31
|
(in thousands of CAD$
except for per Unit amounts)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Declared
distributions on Units
|
|
4,368
|
|
3,205
|
|
15,188
|
|
12,732
|
Declared
distributions on Exchangeable securities
|
|
364
|
|
408
|
|
1,890
|
|
1,688
|
Total declared
distributions
|
|
4,732
|
|
3,613
|
|
17,078
|
|
14,420
|
|
|
|
|
|
|
|
|
|
Distribution per Unit
(diluted)
|
|
$ 0.20625
|
|
$ 0.20625
|
|
$ 0.82500
|
|
$ 0.82500
|
We currently pay monthly distributions to Unitholders of
$0.06875 per Unit, or $0.825 per Unit on an annual basis.
ANALYSIS OF DISTRIBUTED CASH
|
|
Three months ended
December 31
|
|
Year ended
December 31
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Cash flows from
operating activities (A)
|
|
2,586
|
|
1,510
|
|
17,504
|
|
14,472
|
|
|
|
|
|
|
|
|
|
Earnings before
income taxes (B)
|
|
3,974
|
|
7,496
|
|
24,735
|
|
31,947
|
|
|
|
|
|
|
|
|
|
Declared distribution
on Units (C)
|
|
4,368
|
|
3,205
|
|
15,188
|
|
12,732
|
|
|
|
|
|
|
|
|
|
Excess (shortfall) of
cash flows from operating activities over cash distributions paid
(A - C)
|
|
(1,782)
|
|
(1,695)
|
|
2,316
|
|
1,740
|
|
|
|
|
|
|
|
|
|
Excess (shortfall) of
profit or loss over cash distributions paid (B - C)
|
|
(394)
|
|
4,291
|
|
9,547
|
|
19,215
|
|
|
|
|
|
|
|
|
|
As shown in the table above, the cash flows related to operating
activities as reported in the REIT's consolidated statement of cash
flows exceeded the cash distributions declared for the year ended
December 31, 2016. The shortfall of
$1,782 for the quarter ended
December 31, 2016 was compensated by
the excess cash flows generated in the previous quarters.
Also, as shown in the table above, the earnings reported during
the period exceeded the amount of distributions declared for the
year ended December 31, 2016. The
shortfall of $394 for the quarter
ended December 31, 2016 was
compensated by the excess cash flow generated in the previous
quarters.
Every quarter, the REIT ensures that sufficient funds were being
generated from rental operations to continue making distributions
at the planned rate. To perform this assessment, management uses
the FFO and AFFO measures presented in the section entitled
Non-IFRS reconciliation (FFO and AFFO). These measures are used to
determine the amount of funds generated by ongoing rental
operations that are available for distribution. These measures
remove from consideration those gains and losses that are
recognized for accounting purposes but that do not impact cash
flow. They also remove from consideration various revenues and
expenses that are recognized in profit or loss for accounting
purposes but which do not arise from ongoing rental operations, for
example because they were incurred to acquire revenue generating
assets.
As quantified in the FFO and AFFO calculations, the funds used
to make the distributions during the current quarter were generated
through the REIT's ongoing rental operations.
The REIT expects to continue paying distributions based on the
current plan.
RISK AND UNCERTAINTIES
We are exposed to various risks and uncertainties, many of which
are beyond our control, the occurrence of which could materially
and adversely affect our investments, prospects, cash flows,
results of operations or financial condition and our ability to
make cash distributions to Unitholders. We believe the risk factors
described below are the most material risks that we face, however
they are not the only ones. Additional risk factors not presently
known to us or that we currently believe are immaterial could also
materially and adversely affect our investments, prospects, cash
flows, results of operations or financial condition and our ability
to make cash distributions to Unitholders and negatively affect the
value of the Units.
Risks relating to the REIT and its business
Risks inherent in the real estate industry may adversely
affect our financial performance
Real estate ownership
is generally subject to numerous factors and risks, including
changes in general economic conditions, local economic conditions,
the attractiveness of properties to potential tenants or
purchasers, competition with other landlords with similar available
space, and the ability of the owner to provide adequate maintenance
at competitive costs.
