Committed for more than 10 years

Transcription

1 Committed for more than 10 years 2017 BTB Real Estate Investment Trust Third quarterly report

2 Profile BTB is a real estate investment trust listed on the Toronto Stock Exchange. It owns and manages a portfolio of 70 commercial, industrial and office properties, located primarily in the Montréal, Québec City and Ottawa areas. Its portfolio comprises more than 5.2 million square feet of leasable area. Since BTB s inception in 2006, the total value of its assets has grown steadily and now stands at over $679 million, making BTB the secondlargest real estate investment trust in the Province of Québec. BTB s primary objective is to maximize total return for unitholders by: generating stable monthly cash distributions that are reliable and tax-efficient; increasing the Trust s assets value through internal growth accretive and acquisition strategies in order to increase available income and fund distributions; managing assets internally in a centralized and controlled fashion in order to reduce operating expenses, management fees and rental expenses; maximising the value of its assets through dynamic and responsible management so as to ensure the long-term value of its units. Table of contents 1 Highlights 4 Executive Team 5 Our Properties 8 Management Discussion and Analysis 6 Audited Consolidated Financial Statements 9 Corporate Information 70 Unitholder Information BTB Rapport annuel

3 Highlights $17.5 M $679 M Rental income Total assets M 91.8% Number of properties Number of square feet Payout ratio on distributable income 56.8% 90.0% Mortgage debt ratio Occupancy rate BTB Third Quarterly Repport

4 Highlights Evolution of rental income for the quaters ending September 30 (in thousands of dollars) , , , , , ,080 Evolution of net operating income for the quaters ending September 30 (in thousands of dollars) , , , , , ,016 20,000 12,000 15,000 10,000 8,000 10,000 6,000 5,000 4,000 2, Evolution of distributable income for the quaters ending September 30 (in thousands of dollars) , , , , , ,245 Evolution of total leasable area for the quaters ending September 30 (in thousands square feet) , , , , , ,608 6,000 6,000 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1, BTB Third Quarterly Repport

5 Highlights Performance on the markets Oct 1, 2016 Nov 1, 2016 Dec 1, 2016 Jan 1, 2017 Feb 1, 2017 Mar 1, 2017 Relative Value Apr 1, 2017 May 1, 2017 Jun 1, 2017 Jul 1, 2017 Aug 1, 2017 Sep 1, 2017 Sep 30, 2017 BTB's Total Return S&P/TSX Index Total Return S&P/TSX Capped REIT Index Total Return Breakdown of portfolio by geographical region at September 30, 2017 (per leasable area) Greater Montreal area 49% Greater Quebec city area 23% Ottawa area 19% Sherbrooke 5% London area 4% Breakdown by asset type at September 30, 2017 (per leasable area) Office 38% Retail 24% Industrial 30% Mixed-use 8% Total 100 % Total 100 % BTB Third Quarterly Repport

6 Executive Team From left to right: Benoit Cyr, Michel Léonard, Sylvie Laporte and Dominic Gilbert. Michel Léonard President and Chief Executive Officer Benoit Cyr, CPA, CA, MBA Vice President and Chief Financial Officer Sylvie Laporte Vice President, Property Management Dominic Gilbert, B.A.A. Vice President, Leasing BTB Third Quaterly Repport

7 Our Properties Portfolio listing Montreal Area Antonio-Barbeau Street, Montreal 5810 Sherbrooke Street East, Montreal Sherbrooke Street East, Montreal St-Laurent Blvd, Montreal 1001 Sherbrooke Street East, Montreal Crescent Street, Montreal 2101 Ste-Catherine Street West, Montreal Henri-Bourassa Blvd, Montreal des Sources Blvd, Dollard-des-Ormeaux De Salaberry Blvd, Dollard-des-Ormeaux Trans-Canada Highway, Dorval* 1325 Hymus Blvd, Dorval 5600 Côte-de-Liesse, Mont-Royal 4105 Sartelon Street, St-Laurent Migneron Street and Griffith Street, St-Laurent 7777 Trans-Canada Highway, St-Laurent and 2681 Côte Saint-Charles, Saint-Lazare North Shore of Montreal 2900 Jacques-Bureau Street, Laval 4535 Louis B. Mayer Street, Laval 3695 Des Laurentides (Highway-15), Laval Turgeon Street, Ste-Thérèse 5791 Laurier Blvd, Terrebonne 2175 Des Entreprises Blvd, Terrebonne Des Entreprises Blvd, Terrebonne South Shore of Montreal Taschereau Blvd., Brossard 2340 Lapinière Blvd, Brossard 204 De Montarville Blvd, Boucherville 32 St-Charles Street West, Longueuil 50 St-Charles Street West, Longueuil 85 St-Charles Street West, Longueuil De Chambly Road, Longueuil 2111 Fernand-Lafontaine Blvd, Longueuil 2350 Chemin du Lac, Longueuil 145 St-Joseph Blvd, St-Jean-sur-Richelieu MacDonald Street, St-Jean-sur-Richelieu 1000 Du Séminaire Nord Blvd, St-Jean-sur-Richelieu 15,19,21,35 and 41 Georges-Gagné Blvd, Delson , F.X. Sabourin, Saint-Hubert Quebec City Area 6655 Pierre-Bertrand Blvd, Quebec 6700 Pierre-Bertrand Blvd, Quebec Pierre-Bertrand Blvd, Quebec 825 Lebourgneuf Blvd, Quebec 815 Lebourgneuf Blvd, Quebec 1170 Lebourgneuf Blvd, Quebec 191 D Amsterdam Street, St-Augustin-de-Desmaures 175 de Rotterdam Street, St-Augustin-de-Desmaures 1100 and St-Joseph Blvd, Drummondville 505 Des Forges Street and 1500 Royale Street, Three Rivers 3885 Harvey Blvd, Saguenay 100 1st Street West, Thetford Mines* Sherbrooke De Portland Blvd, Sherbrooke King Street West, Sherbrooke Jacques-Cartier Blvd Nord, Sherbrooke King Street East and Duplessis Road, Sherbrooke King Street East, Sherbrooke 3705 Industrial Blvd, Sherbrooke 2059 René-Patenaude Street, Magog Greater London Area, Ontario 311 Ingersoll Street, Ingersoll Ottawa Area, Ontario 80 Aberdeen Street, Ottawa 245 Menten Place, Ottawa 1-9 and 10 Brewer Hunt Way and Teron Rd, Ottawa 400 Hunt Club Rd, Ottawa 2200 Walkley Road, Ottawa 2204 Walkley Road, Ottawa 7 and 9 Montclair Blvd, Gatineau 705 Boundary Road, Cornwall 725 Boundary Road, Cornwall 805 Boundary Road, Cornwall* 2901 and 2905 Marleau Avenue, Cornwall *Properties in redevelopment BTB Third Quarterly Repport

