FIRM CAPITAL PROPERTY TRUST CAPITAL PRESERVATION DISCIPLINED INVESTING MD&A MANAGEMENT DISCUSSION AND ANALYSIS

Transcription

1 FIRM CAPITAL PROPERTY TRUST CAPITAL PRESERVATION DISCIPLINED INVESTING MD&A MANAGEMENT DISCUSSION AND ANALYSIS SECOND QUARTER JUNE 30,

2 The following management's discussion and analysis ( MD&A ) of the financial condition and results of operations of Firm Capital Property Trust ( FCPT or the "Trust ) should be read in conjunction with the Trust s condensed consolidated interim financial statements for the three and six months ended and. This MD&A has been prepared taking into account material transactions and events up to and including August 2,. Additional information about the Trust has been filed with applicable Canadian securities regulatory authorities and is available at or on our web site at Certain information included in this MD&A contains forward-looking statements within the meaning of applicable securities laws including, among others, statements concerning our objectives and our strategies to achieve those objectives, as well as statements with respect to management s beliefs, estimates, and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Forward-looking statements generally can be identified by the use of forward-looking terminology such as outlook, objective, may, will, expect, intent, estimate, anticipate, believe, should, plans or continue or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect management s current beliefs and are based on information currently available to management. These statements are not guarantees of future performance and are based on our estimates and assumptions that are subject to risks and uncertainties, including those described below in this MD&A under Risks and Uncertainties, which could cause our actual results to differ materially from the forward-looking statements contained in this MD&A. Such risk factors include, but are not limited to, risks associated with real property ownership, availability of cash flow, general uninsured losses, future property acquisitions, environmental matters, tax related matters, debt financing, unitholder liability, potential conflicts of interest, potential dilution, reliance on key personnel, changes in legislation and changes in the tax treatment of trusts. The Trust cannot assure investors that actual results will be consistent with any forward-looking statements and the Trust assumes no obligation to update or revise such forward-looking statements to reflect actual events or new circumstances. All forward-looking statements contained in this MD&A are qualified by this cautionary statement. Although the forward-looking information contained in this MD&A is based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. All forward-looking statements in this MD&A are qualified by these cautionary statements. Except as required by applicable law, the Trust undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. INTRODUCTION Firm Capital Property Trust (TSXV: FCD.UN) is focused on creating long-term value for Unitholders through capital preservation and disciplined investing to achieve stable distributable income. In partnership with management and industry leaders, FCPT s plan is to co-own a diversified property portfolio of the following real estate asset classes: Multi Residential, Industrial & Flex Industrial, Net Lease Convenience and Stand Alone Retail, and Core Service Provider / Healthcare Professional Office. In addition to stand alone accretive acquisitions, the Trust will make acquisitions, on a coownership basis with strong financial partners and will make joint acquisitions and the acquisition of partial interests from existing ownership groups, in a manner that provides liquidity to those selling owners and professional management for those remaining as partners. Firm Capital Realty Partners Inc., through a structure focused on an alignment of interests with the Trust sources, syndicates and manages investments on behalf of the Trust. Firm Capital Property Trust Q2/ Page 2

3 The Trust is an unincorporated open-ended real estate investment trust established on August 30, 2012 under the laws of the Province of Ontario pursuant to a Declaration of Trust. The Trust is a mutual fund trust as defined in the Tax Act, but is not a mutual fund within the meaning of applicable Canadian securities legislation. The head office and registered office of the Trust is located at 163 Cartwright Avenue; Toronto, Ontario, M6A 1V5. The Trust is the reporting issuer trading on the TSX Venture Exchange under the ticker symbol FCD.UN. Additional information on the Trust and its portfolio is available on the Firm Capital website at or on the SEDAR website at BASIS OF PRESENTATION The Trust has adopted International Financial Reporting Standards ( IFRS ), as issued by the International Accounting Standards Board as its basis of financial reporting. The Trust s reporting currency is the Canadian dollar. Certain financial information presented in this MD&A reflects certain non-ifrs financial measures, which include Net Operating Income ( NOI ), Earnings Before Interest, Taxes, Depreciation & Amortization ( EBITDA ), Funds From Operations ( FFO ) and Adjusted Funds From Operations ( AFFO ), Adjusted FFO, Adjusted AFFO, AFFO Payout Ratio and Debt/Gross Book Value ( GBV ) (each as defined below). These measures are commonly used by real estate investment trusts as useful metrics for measuring performance and/or cash flows, however, they do not have any standardized meaning prescribed by IFRS and are not necessarily comparable to similar measures presented by other real estate investment trusts. The Trust believes that FFO is an important measure to evaluate operating performance, AFFO is an important measure of cash available for distribution and, NOI is an important measure of operating performance. "GAAP" means generally accepted accounting principles described by the Chartered Professional Accountants Canada ("CPA") Handbook - Accounting, which are applicable as at the date on which any calculation using GAAP is to be made. As a public entity, the Trust applies IFRS as described in Part I of the CPA Handbook - Accounting. Occupancy rate represents the total square footage leased as a percentage of the total number of square footage owned. Leased properties consist solely of those units that are occupied by a tenant at the given date. NOI is a term used by industry analysts, investors, trusts, and management to measure operating performance of Canadian real estate investment trusts. NOI represents rental revenue from properties less repairs and maintenance, insurance, utilities, property management, property taxes, bad debt, and other property operating costs. NOI excludes certain expenses included in the determination of net income such as interest, amortization, corporate overhead and taxes. Net income (loss) before other income (expenses) is a measure that the Trust uses in order to present the key operations and administration of the Trust, excluding special items. Items that are excluded from this total and are presented in other income include transaction costs, fair value adjustments of investment properties, and gain (loss) on dispositions. Funds From Operations ( FFO ) is a term used to evaluate operating performance, but is not indicative of funds available to meet the Trust s cash requirements. The Trust calculates FFO in accordance with the guidelines set out by the Real Property Association of Canada ( RealPAC ), as issued in February for entities adopting IFRS. FFO is defined as net income before fair Firm Capital Property Trust Q2/ Page 3