The properties generate income through rent payments made by our
tenants. Upon the expiry of any lease, there can be no assurance
that the lease will be renewed or the tenant replaced for a number
of reasons. Furthermore, the terms of any subsequent lease may be
less favorable than the existing lease. Our cash flows and
financial position would be adversely affected if our tenants were
to become unable to meet their obligations under their leases or if
a significant amount of available space in our properties could not
be leased on economically favorable lease terms. In the event of
default by a tenant, we may experience delays or limitations in
enforcing our rights as sub-lessor and incur substantial costs in
protecting our investment. Furthermore, at any time, a tenant may
seek the protection of bankruptcy, insolvency or similar laws,
which could result in the rejection and termination of the lease of
the tenant and, thereby, cause a reduction in the cash flows
available to us.
An investment in real estate is relatively illiquid. Such
illiquidity will tend to limit our ability to vary our portfolio
promptly in response to changing economic or investment conditions.
The costs of holding real estate are considerable and during an
economic recession we may be faced with ongoing expenditures with a
declining prospect of incoming receipts. In such circumstances, it
may be necessary for us to dispose of properties at lower prices in
order to generate sufficient cash for operations and making
distributions and interest payments.
Concentration of tenants may result in significant
vacancies on the Properties
Five of our largest
tenants, by percentage of total GLA, occupy approximately 59% of
the total weighted areas. Although all five tenants are committed
to multi-year leases, which are set to expire gradually between
2020 and 2024, there is no assurance that such tenants will
continue to occupy such premises for the remainder of their lease
terms. Some of them have indeed break options before the end of
their leases, and the soonest dates on which those five largest
tenants may effectively move range between 2018 and 2021. In order
to minimize this risk of vacancy, Inovalis REIT will continue to
closely monitor all leases and ensure that they work with the
current tenants to determine their future leasing plans, which
would allow Inovalis REIT to source tenants in advance of the
current tenants vacating the property.
Lease renewals, rental increases, lease termination rights
and other lease matters
Expiries of leases for our
properties will occur from time to time over the short and
long-term. No assurance can be provided that we will be able to
renew any or all of the leases upon their expiration or that rental
rate increases will occur or be achieved upon any such renewals.
The failure to renew leases or achieve rental rate increases may
adversely impact our financial condition and results of operations
and decrease the amount of cash available for distribution.
Although certain, but not all, leases contain a provision
requiring tenants to maintain continuous occupancy of leased
premises, there can be no assurance that such tenants will continue
to occupy such premises which may have an adverse effect on us and
could adversely impact our financial condition and results of
operations and decrease the amount of cash available for
distribution. In addition, certain leases contain a provision which
gives tenants the right to terminate their leases upon payment of a
penalty.
Moreover, pursuant to the lease agreement with the National
Conservatory of Arts and Crafts, none of the value-added taxes on
expenses legally due by the REIT are recoverable. However, property
taxes and office taxes are recoverable. Similarly pursuant to the
Fresh & Co. and French Environment and Energy and Management
Agency lease agreements, several forms of taxes, including but not
limited to, property taxes, household refuse taxes and annual
office taxes will be borne by the REIT. As a result, we will bear
the economic cost of increases to these taxes.
Head Lease for properties
According to the head
leases for certain of the properties, the owners of such properties
have certain participation rights with respect to such
properties pursuant to which a French dedicated SPV (a "French
SPV") or the German SPV, as the case may be, would need to
obtain written consent from the respective owner prior to taking
certain actions with respect to such property, including cancelling
or amending lease agreements for such property. If the owner does
not give its prior consent to such actions, it may terminate the
applicable head lease.
Environmental contamination on properties may expose us to
liability and adversely affect our financial
performance
The properties may contain ground
contamination, hazardous substances, wartime relics (including
potentially unexploded ordnance) and/or other residual pollution
and environmental risks. Buildings and their fixtures might contain
asbestos or other hazardous substances above the allowable or
recommended thresholds, or the buildings could bear other
environmental risks. Prior to acquiring the interests in the
properties (including the leasehold interests), we undertook
environmental studies on each property. No sign of pollution was
evidenced on any of the properties.
