InStorage Real Estate Investment Trust. Consolidated Financial Statements December 31, 2006

Transcription

1 InStorage Real Estate Investment Trust Consolidated Financial Statements

2 PricewaterhouseCoopers LLP Chartered Accountants North American Centre 5700 Yonge Street, Suite 1900 North York, Ontario Canada M2M 4K7 Telephone Facsimile April 27, 2007 Auditors Report To the Unitholders of InStorage Real Estate Investment Trust We have audited the consolidated balance sheet of InStorage Real Estate Investment Trust (REIT) as at and the consolidated statements of operations, unitholders equity and cash flows for the period from January 12, 2006 to. These consolidated financial statements are the responsibility of the REIT s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the REIT as at and the results of its operations and its cash flows for the period from January 12, 2006 to in accordance with Canadian generally accepted accounting principles. (Signed) PricewaterhouseCoopers LLP Chartered Accountants, Licensed Public Accountants PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and the other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

3 Consolidated Balance Sheet (dollars in thousands) As at Assets Real estate assets Income-producing properties (note 4) Tangible assets 126,239 Intangible assets 2,162 Mezzanine loans receivable (note 12) 13, ,130 Deferred financing costs (note 5) 415 Prepaid expenses and deposits (note 6(a)) 5,477 Amounts receivable 1,679 Cash and cash equivalents 37,315 Liabilities 187,016 Debt (note 7) 71,841 Accounts payable and accrued liabilities (note 6(b)) 5,618 77,459 Unitholders equity 109, ,016 Commitments and contingencies (note 16) Subsequent events (note 17) The accompanying notes are an integral part of these consolidated financial statements.

4 Consolidated Statement of Operations (dollars in thousands, except per unit amounts) For the period from January 12, 2006 to Revenues Rental property income 4,369 Interest income on mezzanine loans 527 4,896 Expenses Property operating costs 1,497 Interest (note 7(d)) 1,518 General and administrative 1,234 Asset management fees (note 12(a)) 143 Unit-based compensation (note 9) 373 Amortization of income-producing properties (note 10) 2,205 6,970 Net loss for the period (2,074) Basic and diluted loss per unit (0.05) Weighted average number of units in thousands 46,031 The accompanying notes are integral part of these consolidated financial statements.

5 Consolidated Statement of Unitholders Equity (dollars in thousands) For the period from January 12, 2006 to Unit equity (note 8) Contributed surplus Cumulative net loss Cumulative distributions Total Trust units issued on establishment of the REIT (note 1) SCOSS Capital Corp. offerings - net of issuance costs (note 1, note 8) 5, ,439 Issuance of units, net of costs 98, ,841 Issuance of Class C units of InStorage Limited Partnership 9, ,400 Option Compensation Expense (note 9) Exercise of options Net loss for the period - - (2,074) - (2,074) Distributions (2,575) (2,575) Unitholders equity - 113, (2,074) (2,575) 109,557 The accompanying notes are an integral part of these consolidated financial statements.

6 Consolidated Statement of Cash Flows (dollars in thousands) For the period from January 12, 2006 to Cash provided by (used in) Operating activities Net loss for the period (2,074) Add: Items not affecting cash Amortization of income-producing properties 2,205 Amortization of deferred financing costs 281 Unit-based compensation expense Changes in other non-cash operating items (note 11(a)) 1,242 2,027 Financing activities Proceeds from mortgages and other debt 76,837 Mortgages and other debt repayments (25,577) Proceeds from exercise of unit options 153 Proceeds from issuance of units - net of issuance costs 104,280 Distributions paid (1,931) Deferred financing costs incurred (696) 153,066 Investing activities Acquisitions of income-producing properties (note 3) (99,894) Capital expenditures (157) Advances of mezzanine debt (12,427) Deposits (5,300) (117,778) Increase in cash and cash equivalents during the period 37,315 Cash and cash equivalents - beginning of period - Cash and cash equivalents - end of period 37,315 Supplemental cash flow information (note 11) The accompanying notes are an integral part of these consolidated financial statements.