8 50, Saint-Charles Street, Longueuil, Quebec

9 Management Discussion and Analysis Quarter ended September 30, 2017 BTB Rapport annuel

10 TABLE OF CONTENTS 9 Introduction 9 Forward Looking Statements Caveat 10 Non IFRS Financial Measures 11 The Trust 11 Objectives and Business Strategies 12 Highlights of the Quarter Ended September 30, Selected Financial Information 14 Selected Quarterly Information 14 Real Estate Portfolio 15 Real Estate Operations 18 Operating Results 23 Operating Results Same Property Portfolio 23 Distributable Income and Distributions 26 Funds from Operations (FFO) 27 Adjusted Funds from Operations (AFFO) 28 Segmented Information 28 Sustainable Development 29 Financial Position 29 Assets 32 Capital Resources 38 Income Taxes 39 Taxation of Unitholders 39 Accounting Policies and Estimates 39 New Accounting Policies 39 Risks and Uncertainties 40 Disclosure Controls and Procedures and Internal Control Over Financial Reporting 41 Appendix 1 Performance Indicators 42 Appendix 2 Definitions BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

11 INTRODUCTION The purpose of this Management Discussion and Analysis is to allow the reader to evaluate the operating results of BTB Real Estate Investment Trust ("BTB" or the "Trust") for the quarter ended September 30, 2017, as well as its financial position on that date. The report also presents the Trust s business strategies and the risk exposure it faces. This MD&A dated November 3, 2017 should be read together with the unaudited condensed consolidated interim financial statements and accompanying notes for the quarter ended September 30, It discusses any significant information available up to the date of this MD&A. The Trust s consolidated annual financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB"). Unless otherwise indicated, all amounts are in thousands of Canadian dollars, except for per unit and per square foot amounts. Per unit amounts are calculated using the weighted average number of trust units outstanding for the quarters ended September 30, 2017 and Additional information about the Trust, including the 2016 Annual Information Form, is available on the Canadian Security Administrators ("CSA") website at and on our website at The Audit Committee and the Trust s Board of Trustees have approved the contents of this Management Discussion and Analysis and the quarterly financial statements. FORWARD LOOKING STATEMENTS CAVEAT From time to time, we make written or oral forward looking statements within the meaning of applicable Canadian securities legislation. We may make forward looking statements in this MD&A, other filings with Canadian regulators, reports to unitholders and other communications. These forward looking statements include statements regarding our future objectives, strategies to achieve our objectives, as well as statements with respect to our beliefs, outlooks, plans, objectives, expectations, forecasts, estimates and intentions. The words may, could, should, outlook, believe, plan, forecast, estimate, expect, propose, and the use of the conditional and similar words and expressions are intended to identify forward looking statements. By their very nature, forward looking statements involve numerous factors and assumptions, and are subject to inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections and other forward looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause our actual results to differ materially from the expectations expressed in such forward looking statements. These factors include general economic conditions in Canada and elsewhere, the effects of competition in the markets where we operate, the impact of changes in laws and regulations, including tax laws, successful execution of our strategy, our ability to complete and integrate strategic acquisitions successfully, potential dilution, our ability to attract and retain key employees and executives, the financial position of lessees, our ability to refinance our debts upon maturity and to lease vacant space, our ability to complete developments on plan and on schedule and to raise capital to finance our growth, as well as changes in interest rates. We caution that the foregoing list of important factors likely to affect future results is not exhaustive. When relying on forward looking statements to make decisions with respect to BTB, investors and others should carefully consider these factors and other facts and uncertainties. Additional information about these factors can be found in the Risks and Uncertainties section of this quarterly MD&A. BTB cannot assure investors that actual results will be consistent with any forward looking statements and BTB assumes no obligation to update or revise such forward looking statements to reflect new events or circumstances, except as required under applicable securities regulations. BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