We are subject to various federal, state and municipal laws
relating to environmental matters. Such environmental laws impose
actual and contingent liabilities on us to undertake remedial
action on contaminated sites and in contaminated buildings. The
costs of any removal, investigation or remediation of any residual
pollution on such sites or in such buildings as well as costs
related to legal proceedings, including potential damages,
regarding such matters may be substantial.
We have insurance in place to protect against certain
environmental liabilities in respect of certain of the properties,
with limits, which are customary and available for portfolios
similar to ours.
We make the necessary capital and operating expenditures to
ensure compliance with environmental laws and regulations. Although
there can be no assurance, we do not believe that costs relating to
environmental matters will have a material adverse effect on our
investments, financial condition, results of operations or
distributions or cash interest payments.
We may incur significant capital expenditures and other
fixed costs
Certain significant expenditures must be
made throughout the period of ownership of real property,
regardless of whether the property is producing sufficient income
to pay such expenses. In order to retain desirable rentable space
and to generate adequate revenue over the long term, we must
maintain or, in some cases, improve each property's condition to
meet market demand, which can entail significant costs we may not
be able to pass on to our tenants.
Any failure by us to undertake appropriate maintenance and
refurbishment work in response to the factors described above could
entitle tenants to withhold or reduce rental payments or even to
terminate existing letting contracts. Any such event could have a
material adverse effect on our cash flows, financial condition and
results of operations and our ability to make distributions on the
Units.
Financing risks, leverage and restrictive covenants may
limit our ability for growth
The real estate industry
is capital intensive. We will require access to capital to maintain
our properties, as well as to fund our growth strategy and
significant capital expenditures from time to time. There is no
assurance that capital will be available when needed or on
favorable terms. Our failure to access required capital could
adversely impact our investments, cash flows, operating results or
financial condition, our ability to make distributions on the Units
and our ability to implement our growth strategy.
A high level of indebtedness increases the risk that we may
default on our debt obligations. Our ability to make scheduled
payments of the principal of, or interest on, and to otherwise
satisfy our debt obligations depends on future performance, which
is subject to the financial performance of our properties,
prevailing economic conditions, prevailing interest rate levels,
and financial, competitive, business and other factors, many of
which are beyond our control.
Changes in government regulations may affect our
investment in our properties
We are subject to laws and
regulations governing the ownership and leasing of real property,
employment standards, environmental and energy efficiency matters,
taxes and other matters. It is possible that future changes in
applicable federal, state, local or common laws or regulations or
changes in their enforcement or regulatory interpretation could
result in changes in the legal requirements affecting us (including
with retroactive effect). In addition, the political conditions in
the jurisdictions in which we operate are also subject to change.
Any changes in investment policies or shifts in political attitudes
may adversely affect our investments. Any changes in the laws to
which we are subject in the jurisdictions in which we operate could
materially affect the rights and title to the properties. All of
the properties are located in France and Germany. Although the governments in
France and Germany are stable and generally friendly to
foreign investments, there are still political risks. It is not
possible to predict whether there will be any further changes in
the regulatory regime(s) to which we are subject or the effect of
any such change on our investments.
Failure to receive deductions for interest payments may
adversely affect our cash flows, results of operations and
financial condition
In the course of the acquisition of
the properties, we entered into financing transactions with third
parties and affiliates. These financing agreements will require us
to pay principal and interest. There are several rules in German
tax laws restricting the tax deductibility of interest expenses for
corporate income and municipal trade tax purposes. Such rules have
been changed considerably on several occasions in recent past. As a
result, major uncertainties exist as to the interpretation and
application of such rules, which are not yet clarified by the tax
authorities and the tax courts. The tax deductibility of interest
expenses depends on, among other things, the details of the
security structure for debt financings, the annual amount of tax
net-debt interest, the amounts and terms of shareholder or
affiliate financings and our general tax structure. There is a risk
of additional taxes being triggered on the rental income and
capital gains in case the tax authorities or the tax courts adopt
deviating views on the above. If this were the case, this would
result in a higher tax burden and, consequently, could have a
material adverse effect on our cash flows, financial condition and
results of operations and ability to pay distributions on the
Units.