7 1 Organization InStorage Real Estate Investment Trust ( InStorage or the REIT ) is an open-ended real estate investment trust formed under the laws of the Province of Ontario pursuant to the declaration of trust dated June 20, 2006 when ten trust units were issued for cash consideration of one hundred and thirty dollars. The trust units trade on the TSX Venture Exchange under the symbol IS.UN. The REIT was created to invest in income-producing self-storage properties within Canada. The REIT entered into a plan of arrangement (the Arrangement ) on August 4, 2006, whereby SCOSS Capital Corp. ( SCOSS ) was continued as the REIT and all of SCOSS s common shares were exchanged for a similar number of REIT units. SCOSS was incorporated on January 12, 2006 and its common shares were listed for trading on the TSX Venture Exchange on March 27, 2006 as a capital pool corporation. SCOSS completed its qualifying transaction on May 29, 2006 and was approved as a real estate issuer on the TSX Venture Exchange. 2 Summary of significant accounting policies Basis of presentation The REIT is considered to be a continuation of SCOSS following the continuity of interest method of accounting. These consolidated financial statements reflect the results of operations of SCOSS from January 12, 2006 to August 4, 2006 and the REIT from that date forward. The REIT had no activity between June 20, 2006 and August 4, The REIT s accounting policies and its standards of financial disclosure are in accordance with Canadian generally accepted accounting principles ( GAAP ). The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The consolidated financial statements include the accounts of the REIT and its subsidiaries, including InStorage Limited Partnership (the LP ), together with its proportionate share of the assets, liabilities, revenue and expenses of all co-ownerships in which it participates. Real estate assets a) Income-producing properties Income-producing properties are carried at cost less accumulated amortization, less impairment loss, if any. Cost includes all amounts relating to the acquisition and improvement of the properties. All costs associated with upgrading the existing facilities, other than ordinary repairs and maintenance, are capitalized as property improvements and amortized over their expected useful lives.

8 In accordance with The Canadian Institute of Chartered Accountants ( CICA ) Emerging Issues Committee Abstract ( EIC ) No. 137, Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination, and, EIC-140 Accounting for Operating Leases Acquired in Either an Asset Acquisition or a Business Combination, the cost of income-producing property acquisitions is allocated to tangible and intangible assets based on their respective fair market values. Tangible assets include land, buildings, furniture and equipment. Intangible assets mainly include the value of in-place leases. The REIT records amortization expense on a straight-line basis over the assets estimated useful lives as follows: Buildings Furniture and equipment Value of in-place leases 25 years 5 years 1 year b) Impairment of income-producing properties The REIT uses a two-step process for determining when an impairment of income-producing properties should be recognized in the consolidated financial statements. If events or circumstances indicate that the carrying value of a property may be impaired, a recoverability analysis is performed based on estimated undiscounted future cash flows to be generated from property operations and its projected disposition. If the analysis indicates that the carrying value is not recoverable from future cash flows, the property is written down to estimated fair value and an impairment loss is recognized in the consolidated statement of operations. No impairment losses were recorded by the REIT during c) Impairment of mezzanine loans receivable Mezzanine loans receivable are classified as impaired when, in the opinion of management, there is reasonable doubt as to the timely collection of principal and interest. The carrying amount of mezzanine loans that are classified as impaired are reduced to their estimated fair value. Revenue recognition Rental property income, which is generally earned pursuant to month-to-month leases for self-storage space, is recognized as services are provided. Amounts billed in advance of providing services are recorded as deferred revenue. Late charges and administrative fees are recognized as income when collected. Revenue from merchandise sales is recognized when earned on delivery of products to the customer and ultimate collection is reasonably assured. Unit-based compensation The REIT has a unit option plan for trustees, officers and employees. The REIT recognizes compensation expense based on the fair value of the options at the date of grant, using a Black-Scholes option pricing model, over the vesting period. A summary of the plan is included in note 9.

9 Deferred financing costs Deferred financing costs include commitment fees, underwriting costs and legal costs associated with new debt and the renewal of existing debt of the REIT. Financing costs for term mortgages are deferred and amortized over the term of the respective indebtedness. Financing costs for non-term debt are deferred and amortized over the expected term of the debt. In the event any debt is terminated, any associated unamortized financing costs are expensed immediately. Income (loss) per unit calculations Basic and diluted income (loss) per unit is calculated by dividing net income (loss) for the period by the weighted average number of units outstanding during the period. Diluted income (loss) per unit is calculated by dividing net income (loss) for the period by the weighted average number of units outstanding during the period plus the effect of dilutive unit equivalents such as unit options. The diluted amounts are calculated using the treasury method as if all the unit equivalents in respect of which average market prices exceed issue price, have been exercised at the beginning of the reporting period or the date of issue, as the case may be, and that the funds obtained thereby were used to purchase units of InStorage at the average trading price of units during the period. Unit options are not included in the calculation of diluted net loss for because they are anti-dilutive. Cash and cash equivalents Cash and cash equivalents are comprised of cash and include short-term investments with original maturities of three months or less. Fair value of financial instruments The REIT s amounts receivable, cash and cash equivalents, and accounts payable and accrued liabilities are carried at cost, which approximates their fair values because of the short period to receipt or payment of cash. The fair values of other financial instruments are disclosed in notes 7 and 12, with fair values estimated based on discounted future cash flows using discount rates that reflect current market conditions for instruments with similar terms and risks. Such fair value estimates are not necessarily indicative of the amounts the REIT might pay or receive in actual market transactions. Variable interest entities CICA Accounting Guideline 15, Consolidation of Variable Interest Entities ( AcG-15 ), provides guidance for applying the principles in Section 1590, Subsidiaries, to those entities defined as Variable Interest Entities ( VIEs ). This standard considers a VIE to be an entity in which either the equity at risk is not sufficient to permit it to finance its activities without additional subordinated financial support from other parties, or equity investors lack either voting control, or an obligation to absorb expected losses or the right to receive expected residual returns. AcG-15 requires consolidation of VIE s by the Primary Beneficiary. The Primary Beneficiary is defined as the party who has exposure to the majority of a VIE s expected losses and/or expected residual