4 value gains/losses on real estate properties, gains/losses on the disposition of real estate properties, deferred income taxes, and certain other non-cash adjustments. Adjusted Funds from Operations ( AFFO ) is a term used as a non-ifrs financial measure by most Canadian real estate investment trusts but should not be considered as an alternative to net income, cash flow from operations, or any other measure prescribed under IFRS. Unlike RealPac, who considers AFFO to be a useful measure of net income, the Trust considers AFFO to be a useful measure of cash available for distributions. AFFO is calculated largely in accordance with the guidelines set out by RealPAC and is defined as FFO less adjustments for non-cash items such as straight-line rent, free rent and noncash interest expense as well as normalized capital expenditures, tenant inducements and leasing charges. However, under RealPAC, unit-based compensation expense is deducted for reporting AFFO, but the Trust adds back this expense. FFO Payout Ratio is defined as Distributions Declared divided by FFO. AFFO Payout Ratio is defined as Distributions Declared divided by AFFO. NOI, EBITDA, FFO, AFFO, Adjusted FFO, Adjusted AFFO, FFO Payout Ratio, AFFO Payout Ratio and Debt/GBV should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. NOI, FFO, AFFO, Adjusted FFO and Adjusted AFFO are not intended to represent operating profits for the period, or from a property, nor should any of these measures be viewed as an alternative to net income, cash flow from operating activities or other measures of financial performance calculated in accordance with IFRS. Readers should be further cautioned that NOI, EBITDA, FFO, AFFO, Adjusted FFO, Adjusted AFFO, FFO Payout Ratio, AFFO Payout Ratio and Debt/GBV as calculated by the Trust may not be comparable to similar measures presented by other issuers. ( TIs/LCs ) are defined as Tenant Inducements, Leasing Charges and Capital Expenditures. The Trust bases its calculation of TIs/LCs an estimated 2.5% of Net Operating Income or NOI, which is senior managements best estimate in operating real estate of the type that the Trust owns and operates. SECOND QUARTER AND YEAR TO DATE HIGHLIGHTS Net income for the three months ended was approximately $3.7 million in comparison to the $6.2 million reported for the three months ended March 31, and the $5.2 million reported for the three months ended. Excluding fair value adjustments, net income is approximately $2.0 million for the three months ended, which is a 5% increase over the $1.9 million reported for the three months ended March 31, and a 33% increase over the $1.5 million reported for the three months ended ; Net income for the six months ended, was approximately $9.9 million, which is a 34% increase over the $7.4 million reported for the six months ended ; $7.01 Net Asset Value ( NAV ) per Unit based on a IFRS book value of equity of approximately $120.7 million, which is a 0.5% increase over the $6.97 NAV per unit reported at March 31, ; Firm Capital Property Trust Q2/ Page 4

5 On an IFRS basis, NOI for the three months ended was approximately $3.4 million which is an 11% increase over the $3.1 million reported March 31, and a 19% increase in comparison to the $2.9 million reported for the three months ended. NOI for the six months ended was approximately $6.5 million which is a 17% increase over the $5.5 million reported for the six months ended ; On a cash basis ( Cash NOI ), for the three months ended was approximately $3.4 million, which is 12% increase over the $3.1 million reported for the three months ended March 31, and a 21% increase over the $2.8 million reported for the three months ended. NOI for the six months ended was approximately $6.5 million which is a 20% increase over the $5.4 reported for the six months ended ; Funds From Operations ( FFO ) for the three months ended was approximately $2.0 million, which is a 5% increase over the $1.9 million reported for the three months ended March 31,, and a 27% increase over the $1.5 million reported for the three months ended ; Adjusted Funds From Operations ( AFFO ) for the three months ended was approximately $1.9 million, which is an 17% increase over the $1.6 million reported for the three months ended March 31,, and a 22% increase in comparison to the $1.6 million reported for the three months ended ; FFO for the six months ended was approximately $3.8 million, a 22% increase in comparison to the $3.1 million reported for the six months ended. AFFO for the six months ended was $3.5 million a 21% increase in comparison to the $2.9 million reported for the six months ended ; FFO per Unit for the three months ended was $0.118 while AFFO per Unit was $ For the six months ended FFO per Unit was $0.240 while AFFO per Unit was $0.223; For the three months ended, FFO and AFFO payout ratios are 97% and 99% respectively. For the six months ended, FFO and AFFO payout ratios are 96% and 103% respectively; Commercial occupancy was 94.6% while residential occupancy improved to a strong 98.5%; and Conservative leverage profile with Debt / Gross Book Value ( GBV ) at 41.2%. Firm Capital Property Trust Q2/ Page 5

6 % Change Over Three Months Six Months Three Months Six Months March 31, March 31, Rental Revenue $ 5,546,678 $ 5,463,490 $ 4,660,305 $ 11,010,170 $ 9,458,502 2% 19% 16% NOI - IFRS Basis $ 3,411,330 $ 3,069,874 $ 2,868,130 $ 6,481,206 $ 5,548,408 11% 19% 17% - Cash Basis $ 3,420,534 $ 3,059,174 $ 2,830,095 $ 6,479,710 $ 5,398,113 12% 21% 20% Net Income $ 3,715,744 $ 6,231,326 $ 5,171,698 $ 9,947,070 $ 7,399,242 (40%) (28%) 34% FFO $ 1,950,304 $ 1,860,165 $ 1,533,888 $ 3,810,471 $ 3,130,621 5% 27% 22% AFFO $ 1,904,121 $ 1,624,880 $ 1,564,472 $ 3,529,003 $ 2,915,499 17% 22% 21% FFO Per Unit $ $ $ $ $ (3%) (1%) (2%) AFFO Per Unit $ $ $ $ $ % (5%) (3%) Distributions Per Unit $ $ $ $ $ % 5% Payout Ratios - FFO 97% 94% 92% 96% 89% - AFFO 99% 108% 90% 103% 96% FINANCIAL HIGHLIGHTS Mortgage Repayment Activity: On May 4,, the Trust repaid a $4.9 million and $2.3 million mortgage fully secured against the Bridgewater, Nova Scotia and Hanover, Ontario properties, respectively; $9.0 Million of Equity Issuance Activity: On May 30,, the Trust announced that it closed the first tranche of its previously announced non-brokered private placement. On that date, the Trust closed on 1,140,040 trust units for gross proceeds of approximately $7.1 million. In addition, on July 26,, the Trust closed on an additional 296,800 trust units for gross proceeds of approximately $1.9 million. In aggregate, the Trust has raised $9.0 million in Trust Units since April 1, ; Announces Appointment of Two New Trustees: The Trust is pleased to announce the appointment of Jeffrey Goldfarb and Victoria Granovski to the Board of Trustees of the Trust; and Declaration of Monthly Distributions: On August 2,, the trust announced that it has declared and approved monthly distributions in the amount of $ per Trust Unit for Unitholders of record on October 31,, November 30,, and December 31, payable on or about November 15,, December 14,, and January 15, PORTFOLIO HIGHLIGHTS Based on the Trust s pro rata interests as at, the portfolio consists of 61 commercial properties with a total GLA of 1,506,133 square feet and one apartment complex comprised of 135 apartment units. Firm Capital Property Trust Q2/ Page 6