Changes in currency exchange rates could adversely affect
our business
Substantially all of our investments and
operations are conducted in currencies other than Canadian dollars;
however, we pay distributions to Unitholders in Canadian dollars.
We also raise funds primarily in Canada from the sale of securities in Canadian
dollars and invest such funds indirectly through our subsidiaries
in currencies other than Canadian dollars. As a result,
fluctuations in such foreign currencies against the Canadian dollar
could have a material adverse effect on our financial results,
which are denominated and reported in Canadian dollars, and on our
ability to pay cash distributions to Unitholders. We have
implemented active hedging programs in order to offset the risk of
revenue losses and to provide more certainty regarding the payment
of distributions to Unitholders if the Canadian dollar increases in
value compared to foreign currencies.
Changes in interest rates could adversely affect our cash
flows and our ability to pay distributions and make interest
payments
When concluding financing agreements or
extending such agreements, we depend on our ability to agree on
terms for interest payments that will not impair our desired profit
and on amortization schedules and that do not restrict our ability
to pay distributions. In addition to the variable rate portion of
the leaseholds in respect of the properties, we may enter into
financing agreements with variable interest rates if the current
historical low level of interest rates continues. There is a risk
that interest rates will increase, which would result in a
significant increase in the amount paid by us and our subsidiaries
to service debt, resulting in a decrease in distributions to
Unitholders, and could impact the market price of the Units.
We rely on Inovalis SA for management services
We rely on Inovalis SA with respect to the asset management of our
properties and the property management of the properties.
Consequently, our ability to achieve our investment objectives
depends in large part on Inovalis SA and its ability to advise us.
This means that our investments are dependent upon Inovalis SA'
business contacts, its ability to successfully hire, train,
supervise and manage its personnel and its ability to maintain its
operating systems. If we were to lose the services provided by
Inovalis SA or its key personnel, our investments and growth
prospects may decline.
While the Trustees have similar oversight responsibility with
respect to the services provided by Inovalis SA pursuant to the
management agreement, the services provided by Inovalis SA are not
performed by employees of the REIT, but by Inovalis SA directly and
through entities to which it may subcontract. In addition to its
right to internalize management at any time, Inovalis SA has the
right to terminate the management agreement upon 180 days' prior
written notice to the REIT.
Investments in, and profits and cash flows from,
properties may be lost in the event of uninsured or underinsured
losses to properties or losses from title defects
We
carry general liability, umbrella liability and excess liability
insurance with limits that are typically obtained for similar real
estate portfolios in France and
Germany and otherwise acceptable
to the Trustees. For the property risks we intend to carry
"Multi-Risk" property insurance including but not limited to,
natural catastrophic events and loss of rental income insurance
(with at least a 12 to 18-month indemnity period). We also carry
boiler and machinery insurance covering all boilers, pressure
vessels, HVAC systems and equipment breakdown. There are, however,
certain types of risks (generally of a catastrophic nature such as
from war or nuclear accident) that are uninsurable under any
insurance policy. Furthermore there are other risks that are not
economically viable to insure at this time. We partially
self-insure against terrorism risk for our entire portfolio. We
have insurance for earthquake risks, subject to certain policy
limits, deductibles and self-insurance arrangements. Should an
uninsured or underinsured loss occur, we could lose our investment
in, and anticipated profits and cash flows from, one or more of our
properties, but we would continue to be obligated to repay any
recourse mortgage indebtedness on such properties. We do not carry
title insurance on the properties. If a loss occurs resulting from
a title defect with respect to a property where there is no title
insurance or the loss is in excess of insured limits, we could lose
all or part of our investment in, and anticipated profits and cash
flows from, such property.