10 returns. InStorage has reviewed its interests, specifically its relationship with InScotia Developments Limited Partnership ( InScotia ), and has determined that the results of InScotia are not required to be included in the consolidated financial statements of the REIT. Further details about the relationship with InScotia are included in note Acquisitions Acquisitions during the period ended On May 29, 2006, SCOSS purchased two self-storage facilities in Toronto, Ontario for a total purchase price of 8.1 million. The acquisition was funded by a first mortgage loan of 6.0 million, with the balance paid in cash, adjusted for working capital amounts. On August 25, 2006, InStorage purchased three self-storage properties. The properties were acquired for a total purchase price of 4.6 million and are located in Aylmer, Ontario and St. Thomas, Ontario. The acquisition was funded by first mortgage financing of 3.5 million, with the balance paid in cash, adjusted for working capital amounts. On September 1, 2006, InStorage purchased six self-storage properties. The properties were acquired for a total purchase price of 59.2 million plus transaction costs of 1.7 million and are located in the Toronto, Ontario area. The acquisition was funded by first mortgage financing in the amount of 5.3 million, bridge facility financing in the amount of 16.7 million, the assumption of debt in the amount of 8.6 million and by issuance of 7.0 million Class C LP units of the LP for 7.0 million, with the balance paid in cash, adjusted for working capital amounts. The Class C LP units were valued at their estimated fair value of 1.00 per unit, which is equal to the unit price at which 75 million units were issued in a private placement completed on August 31, An additional amount of up to approximately 8.5 million may be payable as an increased purchase price in connection with this acquisition, contingent upon certain acquired properties generating specified operating income during the period commencing 12 months after closing and ending 24 months after closing. As the outcome of this contingency cannot be determined beyond reasonable doubt at this time, no amount has been recognized as part of the cost of acquisition. This purchase price adjustment consideration, if and when due, would be payable in the form of Class C LP units issuable at a price of 1.00 per unit, which would be measured at the estimated fair value of these units and recognized when issued. On September 5, 2006, InStorage purchased four self-storage properties. The properties were acquired for a total purchase price of 34.0 million plus transaction costs of 1.2 million. Two of the properties are located in London, Ontario, while the other two are located in Toronto, Ontario. The acquisition was funded by first mortgage financing in the amount of 8.4 million, a bridge facility draw in the amount of 8.6 million, the assumption of debt in the amount of 8.3 million and the issuance of 2.4 million Class C LP units of the LP for 2.4 million, with the balance paid in cash, adjusted for working capital amounts. The Class C LP units were valued at their estimated fair value of 1.00 per unit as described above. On September 20, 2006, InStorage purchased a self-storage property located in Belleville, Ontario. The total purchase price was 2.2 million, which was paid in cash, adjusted for working capital amounts.

11 On October 13, 2006, InStorage purchased a self-storage facility located in Calgary, Alberta. The total purchase price for the property was 8.5 million, which was paid in cash, adjusted for working capital amounts. On October 17, 2006, InStorage acquired a 50% co-ownership interest in a self-storage property in Toronto, Ontario at a purchase price of approximately 4.0 million. The acquisition was funded through the assumption of a proportionate share of the first mortgage debt of 3.7 million, with the balance paid in cash, adjusted for working capital amounts. On November 15, 2006, InStorage acquired two self-storage properties located in Edmonton, Alberta. The total purchase price for these properties was 5.5 million, which was financed with a first mortgage of 4.0 million, with the balance paid in cash, adjusted for working capital amounts. Consideration paid for the assets acquired during the period ended is summarized as follows: September 1, 2006 September 5, 2006 Others Total Cash 45,263 24,446 30,185 99,894 Issuance of Class C LP units 7,000 2,400-9,400 Mortgages assumed on acquisition 8,588 8,331 3,662 20,581 60,851 35,177 33, ,875 The allocations of the purchase price of the acquisitions during the period ended to the assets acquired are summarized as follows: September 1, 2006 September 5, 2006 Others Tangible assets Land 9,163 7,134 4,945 21,242 Building 50,861 27,343 27, ,135 Furniture and equipment ,024 34,477 32, ,452 Net working capital (159) (88) (327) (574) Intangible assets: In-place leases ,223 2,997 Total 60,851 35,177 33, ,875