7 Occupancy Gross Leaseable Retail Area Q2/ Q1/ Q4/ Q3/ Q2/ Bridgewater, Nova Scotia 46, % 84.9% 84.9% 84.9% 84.9% Brampton, Ontario 36, % 85.0% 85.0% 85.0% 100.0% Hanover, Ontario 19, % 100.0% 100.0% 100.0% 100.0% Pembroke, Ontario 11, % 100.0% 100.0% 100.0% 100.0% Moncton, New Brunswick 16, % 100.0% 100.0% 100.0% 100.0% Guelph, Ontario 115, % 99.0% 99.0% Centre Ice Retail Portfolio 138, % 85.0% 89.3% 88.5% 88.5% The Whitby Mall, Ontario 118, % 98.9% 98.9% 95.3% 92.1% Thickson Place, Ontario 37, % 100.0% 100.0% 100.0% 99.5% Total / Weighted Average 541, % 93.4% 94.5% 93.7% 92.9% Office Barrie, Ontario 42, % 63.0% 63.0% 63.2% 64.9% The Whitby Mall, Ontario 41, % 73.4% 67.4% 67.0% 80.6% Total / Weighted Average 84, % 68.4% 65.3% 65.2% 74.3% Industrial Montreal, Quebec 515, % 98.8% 89.8% 91.0% 91.0% Waterloo, Ontario 364, % 98.4% 100.0% 100.0% 100.0% Total / Weighted Average 879, % 98.7% 94.0% 94.7% 93.8% Total / Wtd. Average 1,506, % 95.1% 92.6% 93.1% 92.5% Multi-Residential Occupancy Ottawa, Ontario 98.5% 95.6% 85.2% 87.4% 95.6% Residential Total / Wtd. Average 98.5% 95.6% 85.2% 87.4% 95.6% TENANT DIVERSIFICATION The portfolio is well diversified by tenant profile with no tenant accounting for more than 4.7% of total net rent. Further, the top 10 tenants are largely comprised of creditworthy and large national tenants and account for 23.3% of total net rent: Firm Capital Property Trust Q2/ Page 7

8 % of Total Net # Tenant Location Rent 1 PPG (Dulux Paints) 8 locations in ON, with 1 in each of NB, MB, AB 4.7% 2 Sobeys Guelph and Whitby, ON 3.6% 3 NCR Canada Corp. Waterloo, ON 2.7% 4 LCBO Guelph and Whitby, ON 2.4% 5 Sport Systems Unlimited Corp. Waterloo, ON 2.0% 6 Connect Telecommunication Inc. Waterloo, ON 1.6% 7 Quebecor Media Montreal, QC 1.6% 8 Staples Bridgewater, NS 1.6% 9 World Gym Waterloo, ON 1.5% 10 Dollar Tree Stores Canada Inc Guelph, ON 1.4% Total 23.3% Geographical and Asset Class Portfolio Diversification based on NOI Office, 3% Apartment, 2% Industrial, 32% Retail,63% OCCUPANCY As at, commercial portfolio occupancy was 94.6%, largely in line with the 95.1% reported at March 31,, but a 210 basis point increase over the 92.5% reported at. The increase over was largely due to the increase in the industrial and retail portfolios, offset by a decline in the office portfolio. As at, occupancy for the multi-residential portfolio was 98.5%. COMMERCIAL NET RENT AND MULTI-RESIDENTIAL AVERAGE MONTHLY RENT Commercial net rent per occupied square foot and average multi-residential monthly rent per occupied unit for the past four quarters is as follows: Firm Capital Property Trust Q2/ Page 8

9 Mar 31, Dec 31, Sept 30, Retail $ $ $ $ $ Industrial $ 5.63 $ 5.63 $ 5.63 $ 5.64 $ 5.50 Office $ $ $ $ $ Multi-Residential $ 910 $ 894 $ 875 $ 877 $ 875 RESULTS OF OPERATIONS RENTAL REVENUE Rental revenue for the three months ended was $5,546,678, a 2% sequential increase over the $5,463,490 reported for the three months ended March 31, and a 19% increase over the $4,660,305 reported for the three months ended. Rental revenue for the six months ended was $11,010,170, a 16% increase over the $9,458,502 reported for the six months ended. Rental revenue includes all amounts earned from tenants lease agreements including rent, operating costs and realty tax recoveries. March 31, Base Rent $ 3,642,101 $ 3,464,447 $ 3,057,130 $ 7,106,550 $ 6,047,869 CAM & Tax Recoveries 1,913,781 1,988,343 1,565,140 3,902,124 3,260,338 Straight Line Rent 16,486 20,908 44,993 37, ,764 Free Rent (25,690) (10,208) (6,958) (35,898) (4,469) Rental Revenue $ 5,546,678 $ 5,463,490 $ 4,660,305 $ 11,010,170 $ 9,458,502 The variance in comparing the three and six months ended over the three and six months ended is largely due to increased rental income from new and renewal leasing activity in the entire portfolio combined with the full impact of the Trust s acquisition of the Guelph Retail Portfolio in late. Free rent relates to rent free periods provided to certain new and renewal tenants at the Trust s properties. Under IFRS, the Trust is required to adjust rental revenue by the value of the rent free period and amortize this adjustment out of income over the life of the individual lease. PROPERTY OPERATING EXPENSES Three Months Ended Property operating expenses for the three months ended were $2,135,348, an 11% decrease in comparison to the $2,393,616 reported for the three months ended March 31,, but a 19% increase over the $1,792,175 reported for the three months ended. Property operating expenses for the six months ended were $4,528,964, a 16% increase in comparison to the $3,910,094 reported for the six months ended. Property operating expenses include realty taxes as well as other costs related to maintenance, HVAC, insurance, utilities and property management fees. Property operating expenses consist of the following: Firm Capital Property Trust Q2/ Page 9 Six Months Ended