IFRS reporting may result in our consolidated statement of
financial position and consolidated statement of earnings being
subject to volatility as the fair value of our portfolio
changes
The fair value of our properties is dependent
upon, among other things, rental income from current leases,
assumptions about rental income from future leases reflecting
market conditions, expected future cash outflow in respect of such
leases, the demand for properties such as the properties, the
availability and cost of financing and general economic conditions.
A change in one or a combination of these factors, many of which
are not controlled by us, may have a material impact to the fair
value of our properties. Our chosen accounting policy under IFRS
requires that real estate assets be recorded at "fair value" with
changes in fair value being recorded in earnings in the period of
change. Accordingly, our statement of financial position and our
statement of earnings are subject to volatility as the fair value
of its real estate portfolio changes and these changes may be
material.
Reliance on partnerships
The REIT has a
material non-controlling interest in partnerships with several
institutional investors. These arrangements create a risk as the
business objectives or economic interests of the partner, as in any
joint business arrangement, may not be aligned with those of the
REIT. The partner may want to make decisions that negatively affect
the value of its real estate assets or income of the REIT. Such
investments may involve risks not present in investments where a
third party is not involved, including the possibility that a
partner may have financial difficulties resulting in a negative
impact on the investment or be liable for the actions of its third
party partner. Although the REIT may not have control over these
investments and therefore, may have a limited ability to protect
its position, such partnership arrangements contain terms and
conditions which, in the opinion of the independent trustees, are
commercially reasonable, including without limitation such terms
and conditions relating to restrictions on the transfer,
acquisition and sale of the REIT's and any joint venturer's
interest in the joint venture arrangement, provisions to provide
liquidity to the REIT, provisions to limit the liability of the
REIT and its Unitholders to third parties and provisions to provide
for the participation of the REIT in the management of the joint
venture arrangements. The REIT's investment in properties through
joint arrangements is subject to the investment guidelines set out
in the Declaration of Trust.
Risks Relating to Tax Matters
Taxation of Trusts
The REIT qualifies as a "unit trust" and a "mutual fund trust" for
purposes of the Tax Act. There can be no assurance that Canadian
federal income tax laws and the administrative policies and
assessing practices of the Canadian Revenue Agency ("CRA")
respecting mutual fund trusts will not be changed in a manner that
adversely affects Unitholders. Should the REIT cease to qualify as
a mutual fund trust under the Tax Act, the income tax
considerations could be material and adverse for the REIT and
Unitholders.
Application of the SIFT Rules
The SIFT Rules
apply to a trust that is a "SIFT trust" as defined in the Tax Act.
Provided that a trust does not own "non-portfolio property" (as
defined in the Tax Act), it will not be subject to the SIFT Rules.
Based on the investment restrictions of the REIT, the REIT may not
acquire any non-portfolio property and, therefore, is not subject
to the SIFT Rules. However, there can be no assurance that the SIFT
Rules or the administrative policies or assessing practices of the
CRA will not be changed in a manner that adversely affects the REIT
and Unitholders.
FAPI
The REIT's "participating percentage" (as
defined in the Tax Act) of FAPI earned by CFAs of the REIT must be
included in computing the income of the REIT for the fiscal year of
the REIT in which the taxation year of such CFA ends, subject to a
deduction for grossed-up "foreign accrual tax" as computed in
accordance with the Tax Act. The deduction for grossed-up "foreign
accrual tax" may not fully offset the FAPI realized by the REIT,
thereby increasing the allocation of income to the REIT and,
therefore, the allocation of income by the REIT to Unitholders. In
addition, as FAPI generally must be computed in accordance with
Part I of the Tax Act as though the CFA were a resident of
Canada and in Canadian currency
(subject to the detailed rules contained in the Tax Act), income or
transactions may be taxed differently under foreign tax rules as
compared to the FAPI rules and, accordingly, may result in
additional income being allocated to Unitholders.