12 As at, the allocations of the purchase prices to the fair value of some of the assets acquired have not been finalized and may be subject to adjustment. Income from the acquired properties is included in the consolidated statement of operations from the dates of acquisition of the respective income-producing properties. 4 Income-producing properties Income-producing properties consist of the following: Cost Accumulated amortization Net Tangible assets Land 21,242-21,242 Buildings 106,135 1, ,795 Furniture and equipment ,609 1, ,239 Intangible assets In-place leases 2, , ,606 2, ,401 5 Deferred financing costs Deferred financing costs consist of the following: Cost Accumulated amortization Net Deferred financing costs Interest expense for 2006 includes 0.3 million of amortization of deferred financing costs.

13 6 Working capital a) Prepaid expenses and deposits Prepaid expenses and deposits consist of the following: Deposits on acquisitions 2,000 Mortgage funding reserves held by lender 3,250 Prepaid expenses and other 227 5,477 Mortgage funding reserves held by lender will be released to the REIT upon achieving stipulated occupancy levels and on completing required repairs. Interest is being paid to the lender on these amounts and the funds withheld have been invested by the lender in term deposits on the REIT s behalf. b) Accounts payable and accrued liabilities Accounts payable and accrued liabilities consist of the following: Accounts payable and operating expense accruals 2,571 Tenant prepaid rents and deposits 1,127 Prepaid interest on mezzanine loans 995 Accrued interest payable 281 Distributions payable 644 5,618 7 Debt Debt consists of the following: Fixed rate term mortgages (a) 60,929 Variable rate mortgages (b) 10,912 71,841

14 a) Fixed rate term mortgages Fixed rate term mortgages payable bear interest at rates ranging between 5.32% and 6.35% per annum with a weighted average rate of 5.53% at, payable in monthly principal and interest instalments and mature between 2008 and The weighted average term to maturity of the term mortgages is 6.80 years. The mortgages are secured by registered first charges over specific income properties. All interest rates are fixed for the term of the respective mortgage. Principal repayment requirements for the fixed rate term mortgages are as follows: , , , , ,086 Thereafter 39,730 60,929 b) Variable rate mortgages At, the REIT had the following variable interest rate mortgages: a loan of 7.3 million bearing a variable interest rate at prime plus 1.00%, secured by a first registered mortgage over one income-producing property and an assignment of rents and/or leases of the property. The debt matures on December 31, 2008 and it can be prepaid without penalty at any time in whole or in part during its term; and a demand non-revolving loan in the amount of 3.7 million bearing a variable interest rate at prime plus 0.85%, secured by a first charge on a co-ownership property. The debt is repayable on demand, subject to annual review, but in no case later than August 31, The amount drawn against the facility can be increased to 4.9 million with additional amounts drawn for construction of an expansion on the same property. These amounts represent InStorage s 50% share in the co-ownership of the property. c) Bridge facility On September 5, 2006, InStorage arranged a three-month bridge facility with a bank in the amount of 25.3 million to finance the acquisition of certain self-storage properties. The bridge loan had an interest rate payable at prime plus 1.5% and was repayable upon one week s written notice to the bank. This loan was repaid in the fourth quarter of 2006 and new term mortgage financing was obtained.

15 d) Interest expense Interest expense consists of the following: e) Fair values 8 Unit equity Interest 1,433 Amortization of deferred financing costs 281 1,714 Less: Interest income on short-term investments (196) 1,518 The estimated fair values of the debt balances at are approximately equal to carrying values. The following presents the number of units issued and outstanding and the related carrying value of unit equity as at : Number of units issued and outstanding Carrying amount REIT units Class B LP units Class C LP units Total REIT units Class B LP units Class C LP units Total SCOSS offerings, net of issuance cost, converted into REIT units 8,553,944 12,946,056-21,500,000 2,165 3,274-5,439 Units issued on establishment of REIT Private placement of units, August 31, ,000, ,000,000 70, ,553 Private placement of units, December 29, ,098, ,098,000 28, ,288 Issuance of units on acquisitions - - 9,400,000 9,400, ,400 9,400 Unit options exercised (note 9) 766, , Balance - December 31, ,418,620 12,946,056 9,400, ,764, ,159 3,274 9, ,833