10 March 31, Realty Taxes $ 1,160,057 $ 1,171,135 $ 915,515 $ 2,331,192 $ 1,946,856 Property Management 286, , , , ,503 Operating Expenses 688, , ,655 1,661,888 1,544,735 Property Operating Expenses $ 2,135,348 $ 2,393,616 $ 1,792,175 $ 4,528,964 $ 3,910,094 The variance in comparing the three months ended over the three months ended March 31, is largely due to lower operating expenses due to seasonality for the residential portfolio and the variance in comparing the three and six months ended over the and three and six months is largely due to the full impact of the Trust s acquisition of the Guelph Retail Portfolio in late. NET OPERATING INCOME ( NOI ) Three Months Ended Six Months Ended On an IFRS basis, NOI for the three months ended was $3,411,330 an 11% increase over the $3,069,874 reported for the three months ended March 31,, and a 19% increase in comparison to the $2,868,130 reported for the three months ended. NOI for the six months ended was $6,481,206, a 17% increase in comparison to the $5,548,408 reported for the six months ended. On a cash basis (i.e. excluding straight-line and free rent which are non-cash items) ( Cash NOI ), NOI for the three months ended was $3,420,534, which is a 12% increase over the $3,059,174 reported for the three months ended March 31,, and a 21% increase over the $2,830,095 reported for the three months ended. Cash NOI for the six months ended was $6,479,710, a 20% increase in comparison to the $5,398,113 reported for the six months ended. Three Months Ended Six Months Ended March 31, Rental Revenue $ 5,546,678 $ 5,463,490 $ 4,660,305 $ 11,010,170 $ 9,458,502 Property Operating Expenses (2,135,348) (2,393,616) (1,792,175) (4,528,964) (3,910,094) NOI - IFRS Basis $ 3,411,330 $ 3,069,874 $ 2,868,130 $ 6,481,206 $ 5,548,408 Less: Straight-Line Rent (16,486) (20,908) (44,993) (37,394) (154,764) Less: Free Rent 25,690 10,208 6,958 35,898 4,469 NOI - Cash Basis $ 3,420,534 $ 3,059,174 $ 2,830,095 $ 6,479,710 $ 5,398,113 NOI - Cash Basis % Change vs. March 31, 12% % Change vs. 21% 20% The variance in comparing the three months ended over the three months ended March 31, is largely due to increased rental income from new and renewal leasing activity Firm Capital Property Trust Q2/ Page 10

11 in the entire portfolio. The variance in comparing the three and six months ended over the three and six months ended is largely due to the full impact of the Trust s acquisition of the Guelph Retail Portfolio in late. FINANCE COSTS Finance costs for the three months ended were $816,079, a 7% decrease in comparison to the $880,452 reported for the three months ended March 31,, but a 13% increase in comparison to the $725,185 reported for the three months ended. Finance costs for the six months ended were $1,696,531, a 19% increase over the $1,421,644 reported for the six months ended. Finance costs are comprised of the following: Three Months Ended Six Months Ended March 31, Mortgage Interest $ 764,842 $ 806,696 $ 652,751 $ 1,571,538 $ 1,294,533 Bank Indebtedness Interest 23,524 41,193 7,219 64,717 11,473 Finance Fee Amortization 39,246 41,917 83,845 81, ,114 Non-cash Interest Expense (11,533) (9,354) (18,630) (20,887) (37,476) Finance Costs $ 816,079 $ 880,452 $ 725,185 $ 1,696,531 $ 1,421,644 The variance in comparing the three months ended over the three months ended March 31, is largely due to the interest savings as a result of the repayments of the Hanover, ON and Bridgewater, NS mortgages on May 4, and the facility as outlined below. The variance in comparing the three and six months ended over the three and six months ended is largely due to new and assumed loans on the Trust s various acquisitions. Finance fee amortization relates to fees paid on securing the Facility on the Trust s various mortgages. Non-cash interest expense relates to the fair value adjustment to interest expense required as a result of the assumed mortgages from the Trust s various acquisitions. As outlined below, the weighted average interest rate of the mortgages as at stands at approximately 3.3%. GENERAL AND ADMINISTRATIVE ( G&A ) EXPENSES G&A expenses for the three months ended were $615,650 a 32% increase in comparison to the $465,917 reported for the three months ended March 31, and a 21% increase in comparison to the $508,923 reported for the three months ended. G&A expenses for the six months ended were $1,081,567, a 16% increase in comparison to the $933,826 reported for the six months ended. Public company expenses include trustee fees, transfer agent fees, press releases and print media. Firm Capital Property Trust Q2/ Page 11