Foreign Currency
For purposes of the Tax Act, the REIT generally is required to
compute its Canadian tax results using Canadian currency, including
for purposes of computing FAPI earned by CFAs of the REIT. Where an
amount that is relevant in computing a taxpayer's Canadian tax
results is expressed in a currency other than Canadian currency,
such amount must be converted to Canadian currency in accordance
with the rules in the Tax Act. As a result, the REIT may realize
gains and losses for tax purposes by virtue of the fluctuation of
the value of foreign currencies relative to Canadian dollars.
Change of Tax Law
There can be no assurance that Canadian or foreign income tax laws,
the judicial interpretation thereof, the terms of any income tax
treaty applicable to the REIT or its affiliates or the
administrative policies and assessing practices and policies of the
CRA, Finance and any foreign tax authority or tax policy agency
will not be changed in a manner that adversely affects the REIT,
its affiliates or Unitholders.
Non-Residents of Canada
The Tax Act may impose
additional withholding or other taxes on distributions made by the
REIT to Unitholders who are Non-Residents. These taxes and any
reduction thereof under a tax treaty between Canada and another country may change from
time to time. In addition, the tax consequences under the Tax Act
to Non-Resident may be more adverse than the consequences to other
Unitholders.
Taxation of the REIT and the REIT Subsidiaries
Although the REIT and the REIT Subsidiaries have been structured
with the objective of maximizing after-tax distributions, taxes
(including corporate, withholding, land transfer, and other taxes)
in the various jurisdictions in which the REIT invests will reduce
the amount of cash available for distribution to the REIT by the
REIT Subsidiaries and, therefore, reduce the amount of cash
available for distribution by the REIT to Unitholders. No assurance
can be given as to the future level of taxation suffered by the
REIT or the REIT Subsidiaries. In addition, certain tax positions
adopted by the REIT and the REIT Subsidiaries may be challenged by
the CRA or a foreign taxing authority. This could materially
increase the taxable income of, and taxes payable by, the REIT and
the REIT Subsidiaries, and thereby increase taxable income of
Unitholders and/or adversely affect the REIT's financial position
and cash available for distribution to Unitholders.
The extent to which distributions will be non-taxable in the
future will depend in part on the extent to which the REIT
Subsidiaries are able to deduct depreciation, interest and other
expenses relating to our properties for purposes of the Tax Act. No
assurances can be given that the CRA will agree with capital cost
allowance claims by the REIT Subsidiaries and that expenses claimed
by the REIT and the REIT Subsidiaries are reasonable and
deductible.
Qualified Investors
We will endeavor to ensure that the Units continue to be qualified
investments for Plans. However, there can be no assurance in this
regard. In addition, Redemption Notes or other property received on
an in specie redemption of Units may not be qualified investments
for Plans. The Tax Act imposes penalties for the acquisition or
holding of non-qualified investments.
German Taxes
As
described under the heading Certain Non-Canadian Income Tax
Considerations – Certain Material German Income, Withholding and
Real Estate Transfer Tax Considerations in the IPO final prospectus
dated March 28, 2013, the German SPV
would be subject to municipal trade tax ("TT") if it acts through a
German permanent establishment. We have assumed that the German SPV
will not be subject to TT based on our current understanding of the
structure. However, no assurances can be given that the German SPV
will not be subject to TT.
The German real estate transfer tax (the "RETT") generally
applies where there is a transfer of legal title of properties from
one legal person to another. If the German SPV exercises the
purchase option in respect of the Hanover Property (see Certain
Non-Canadian Income Tax Considerations – Certain Material German
Income, Withholding and Real Estate Transfer Tax Considerations in
the IPO final prospectus dated March 28,
2013), legal title to German real estate would be
transferred and, consequently, RETT would be payable in connection
therewith.
OUTLOOK
We believe that the current market environment is a favorable
one for the REIT to prosper. In addition to actively managing our
properties, we are continuously assessing potential acquisitions in
our target markets and will focus on the ones offering value and
stability. Our long-term credit worthy tenants, low cost of debt
with proper maturity and the foreign exchange rate contracts for
our distributions until April 2019,
not only provide investors with steady cash flows, but also serve
as a basis for future growth. In addition of the cash available, we
can also sell some portion of assets that we own to get access to
additional cash and at the same time diversify our portfolio
risk.