16 Pursuant to a special resolution passed by shareholders of SCOSS at a meeting held on July 25, 2006, SCOSS converted into a real estate investment trust as at August 4, The shareholders of SCOSS exchanged their common shares, on a one-for-one basis, for either units of the REIT or exchangeable Class B LP units of the LP. On January 12, 2006, SCOSS was incorporated with 1 common share issued for gross proceeds of one dollar. On February 10, 2006, SCOSS completed a private placement offering of 4,999,999 shares at a price of 0.10 per share for gross proceeds of 0.5 million. Also on February 10, 2006, SCOSS completed a private placement offering of 3,750,000 shares at a price of 0.20 per share for gross proceeds of 0.8 million. On March 22, 2006 SCOSS completed its initial public offering of 3,750,000 shares at a price of 0.20 per share for gross proceeds of 0.8 million. On May 29, 2006, SCOSS completed a private placement of 9,000,000 shares at a price of 0.50 per share for gross proceeds of 4.5 million. Net of total share issue costs of 1.1 million, SCOSS raised total net proceeds of 5.4 million in the offerings listed above. On August 31, 2006, InStorage completed a private placement offering of 75,000,000 units at a price of 1.00 per unit for net proceeds of 70.6 million after deducting the expenses of the offering. On December 29, 2006, InStorage completed a private placement offering of 23,098,000 units at a price of 1.30 per unit for net proceeds of 28.3 million after deducting the expenses of the offering. In conjunction with the acquisition of properties on September 1, 2006, the REIT issued 7,000,000 exchangeable Class C LP units at 1.00 per unit, for a value of 7.0 million. In conjunction with the acquisition of properties on September 5, 2006, the REIT issued 2,400,000 exchangeable Class C LP units at 1.00 per unit, for a value of 2.4 million. a) Authorized units i) REIT units The REIT is authorized to issue an unlimited number of voting units, each of which represents an equal undivided interest in the REIT. All REIT units outstanding from time to time shall be entitled to participate pro rata in any distributions by the REIT and, in the event of termination or winding up of the REIT, in the net assets of the REIT. All REIT units shall rank among themselves equally and rateably without discrimination, preference or priority. Unitholders are entitled to require the REIT to redeem all or any part of their REIT units at prices determined and payable in accordance with the conditions provided in the REIT s declaration of trust. A maximum amount of fifty thousand dollars may be redeemed in total in any one month unless otherwise waived by the Board of Trustees. The REIT is authorized to issue an unlimited number of special voting units that will be used to provide voting rights to holders of exchangeable securities. Special voting units are not entitled to any interest or share in the distributions or net assets of the REIT. Each special voting unit entitles the holder to the number of votes at any meeting of unitholders of the REIT which is equal to the number

17 of REIT units into which the exchangeable security is exchangeable. Special voting units are cancelled on the issuance of REIT units on exercise, conversion or cancellation of the corresponding exchangeable securities. As at, there were 12,946,056 special voting units outstanding. There is no carrying value assigned to the special voting units in these consolidated financial statements. ii) Limited partnership units InStorage Limited Partnership ( LP ) was formed on June 21, An unlimited number of Class A LP units, Class B LP units and Class C LP units and an unlimited number of limited partnership units of any class (as the same may be created from time to time by the general partner) may be issued by the LP. The Class A LP units are entitled to all distributable cash of the LP after the required distributions on the Class B LP units and Class C LP units have been paid. As at, there were 107,418,620 Class A LP units outstanding. All Class A LP units are owned indirectly by the REIT and have been eliminated on consolidation. Class B LP units and Class C LP units are exchangeable into units of the REIT on a one-for-one basis and entitle holders to receive distributions that are equivalent to distributions made on units of the REIT and do not entitle holders to vote on matters to be considered by the limited partners of the LP. However, holders of Class B LP units are also holders of special voting units of the REIT, which entitles them to vote at meetings of the unitholders of the REIT. The terms of the Class B LP units and the Class C LP units are governed by the limited partnership agreement of the LP and the applicable exchange agreement in respect of such units. These units are non-transferable, except on exchange on a one-for-one basis for units of the REIT. In accordance with EIC-151, Exchangeable Securities Issued by Subsidiaries of Income Trusts, the Class B LP units and Class C LP units are presented in unitholders equity. iii) Unit distributions The declaration of trust of the REIT provides that a sufficient amount of the REIT s net income and net realized capital gains will be distributed each year to unitholders or otherwise in order to eliminate the REIT s liability for tax under Part I of the Income Tax Act (Canada). Unit distributions declared during the period ended are as follows: REIT units 2,034 Class B LP units 314 Class C LP units 227 2,575