12 Three Months Ended Six Months Ended March 31, Asset Management Fees 382, , ,074 $ 706,295 $ 703,104 Public Company Expenses 53,479 19,685 40,435 73,164 76,623 Office & General 179, ,446 81, , ,099 General & Administrative $ 615,650 $ 465,917 $ 508,923 $ 1,081,567 $ 933,826 NET INCOME & COMPREHENSIVE NET INCOME ( NET INCOME ) Net income for the three months ended was $3,715,744 in comparison to the $6,231,326 reported for the three months ended March 31, and the $5,171,698 reported for the three months ended. Net income for the six months ended was $9,947,070, a 34% increase in comparison to the $7,399,242 reported for the six months ended. The variance in comparing the three months ended over the three months ended March 31, as well as the three months ended is largely due to a lower positive fair market value adjustment, offset by higher net income from the investment properties. The variance in comparing the six months ended over the six months ended is largely due to a higher fair market value adjustment along with higher net income due to the full realization of the Trust s acquisition of the Guelph Retail Portfolio in late, offset by lower gains generated from the sale of investment properties. SUMMARIZED OPERATING RESULTS Rental revenue, other income, total revenue, NOI and net income for the past eight quarters for the Trust are as follows: Rental Revenue Other Income Total Revenue NOI Net Income Q2/ $ 5,546,678 $ 14,863 $ 5,561,541 $ 3,411,330 $ 3,715,744 Q1/ $ 5,463,490 $ 6,681 $ 5,470,171 $ 3,069,874 $ 6,231,326 Q4/ $ 5,025,013 $ 3,505 $ 5,028,518 $ 3,124,641 $ 5,125,746 Q3/ $ 4,835,094 $ 477,131 $ 5,312,224 $ 2,867,718 $ 3,704,461 Q2/ $ 4,660,305 $ 370,558 $ 5,030,863 $ 2,868,130 $ 5,171,698 Q1/ $ 4,798,197 $ - $ 4,798,197 $ 2,680,278 $ 2,227,545 Q4/2016 $ 4,601,110 $ 4,583 $ 4,605,693 $ 2,619,801 $ 3,276,096 Q3/2016 $ 4,228,005 $ 1,375 $ 4,299,380 $ 2,506,220 $ 1,349,820 CONSOLIDATED INTERIM STATEMENTS OF INCOME & COMPREHENSIVE INCOME AND CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES. Outlined below are the Consolidated Interim Statements of Income and Comprehensive Income and cashflows from operating activities for the three month period ended, March 31, and and six months ended and : Firm Capital Property Trust Q2/ Page 12

13 Three Months Ended Six Months Ended Net Operating Income March 31, Rental Revenue $ 5,546,678 $ 5,463,490 $ 4,660,305 $ 11,010,170 $ 9,458,502 Property Operating Expenses (2,135,348) (2,393,616) (1,792,175) (4,528,964) (3,910,094) 3,411,330 3,069,874 2,868,130 6,481,206 5,548,408 Interest and Other Income 14,863 6, , Expenses Finance Costs 816, , ,185 1,696,531 1,421,644 General and Administrative 615, , ,923 1,081, ,826 Unit-Based Compensation Expense/(Recovery) 44,160 (129,979) 164,032 (85,819) 126,216 1,475,889 1,216,390 1,398,140 2,692,279 2,481,686 Income Before Fair Value Adjustments and Other 1,950,304 1,860,165 1,470,055 3,810,471 3,066,787 Gain on Sale of Investment Properties - 370, ,493 Fair Value Adjustments on Investment Properties 1,765,440 4,371,161 3,331,150 6,136,601 3,961,964 Net Income and Comprehensive Income $ 3,715,744 $ 6,231,326 $ 5,171,698 $ 9,947,070 $ 7,399,242 Three Months Ended Six Months Ended March 31, Net Income & Comprehensive Income 3,715,744 6,231,326 5,171,698 9,947,070 7,399,242 Fair Value Adjustments: Investment Properties (1,765,440) (4,371,161) (3,331,150) (6,136,601) (3,961,964) Gain on Sale of Investment Properties - - (370,493) - (370,493) Unit-Based Compensation Recovery 44,160 (129,979) 164,032 (85,819) 126,216 Finance Costs, Net of Interest and Dividends 801, , ,120 1,674,987 1,421,579 Finance Fee Amortization 39,246 41,917 83,845 81, ,114 Non-cash Interest Expense (11,533) (9,354) (18,630) (20,887) (37,476) Straight-line Rent Adjustment (16,486) (20,908) (44,993) (37,394) (154,764) Free Rent, Net of Amortization 25,690 10,208 6,958 35,899 4,469 Change in Working Capital Accounts Receivable (296,621) (240,344) 14,375 (546,236) 220,574 Prepaid Expenses, Deposits and Other Assets (930,170) (17,817) (504,313) (947,987) (855,802) Restricted Cash 136,070 (4,063) - 132,007 - Accounts Payable and Accrued Liabilities 10,625 (146,202) 193,547 (126,305) (628,459) Tenant Rental Deposits 60,373 22,720 56,725 83,093 59,366 Interest Accrual (20,200) 53,492 (1,064) 33,292 (2,708) Cash Flows From Operating Activities $ 1,792,674 $ 2,293,606 $ 2,145,658 $ 4,086,281 $ 3,372,897 ADJUSTED FFO AND ADJUSTED AFFO Funds From Operations ( FFO ) for the three months ended was $1,950,304, which is a 5% increase over the $1,860,165 reported for the three months ended March 31, and a 27% increase over the $1,533,889 reported for the three months ended. FFO for Firm Capital Property Trust Q2/ Page 13

14 the six months ended was $3,810,469, a 22% increase over the $3,130,621 reported for the six months ended. Adjusted Funds From Operations ( AFFO ) for the three months ended was $1,904,121, a 17% increase over the $1,624,880 reported for the three months ended March 31,, and a 22% increase in comparison to the $1,564,472 reported for the three months ended. AFFO for the six months ended was $3,529,002, a 21% increase in comparison to the $2,915,499 reported for the six months ended. FFO per Unit for the three months ended was $0.118 while AFFO per Unit was $ FFO per Unit for the six months ended was $0.240 while AFFO per Unit was $ For the three months ended, FFO and AFFO payout ratios are 97% and 99% respectively. For the six months ended FFO and AFFO payout ratios are 96% and 103% respectively. The variance in comparing FFO and AFFO for the three months ended over the three months ended March 31, is largely due to increased rental income from new and renewal leasing activity in the entire portfolio along with lower operating costs and finance costs offset by higher G&A expenses. The variance in comparing FFO and AFFO for the three and six months ended over the three and six months ended, is largely due to the full impact of the Trust s acquisition of the Guelph Retail Portfolio in late combined with higher rental income, offset by higher overall expenses. The variance in FFO per Unit and AFFO per Unit when comparing the three months ended June 30, over the three months ending March 31, as well as the three and six months ended and three and six months ending was due to the net overall activity as outlined above, offset by the impact of issuing trust units and not fully deploying the net cash received along with the exercise of options and the issuance of DRIP units as outlined below. For the three months ended, The Trust had TIs/LCs and capital expenditures of approximately $0.7 million ( - $0.3 million). For the six months ended, The Trust had TIs/LCs and capital expenditures of approximately $1.0 million ( - $0.4 million). As the Trust considers AFFO to be a useful measure of cash flow available for distributions, the following table is a reconciliation from IFRS Cash Flow from Operating Activities to FFO and AFFO: Firm Capital Property Trust Q2/ Page 14