CRITICAL ACCOUNTING POLICIES
The preparation of the REIT's audited consolidated financial
statements in conformity with IFRS requires management to make
judgments and estimates affecting the reported amounts of revenues
and investment properties owned directly and indirectly at the
reporting date. However, uncertainty about these estimates could
result in outcomes requiring a material adjustment to the carrying
amount of the asset or liability affected in future periods.
We consider the following policies and estimates to be the most
critical in understanding the assumptions and judgments that are
involved in preparing our financial statements and the
uncertainties that could affect our financial results, financial
condition and cash flows: (i) recognition and valuation of
investment properties; (ii) distinction between business
combinations or asset acquisitions and (iii) classification of and
accounting for joint arrangements.
A more detailed description of significant accounting policies
and critical accounting judgment and estimates that we apply under
IFRS is provided in notes 3 and 4 of the consolidated financial
statements for the year ended December 31, 2016.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL
CONTROLS OVER FINANCIAL REPORTING
The REIT's Chief Executive Officer (the "CEO"), and the Chief
Financial Officer (the "CFO") of the REIT are responsible for
establishing and maintaining the REIT's disclosure controls and
procedures ("DCP") including adherence to the Disclosure Policy
adopted by the Board of Trustees. The Disclosure Policy requires
all staff and certain other personnel providing services to the
REIT to keep senior management fully apprised of all material
information affecting the REIT so that they may evaluate and
discuss this information and determine the appropriateness and
timing for public release.
The REIT's CEO and the CFO are also responsible for the design
of internal controls over financial reporting ("ICFR"). Internal
control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions
and disposition of the assets of the REIT, (2) provide reasonable
assurance that all transactions are recorded as necessary to permit
the preparation of financial statements in accordance with
International Financial Reporting Standards, and that receipts and
expenditures of the REIT are being made only in accordance with
authorizations of the management and Trustees of the REIT, and 3)
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
REIT's assets that could have a material effect on the REIT's
financial statements.
The CEO and CFO have evaluated the effectiveness of the
Company's DCP and ICFR as required by National Instrument 52-109
issued by the Canadian Securities Administrators. They have
concluded that as of December 31,
2016, the REIT's design and operation of its DCP and ICFR
were effective in providing reasonable assurance that material
information regarding this report, and the annual consolidated
financial statements and other disclosures was made known to them
on a timely basis and reported as required and that the financial
statements present fairly, in all material aspects, the financial
condition, results of operations and cash flows of the REIT as of
December 31, 2016.
A control system, no matter how well conceived and operated, can
provide only reasonable, and not absolute, assurance that the
objectives of the control system are met. As a result of the
inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues,
including instances of fraud, if any, have been detected. These
inherent limitations include, amongst other items: (i) that
Management's assumptions and judgments could ultimately prove to be
incorrect under varying conditions and circumstances; or (ii) the
impact of isolated errors. Additionally, controls may be
circumvented by the unauthorized acts of individuals, by collusion
of two or more people, or by Management override. The design of any
system of controls is also based, in part, upon certain assumptions
about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated
goals.
SUBSEQUENT EVENTS
New acquisitions
In February
2017, The REIT has entered into exclusivity on the
acquisition of two assets located in Pantin (Paris North-Eastern periphery) and Stuttgart (Germany). Both assets are office buildings,
with an average occupancy rate in excess of 90%, a circa 7-year
weighted average lease term and located either in improving areas
or established office park with main transport access. Tenancy is a
mix of government related tenants, high-grade automotive companies
and other tenants with long standing relations to the zones. The
properties will be bought at a competitive cap rate given the high
prices witnessed over the past months in both markets, and both
acquisitions will be accretive to AFFO. Once these acquisitions
close, the REIT will have deployed the total amount raised during
the bought deal of July 2016.
SOURCE Inovalis Real Estate Investment Trust