18 9 Unit options InStorage has adopted a unit option plan (the Plan ). Under the terms of the Plan, the Board of Trustees of the REIT may from time to time, in its discretion, and in accordance with TSX Venture Exchange requirements, grant trustees, officers, employees and consultants, including all persons acting in such capacity regardless of whether they are employed by the REIT or its subsidiaries or affiliates or by another person or entity, nontransferable options to purchase trust units, exercisable for a period of up to ten years from the date of grant. The maximum number of units reserved for issuance under the plan is 10% of the total number of issued and outstanding units. On March 21, 2006, SCOSS granted 1,250,000 options to its officers and directors at an exercise price of 0.20 per share, expiring on March 21, These options vested immediately upon granting. On May 29, 2006, SCOSS granted 900,000 options to its officers and directors at an exercise price of 0.94 per share, expiring on May 29, These options vested immediately upon granting. The compensation expense was determined based on the fair value of the options at the grant date as calculated using the Black-Scholes option pricing model with the following assumptions: Risk-free interest rate 4.08% Expected volatility 40.00% Distribution yield 5.00% During the period ended, InStorage recognized 0.4 million of unit-based compensation expense. In conjunction with the Arrangement for the continuation of SCOSS as the REIT, the SCOSS options were converted into unit options of the REIT at a weighted exercise price of 0.51 per unit. During the period ended, 766,666 options were exercised at 0.20 per unit for proceeds of 0.15 million. At, 1,383,334 options were outstanding and vested, with a weighted average exercise price of The weighted average remaining life of options was 4.4 years at.

19 10 Amortization expense Amortization expense consists of the following: Income-producing properties Tangible assets 1,370 Intangible assets 835 2, Supplemental cash flow information The following summarizes supplemental cash flow information and non-cash transactions: Interest paid 1,136 Interest received 192 Mortgages assumed on acquisitions 20,581 Units issued as consideration for acquisitions 9,400 Liabilities assumed on acquisitions 775 Distributions payable at period-end 644 Changes in other non-cash operating items consist of the following: Prepaid expenses and deposits (177) Amounts receivable (1,478) Accounts payable and accrued liabilities 2,897 1,242

20 12 Related party balances and transactions Transactions with related parties that are conducted in the normal course of operations have been recorded at the exchange amount. Monetary and non-monetary transactions with related parties that are not in the normal course of operations, that have commercial substance, but that result in a substantive change in the ownership interests of the item transferred and are supported by independent evidence are recorded at the exchange amount. a) In August 2006, InStorage entered into an exclusive five-year management agreement with Carttera Management Inc. ( Carttera ), whereby Carttera has been engaged as the exclusive provider of management services to InStorage. These services include the provision to the REIT of three executive officers and other staff. Two of the officers of the REIT are shareholders of Carttera and also hold units of the REIT. i) During 2006, the REIT incurred advisory fees of 0.14 million, which has been accrued in the accounts. The annual advisory fee is calculated at 0.25% of the gross book value of the REIT s assets as defined in the management agreement. ii) During 2006, SCOSS was charged 0.14 million for the management of the operations of SCOSS and the conversion of SCOSS into the REIT. This amount is included in general and administrative expenses. iii) The REIT incurred and paid 0.6 million in acquisition fees to Carttera for The acquisition fee is calculated on the date of closing of a purchase or acquisition, as 0.50% of the total cost of acquisition. This amount is included in the cost of acquisitions. b) As of November 1, 2006, InStorage entered into a development agreement with InScotia, a related party of the REIT by virtue of common management and an ownership interest in InScotia by certain members of management of the REIT. This agreement amended certain terms of the previous development agreement between the same parties dated August 4, Pursuant to the development agreement, InStorage has the right of first offer to provide mezzanine financing in respect of, and, where such financing is provided, a first right to acquire, self-storage properties owned and/or under development by InScotia. Under the terms of the development agreement, InStorage can exercise its right of first refusal to acquire, at a price based on 95% of the fair market value, the properties developed by InScotia for which mezzanine financing has been provided by InStorage. The development agreement includes a process to determine the fair market value of the properties to be acquired by InStorage from InScotia. This process includes obtaining two independent appraisals of the property and approval by the independent boards of InStorage and InScotia.

21 The loans advanced under this agreement are secured by a second charge on the property in favour of InStorage. The mezzanine loans provided under the development agreement have a maturity at the earlier of the following: five years from the date of initial advance of funds under the loan; the sale of the project to InStorage or to a third party in compliance with the terms of the development agreement; or the second anniversary of the date on which stabilization of the project has occurred. A project is considered to be stabilized when it has been occupied by tenants, in possession and paying full rent, at an average occupancy rate of 85% or greater over a period of three consecutive months. InStorage had funded InScotia with a total principal amount of 12.5 million and 1.3 million to a nonrelated party, in mezzanine loans that are open for prepayment without penalty, with a weighted average interest rate of 13.6%. Interest income for the period ended in the amount of 0.5 million has been accrued. This includes a proportionate share of the interest income on the mezzanine loan to a co-ownership in which InScotia has a 50% interest. Accrued liabilities at include a prepaid interest amount received from InScotia of 0.7 million. The estimated fair value of the mezzanine loans receivable is approximately equal to its carrying value, based on current market rates for mortgages and loans with similar terms and risks. At, 0.5 million was owing to InStorage from InScotia on account of mezzanine interest and other items, and 0.1 million was owing from InStorage to Carttera on account of asset management fees and other items. 13 Segmented information The REIT owns income-producing properties located in Canada. In measuring performance, the REIT does not distinguish or group its operations on a geographical or any other basis and, accordingly, has a single reportable segment for disclosure purposes. None of InStorage s tenants individually account for revenues in excess of 10% of the REIT s total revenues for Income taxes The REIT currently qualifies as a Mutual Fund Trust for Canadian income tax purposes and does not record a provision for income taxes on income earned by the REIT and its flow-through entities. The REIT is required by its declaration of trust to distribute all of its taxable income to unitholders, which enables the REIT to deduct such distributions for income tax purposes. Accordingly, no provision for income taxes is recorded in the consolidated financial statements. In respect of assets and liabilities of the REIT, and its flow through entities, the carrying value of net assets for accounting purposes exceeds their tax basis by approximately 2.2 million at.