15 Three Months Ended Six Months Ended March 31, Cash Flows from Operating Activities $ 1,792,674 $ 2,293,606 $ 2,145,658 $ 4,086,281 $ 3,372,897 Add (deduct): Interest Accrual 20,200 (53,492) 1,064 (33,292) 2,708 Tenant Rental Deposits (60,373) (22,720) (56,725) (83,093) (59,366) Accounts Payable and Accrued Liabilities (10,625) 146,202 (193,547) 126, ,459 Restricted Cash (136,070) 4,063 - (132,007) - Prepaid Expenses, Deposits & Other Assets 930,170 17, , , ,802 Accounts Receivable 296, ,344 (14,375) 546,236 (220,574) Finance Fee Amortization (39,246) (41,917) (83,845) (81,163) (153,114) Finance Costs, Net of Interest & Dividends (801,216) (873,771) (725,120) (1,674,987) (1,421,579) Unit Based Compensation Expense (44,160) 129,979 (164,032) 85,819 (126,216) Performance Fee Attributable To Gain ,834-63,834 Straight-Line Rent Adjustment 16,486 20,908 44,993 37, ,764 Free Rent, Net of Amortization (25,690) (10,208) (6,958) (35,899) (4,469) Non-Cash Interest Expense 11,533 9,354 18,630 20,887 37,476 FFO $ 1,950,304 $ 1,860,165 $ 1,533,888 $ 3,810,469 $ 3,130,621 Straight Line Rent Adjustment (16,486) (20,908) (44,993) (37,394) (154,764) Free Rent, Net of Amortization 25,690 10,208 6,958 35,899 4,469 Tenant Inducements, Leasing Costs & Capex (88,014) (85,252) (76,784) (173,266) (153,568) Non-Cash Interest Expense (11,533) (9,354) (18,630) (20,887) (37,476) Unit Based Compensation Expense 44,160 (129,979) 164,032 (85,819) 126,216 AFFO $ 1,904,121 $ 1,624,880 $ 1,564,472 $ 3,529,002 $ 2,915,499 FFO Per Unit $ $ $ $ $ AFFO Per Unit $ $ $ $ $ Distributions Per Unit $ $ $ $ $ FFO Payout Ratio 97% 94% 92% 96% 89% AFFO Payout Ratio 99% 108% 90% 103% 96% The differences between the add back of FFO and AFFO is the deduction for straight-line rent, free rent, reserves for TIs/LCs, capital expenditures and the non-cash interest expense component for all assumed mortgages, offset by the deduction for unit-based compensation expense. Under RealPAC and the Trust, unit-based compensation expense is deducted for reporting FFO. However, the Trust adds back this expense for the purpose of calculating AFFO. AFFO is calculated largely in accordance with the guidelines set out by RealPAC and is defined as FFO less adjustments for non-cash items such as straight-line rent, free rent and noncash interest expense as well as normalized capital expenditures, tenant inducements and leasing charges. However, under RealPAC, unit-based compensation expense is deducted for reporting AFFO, but the Trust adds back this expense. DISTRIBUTIONS For the six months ended distributions of $ per unit were declared each month commencing in January through to June,, resulting in total distributions declared of $3,692,008. For the six months ended distributions of $ per unit were declared each month commencing in January through to June resulting in total distributions declared of $2,800,944. Firm Capital Property Trust Q2/ Page 15

16 Since the Trust s inception in Q4/2012, distributions have been raised five times: On October 31, 2013, the Trust announced its first distribution increase of 5.7% to $ per unit from $ per unit. On an annualized basis, this equated to anticipated distributions of $0.37 per unit up from $0.35 per unit. On October 20, 2014, the Trust announced its second distribution increase in less than one year with an 8.1% increase in its monthly distributions to $ per unit from $ per unit. On an annualized basis this equated to anticipated distributions of $0.40 per unit up from $0.37 per unit. On August 27, 2015, as a result of the acquisition of the Waterloo Industrial Portfolio, the Trust formally increased its annualized cash distribution by a further 5% to $0.42 per Trust Unit per annum or $0.035 per Trust Unit per month from $0.40 per Trust Unit per annum commencing in November, On November 1, 2016, as a result of the acquisitions of The Whitby Mall, Thickson Place and the Moncton retail portfolio, the Trust announced its fourth distribution increase of 4.8% to $ per unit from $0.035 per unit. On an annualized basis, this equates to anticipated distributions of $0.44 per unit up from $0.42 per unit. On November 10,, the Trust announced its fifth distribution increase of 4.5% to $ per Trust Unit commencing January. On an annualized basis this equates to anticipated distributions of $0.46 per unit up from $0.44 per unit. Overall, the Trust has increased distributions five times in five years and represents a cumulative increase of 31.4% since the Trust s inception in The policy of the Trust is to pay cash distributions on or about the 15th day of each month to Unitholders of record on the last business day of the preceding month. Distributions paid to Unitholders who are non-residents of Canada will be subject to Canadian withholding tax. The excess of cash flow from operating activities over distributions and net income and comprehensive income over distributions for the three and six months ended, March 31, and are outlined below: Firm Capital Property Trust Q2/ Page 16