22 New proposed tax rules for income trusts On October 31, 2006, the Canadian Minister of Finance announced proposals to amend the Income Tax Act (Canada) to change the taxation regime applicable to specified investment flow-through trusts or partnerships (a SIFT ), including certain income trusts, and their investors. On March 29, 2007, Bill C-52 was tabled in Parliament proposing draft legislation to implement the SIFT Proposals (the 2007 Amendments ). The REIT will be a SIFT for the purposes of the 2007 Amendments unless it qualifies for the exception for certain real estate investment trusts (the REIT Exception ). Under the 2007 Amendments, certain distributions from a SIFT will no longer be deductible in computing a SIFT's taxable income, and a SIFT will be subject to tax on such distributions at a rate that is substantially equivalent to the general tax rate applicable to a Canadian corporation. However, the 2007 Amendments provide that distributions paid by a SIFT as returns of capital are not subject to the tax. The 2007 Amendments will apply to income trusts for taxation years that end after 2006, except that if a trust would have been a SIFT trust on October 31, 2006 (an Existing Trust ) had the definition been in force and applied to the trust as of that date, the 2007 Amendments will apply to a trust for its taxation year that ends before the earlier of 2011 and the first day after December 15, 2006 on which the trust exceeds normal growth as determined by reference to the normal growth guidelines issued by the Department of Finance on December 15, 2006, as amended from time to time. In the case of the REIT, its subsequent offerings have exceeded the guidelines on the amount of normal growth allowed. Accordingly, in the event that the REIT was a SIFT as finally enacted, the 2007 Amendments would be expected to apply commencing on January 1, Under the 2007 Amendments, the new taxation regime will not apply to a Real Estate Investment Trust (a Trust ) that continues to meet prescribed conditions relating to the nature of its income and investments (the Trust Conditions ). Unless an Existing Trust, that was a Trust at the time of the 2007 Amendments, is able to continuously meet all Trust Conditions, the 2007 Amendments, if enacted, would immediately subject an Existing Trust to tax, which may adversely impact the level of cash otherwise available for distribution. As the 2007 Amendments are currently drafted, the REIT would not satisfy the conditions to qualify for the REIT Exception and therefore would be a SIFT for 2007 and for each year in which the technical tests are not met. If the 2007 Amendments are enacted as currently drafted, the REIT would become subject to tax on certain income and, at the date of substantive enactment, the REIT would record future income tax assets and liabilities in respect of accounting and tax basis differences that are expected to reverse in future periods, with a corresponding credit or charge to consolidated earnings for the period. To the extent InStorage does not qualify for the REIT Exception under the specific legislation as finally enacted, InStorage will consider alternative measures, including restructuring, assuming that they are in the best interests of its unitholders, in order to qualify for the REIT Exception in 2008 and subsequent years. There can be no assurances, however, that changes will be made to the 2007 Amendments, or that the REIT would be able to restructure such that the REIT would not be subject to the tax contemplated by the 2007 Amendments.

23 15 Risk management The REIT is exposed to certain financial risks, including changes in interest rates, the credit quality of its borrowers and environmental matters. The REIT manages these risks as follows: a) Interest rate risk The majority of the REIT s debt is financed at fixed rates with maturities staggered over a number of years, thereby mitigating its exposure to changes in interest rates. The variable rate loans outstanding have a short maturity and can be prepaid without any penalties should that be necessary. b) Credit risk Risks arise in the event that borrowers default on the repayment of amounts owing to the REIT. The REIT endeavours to ensure adequate security has been provided in support of mezzanine loans receivable. c) Environmental risk As an owner of real property, the REIT is subject to various federal, provincial and municipal laws relating to environmental matters. Such laws provide a range of potential liability, including potentially significant penalties, and potential liability for the costs of removal or remediation of certain hazardous substances. The presence of such substances, if any, could adversely affect the REIT s ability to sell or redevelop such real estate or to borrow using such real estate as collateral and, potentially, could also result in civil claims against the REIT. As required by the declaration of trust, and in accordance with best management practices, Phase I Environmental Site Assessments are completed on all properties prior to acquisition. Further investigation is conducted if Phase I tests indicate a potential problem. In addition, the standard lease restricts tenants from carrying on environmentally hazardous activities or having environmentally hazardous substances on site. The trust has obtained environmental insurance on certain assets to further manage risk.