17 Three Months Ended Six Months Ended March 31, Cash Flow From Operating Activities (A) $ 1,792,674 $ 2,293,606 $ 2,145,658 $ 4,086,281 $ 3,372,897 Net Cash Interest Expense Less: Mortgage Interest $ (764,842) $ (806,696) $ (652,751) $ (1,571,538) $ (1,294,533) Less: Bank Indebtedness Interest (23,524) (41,193) (7,219) (64,717) (11,473) Add: Interest and Other Income 14,863 6, , Net Cash Interest Expense (B) $ (773,503) $ (841,208) $ (659,905) $ (1,614,711) $ (1,305,941) Net Cash Flows from Operating Activities (A-B) $ 1,019,171 $ 1,452,398 $ 1,485,753 $ 2,471,570 $ 2,066,956 Net Income & Comprehensive Income $ 3,715,744 $ 6,231,326 $ 5,171,698 $ 9,947,070 $ 7,399,242 Distributions $ 1,937,044 $ 1,754,964 $ 1,404,564 $ 3,692,008 $ 2,800,944 Excess / (Shortfall) of Net Cash Flow From Operating Activities Over Distributions $ (917,872) $ (302,566) $ 81,189 $ (1,220,439) $ (733,988) Excess of Net Income & Comprehensive Income Over Distributions $ 1,778,701 $ 4,476,362 $ 3,767,134 $ 6,255,062 $ 4,598,298 For the three and six months ended and six months ended, the Trust had distributions in excess of net cash flow from operating activities. As such, a return of capital was provided to Unitholders. These distributions were funded from the Trust s cash on hand. The excess distributions were paid in the normal course from recurring cash flow and had no impact on the sustainability of distributions given that the distributions were covered from ongoing cash flows generated from the trust s investment portfolio. COMPARABLE CASH FLOWS Comparable operating, investing and financing cash flows for the three and six months ended and are outlined below: Three Months Ended Six Months Ended Operating Activities $ 1,792,674 $ 2,145,658 $ 4,086,281 $ 3,372,897 Investing Activities (721,401) 719,234 (1,030,586) 628,787 Financing Activities (3,601,049) (2,389,732) 7,653,598 (4,752,907) Increase/(Decrease) in Cash & Cash Equivalents $ (2,529,776) $ 475,160 $ 10,709,293 $ (751,223) Cash & Cash Equivalents / (Bank Indebtedness), Beginning of Period 4,785,853 (611,031) (8,453,216) 615,352 Cash & Cash Equivalents / (Bank Indebtedness), End of Period $ 2,256,077 $ (135,871) $ 2,256,077 $ (135,871) Cash provided by operating activities decreased for the three months ended in comparison to the three months ended, but increased for the six months ended compared to, largely due to changes in working capital. Firm Capital Property Trust Q2/ Page 17

18 Cash provided to investing activities decreased for the three and six months ended in comparison to the three and six months ended largely due to higher capital expenditures, offset by lower net proceeds received from the sale of investment properties. Cash provided by financing activities decreased for the three months ended in comparison to the three months ended largely due to the mortgage repayments at Hanover, Ontario and Bridgewater, Nova Scotia as outlined below, offset by cash provided by the various overnight public offerings and private placements. Cash provided by financing activities for the six months ended increased in comparison to the six months ended June 30, largely due to the capital raised from the various overnight public offerings and private placements as outlined below, offset by mortgage repayments at Hanover, Ontario and Bridgewater, Nova Scotia as outlined below. INVESTMENT PROPERTIES As at, the Trust s property portfolio consists of 61 properties with a fair value of $207.4 million, in comparison to the $200.2 million reported as at December 31,. The variance is largely the result of the increases in fair market value predominately due to recent appraisals and capitalization rate compression. The investment portfolio valuation is allocated by property type as follows: Retail and Commercial Core Service Provider Office Industrial Multi- Residential Total Balance, December 31, 2016 $ 91,800,587 $ 6,511,841 $ 59,852,374 $ 5,727,267 $ 163,892,069 Dispositions (666,400) (666,400) Capital Expenditures 84,947 (4,524) 310,601 17, ,106 Fair Value Adjustment 3,481,244 (107,039) 90, ,069 3,961,963 Balance, $ 94,700,378 $ 6,400,278 $ 60,253,665 $ 6,241,416 $ 167,595,738 Acquisitions 27,289, ,289,805 Dispositions (501,900) (501,900) Capital Expenditures 378,134 11, ,737 86, ,802 Fair Value Adjustment 3,401,957 (181,128) 1,881,815 (86,398) 5,016,246 Balance, December 31, $ 125,268,374 $ 6,230,683 $ 62,469,217 $ 6,241,416 $ 200,209,691 Capital Expenditures 638,016 (211) 281, ,490 1,030,586 Fair Value Adjustment 60,059 (159,557) 6,347,588 (111,490) 6,136,601 Balance, $ 125,966,449 $ 6,070,915 $ 69,098,096 $ 6,241,416 $ 207,376,876 For the three month period ended, senior management of the Trust valued the Investment Properties using independent third party appraisals for the Hanover, Ontario; Brampton, Ontario; Pembroke, Ontario; Bridgewater, Nova Scotia; Mountain Road; and Montreal Industrial properties and the overall capitalization method for the remaining properties. Investment properties are valued on a highest and best use basis. For all of the Trust s investment properties the current use is considered the best use. Fair value was determined by applying a capitalization rate to stabilized net operating income ( Stabilized NOI ). Stabilized NOI incorporates allowances for vacancy, management fees and structural reserves for tenant inducements and capital expenditures and is capped at a rate deemed appropriate for each investment property. Capitalization rates are based on many factors, including but not limited to the asset location, type, size and quality of the asset and taking into account any available market data at the valuation date. Firm Capital Property Trust Q2/ Page 18