24 16 Commitments and contingencies a) Lease commitments: Future minimum lease payments under a non-cancellable lease agreement for office space amount to 0.1 million for 2007, 0.1 million for 2008 and 0.1 million for b) Under the terms of the purchase and sale agreement between Access Self Storage Inc., Ontario Inc. and InStorage LP dated June 30, 2006, InStorage LP agreed to a post-closing purchase price adjustment on the three properties known as 1776 O Connor Drive, 542 Evans Avenue and 3429 Kennedy Road. An adjustment will be made to the purchase price if operating income for the period commencing 12 months after closing and ending 24 months after closing exceeds certain specified levels. The maximum contingent amount of the increase in the purchase price for these properties if all conditions are satisfied would be 8.5 million. c) Under the terms of the purchase and sale agreement between Access Self Storage Inc., Ontario Inc., and InStorage LP dated June 30, 2006, it was agreed that if at any time prior to the second anniversary of the closing date, the purchaser sells 1776 O Connor Drive, 542 Evans Avenue or 3429 Kennedy Road, the purchaser will pay to the vendor an adjustment to the purchase price. The adjustment to the purchase price for Evans Avenue would be in the amount of 2.1 million; O Connor Drive, 3.4 million; and Kennedy Road, 1.9 million. 17 Subsequent events a) On February 15, 2007 the REIT, together with InScotia, acquired seven Stor edge Self Storage portfolio properties located in western Canada. InStorage purchased four of the Stor edge properties for an aggregate purchase price of approximately 27.3 million which was financed with a first mortgage on the property of 14.2 million, with the balance paid in cash. InScotia acquired three of the Stor edge properties for an aggregate purchase price of approximately 11.1 million. The REIT funded InScotia with mezzanine loan financing in the principal amount of approximately 5.3 million to acquire the three Stor edge properties. InScotia has also agreed to purchase three other Stor edge properties, the closing for one of which is expected to be before May 31, 2007 and the other two purchases are anticipated to close before December 1, 2007, when certain outstanding title-related approvals are expected to be obtained. The aggregate purchase price for the remaining three Stor edge properties will be approximately 5.5 million and InScotia budgets that additional development costs associated with these properties will be approximately 11.1 million. InStorage has committed to provide InScotia with additional mezzanine loan financing in the aggregate principal amount of approximately 6.7 million at the closing of InScotia s acquisition of these three Stor edge properties. b) On April 2, 2007, InStorage acquired a self-storage facility located in Milton, Ontario. This facility is operated under the name Milton Mini Storage. This facility was purchased for 2.9 million, which was paid in cash, adjusted for working capital amounts.

25 c) On April 3, 2007, InStorage closed a bought deal equity offering of 72,415,000 trust units at a price of 1.45 per unit, for gross proceeds of 105 million, subject to underwriter s fees in the amount of 4.2 million (0.058 per unit). Expenses of the offering are estimated to be 1.5 million. d) On April 5, 2007, InStorage acquired 11 self-storage properties located in Alberta, Saskatchewan and Ontario. The properties operate under the names Storage Maxx in Western Canada and StorageNOW and StorageONE in Ontario. The total purchase price for these properties was million which was financed with a fixed rate mortgage loan in the amount of 57.1 million and a variable rate mortgage loan in the amount of 14.4 million, with the balance paid in cash, adjusted for working capital amounts. The purchase price includes an income guarantee of 2.9 million which will be held in escrow. The amount in escrow can be drawn by InStorage on a monthly basis over a period of 21 months from closing of the acquisition, to the extent of the shortfall between the actual net operating income and the expected net operating income as per the terms of the agreement. e) On March 16, 2007, InStorage announced that it had agreed to purchase the Apple Self Storage ( Apple ) portfolio of 10 self-storage properties located in Ontario and Quebec for an aggregate purchase price of approximately million (subject to customary adjustments). One of the 10 acquisitions, 875 Don Mills Road, Toronto, closed on April 25, 2007, with the remainder of the Apple acquisition scheduled to close on May 4, The REIT will finance this acquisition with first mortgages on these properties of approximately 49.8 million, with the balance paid in cash, adjusted for working capital amounts. In connection with the Apple acquisition, InScotia will also acquire land located at Walkley Road, Ottawa. InStorage has agreed to provide InScotia with mezzanine financing of 1.5 million to finance the acquisition and development of this property.