19 Investment Properties measured at fair value are categorized by level according to the inputs used. The Trust has classified these inputs as Level 3. With the exception of the acquisition and dispositions of investment properties as further described in note 3 of these consolidated financial statements, there have been no transfers into or out of Level 3 in the current year. Significant unobservable inputs in Level 3 valuations are as follows: Retail and Commercial Core Service Provider Office Industrial Multi- Residential Weighted Average Capitalization Rate Range 5.00% % 7.00% 6.25% - 6.5% 5.00% 6.36% Weighted Average Cap. Rate 6.39% 7.00% 6.38% 5.00% 6.36% Weighted Average NOI $ 1,231,938 $ 424,964 $ 2,204,004 $ 312,071 $ 1,505,313 December 31, Retail and Commercial Core Service Provider Office Industrial Multi- Residential Weighted Average Capitalization Rate Range 5.00% % 7.00% 6.50% 5.00% 6.42% Weighted Average Cap. Rate 6.43% 7.00% 6.50% 5.00% 6.42% Weighted Average NOI $ 1,225,517 $ 436,148 $ 2,032,539 $ 312,071 $ 1,425,344 CURRENT ASSETS Current assets as at, March 31, and consist of the following: March 31, Accounts Receivable $ 2,362,245 $ 2,067,053 $ 1,780,219 Prepaid Expenses, Deposits & Other Assets 1,564, ,973 1,242,254 Cash & Cash Equivalents 2,256,077 4,785,853 - Restricted Cash 65, ,825 - $ 6,248,220 $ 7,688,704 $ 3,022,473 Accounts receivable consist mainly of tenant receivables, straight line rent adjustments and Harmonized Sales Tax ( HST ) and Quebec Sales Tax ( QST ) recoveries from the Canada Revenue Agency and Revenue Quebec, respectively. Prepaid expenses, deposits and other assets consist mainly of prepaid property taxes, insurance, utility deposits, deferred financing costs related to the Facility and the capitalization of free rent provided to tenants as required under IFRS. Restricted Cash represents realty tax escrows requested by the lender on the Guelph Retail Portfolio mortgage. BANK INDEBTEDNESS The Trust has entered into a Revolving Operating Facility (the Facility ) with a Canadian Chartered Bank (the Bank ) fully secured by first charges against certain investment properties. Firm Capital Property Trust Q2/ Page 19

20 The total amount available under the Facility is $13.5 million. The interest rate is based on a calculated formula using the Canadian Chartered Bank s Prime Lending Rate. Amounts drawn under the Facility are due to be repaid at the maturity date on November 30, Bank Indebtedness as at and December 31, was $nil and $8.5 million respectively. MORTGAGES As at, total outstanding mortgages were $87,954,616 ($96,323,127 as at December 31, ), net of unamortized financing costs of $290,908 ($314,225 as at December 31, ), offset by a $675,332 ($682,298 as at December 31, ) fair value adjustment with a weighted average interest rate of approximately 3.3% (3.3% as at December 31, ) and weighted average repayment term of approximately 3.1 years (3.3 years as at December 31, ). The mortgages are repayable as follows: Scheduled Principal Repayments Debt Maturing During The Year Total Mortgages Payable Scheduled Interest Payments $ 966,408 $ 14,704,706 $ 15,671,114 $ 1,303, ,827,258 9,500,000 11,327,258 2,309, ,472,394 17,326,664 18,799,058 1,775, ,680 15,818,445 16,489,125 1,138, ,064 3,845,582 4,424, ,762 Thereafter 1,576,643 19,282,346 20,858,989 1,808,078 Face Value $ 7,092,447 $ 80,477,743 $ 87,570,190 $ 9,194,636 Unamortized Financing Costs (290,908) Fair Value Adjustment on Assumed Mortgages 675,332 Total Mortgages $ 87,954,616 December 31, Current: Mortgages $ 18,327,158 $ 25,805,978 Unamortized Financing Costs (103,641) (112,026) Fair Value Adjustment on Assumed Mortgages 70,830 70,536 18,294,347 25,764,488 Non-Current: Mortgages 69,243,032 70,149,076 Unamortized Financing Costs (187,266) (202,199) Fair Value Adjustment on Assumed Mortgages 604, ,762 69,660,269 70,558,639 Total Mortgages $ 87,954,616 $ 96,323,127 Firm Capital Property Trust Q2/ Page 20

21 On November 30,, the Trust assumed a $14.3 million ($14.8 million fair value) first mortgage as part of the Guelph Retail Portfolio acquisition. The mortgage, amortized over 30 years, has a 4.4% fixed interest rate and matures on October 1, On May 4,, the Trust repaid a $4.9 million and $2.3 million mortgage fully secured against the Trust s Bridgewater, Nova Scotia and Hanover, Ontario properties, respectively. On August 1,, the Trust refinanced its existing mortgage on its Montreal Industrial Portfolio with a Canadian Chartered Bank (the Bank ). The principal balance of the mortgage at maturity was $29.6 million, while the Trust s portion was $14.8 million. The new mortgage is a $42.0 million first mortgage fixed at an interest rate of 3.76% with a 25 year amortization. In addition a $1.0 million revolving credit facility was also provided by the Bank that is fully secured against the Montreal Industrial Portfolio with an interest rate based on a calculated formula using the Bank s prime lending rate. The Trust s portion of this new mortgage is $21.0 million and $0.5 million for the revolving credit facility, respectively. ACCOUNTS PAYABLE & ACCRUED LIABILITIES Accounts payable and accrued liabilities as at, March 31,, and consist of the following: March 31, December 31, Professional Fees $ 69,200 $ 69,200 $ 69,200 Utilities, Repairs & Maintenance, Other 2,057,955 1,794,488 2,005,030 Due to Asset & Property Manager 132, , ,553 Accrued Interest Expense 186, , ,454 Option Liabilities 645, , ,011 $ 3,091,626 $ 3,029,067 $ 3,305,248 Professional fees represent amounts payable for legal, audit and advisory fees. Utilities, Repairs & Maintenance, Other consist of utility costs, property taxes, repairs and maintenance, GST/HST payables to CRA and QST payables to Revenue Quebec. Due to Asset & Property Manager represent amounts payable to Firm Capital Realty Partners Inc. ( FCRPI ) and Firm Capital Property Management Corp. ( FCPMC ) as outlined below. Option liabilities relate to the unit option plan as outlined below. UNIT OPTION PLAN & OPTION LIABILITIES Under the Trust's unit option plan, the aggregate number of unit options reserved for issuance at any given time shall not exceed 10% of the number of outstanding Trust Units. As at, the Trust has 1,316,000 Trust unit options issued and outstanding consisting of the following issuances: On June 23, 2014, the Trust granted 285,000 Trust unit options at a weighted average exercise price of $5.30 per Trust Unit. The unit options fully vested on the date of grant and expire on June 23, During the year ended December 31,, 10,000 of these Firm Capital Property Trust Q2/ Page 21