12 NON IFRS FINANCIAL MEASURES Net operating income, net operating income of the same property portfolio, distributable income, recurring distributable income, funds from operations ("FFO"), recurring FFO, adjusted funds from operations ("AFFO"), recurring AFFO, adjusted net income and comprehensive income and net property income and per unit information, if applicable, are non IFRS performance measures and do not have standardized meanings prescribed by IFRS. These measures are used by BTB to improve the investing public s understanding of operating results and the Trust s performance. IFRS are International Financial Reporting Standards defined and issued by the IASB, in effect as at the date of this MD&A. These measures cannot be compared to similar measures used by other issuers. However, BTB presents its FFO in accordance with the Real Property Association of Canada (REALpac) White Paper on Funds from Operations, as revised in April Securities regulations require that these measures be clearly defined, that they be readily comparable to the most similar IFRS measures, and that they not be assigned greater weight than IFRS measures. BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

13 THE TRUST BTB is an unincorporated open ended real estate trust formed and governed under the laws of the Province of Québec pursuant to a trust agreement. BTB began its real estate operations on October 3, 2006, and up to September 30, 2017, it owns 70 retail, office and industrial properties in primary and secondary markets. BTB is an important real estate owner in geographical markets in Québec and eastern Ontario. The units and Series E and F convertible debentures are traded on the Toronto Stock Exchange under the symbols BTB.UN, BTB.DB.E, and BTB.DB.F, respectively. Most of the Trust s properties are managed internally, with 69 of the Trust s 70 properties held as at September 30, 2017 entirely managed by the Trust s employees. Management s objective is to resume, when favourable circumstances prevail, internal management of the Trust s properties under agreements between the Trust and its external managers, thereby achieving savings in management and operating fees through centralized and improved property management. The following table provides a summary of the property portfolio: Number of properties Leasable area (sq. ft.) Fair value (thousands of $) As at September 30, 2017 (1) 70 5,181, ,933 (1) These figures include a 50% interest in a 17,114 square foot building in a Montréal suburb, a 75% interest in a 140,824 square foot building in Québec City and a 50% interest in two buildings totalling 74,940 square feet in Gatineau, Québec. BTB s management is entirely internalized and no service agreements or asset management agreements are in force between BTB and its officers. The Trust therefore ensures that the interests of management and of its employees are aligned with those of the unitholders. OBJECTIVES AND BUSINESS STRATEGIES BTB s primary objective is to maximize total returns to unitholders. Returns include cash distributions and long term appreciation in the value of units. More specifically, the objectives are as follows: (i) (ii) Generate stable monthly cash distributions that are reliable and fiscally beneficial to unitholders. Grow the Trust s assets through internal growth and accretive acquisition strategies in order to increase distributable income and therefore fund distributions. (iii) Optimize the value of its assets through dynamic management of its properties in order to maximize the longterm value of its units. Strategically, BTB has purchased and seeks to acquire properties with low vacancy rates, good lessee quality, superior locations, low lease turnover potential and properties that are well maintained and require a minimum of future capital expenditures. BTB s management also regularly performs a strategic portfolio assessment to determine whether it is financially advisable to hold onto certain investments. BTB may dispose of certain assets if their size, location and/or profitability do not meet the Trust s current criteria. In such cases, BTB expects to use the proceeds from the sale of assets to reduce debt and/or to make accretive acquisitions. BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

14 HIGHLIGHTS OF THE QUARTER ENDED SEPTEMBER 30, 2017 Increase in funds from operations of $0.9 million, from $4.0 million to $4.9 million Adjusted funds from operations increased by $0.3 million, from $12.9 million to $13.2 million for the three quarters, but decreased for the quarter. Occupancy rate increased 1.4% to 90% for the third quarter compared to the second quarter. During the quarter, the Trust enjoyed strong leasing activity with 131,000 square feet leased to new tenants. Of this leasing activity, 120,000 square feet are leased but have not yet impacted the Trust s income. The average rental rate of expired and renewed leases rose 11.35% during the third quarter (3.71% in 2016). For the cumulative nine month period, the average rate increased 7.67% (4.21% in 2016). Tenant retention rate was 59% as at September 30, 2017, up from 55.5% for the same period in Decrease in the mortgage debt ratio from 57.6% to 56.8%. Property sales and purchases Following the strategic portfolio review, the Trust decided to sell certain properties, and the net proceeds of these dispositions will be redeployed to purchase properties in line with the Trust s repositioning. Consequently, during the third quarter, the Trust sold two properties: Saint Martin Blvd. West, Laval and Thibeau Blvd., Trois Rivières. The Trust had already disposed of a property located at Des Sources Blvd., Dollard des Ormeaux during the first quarter. The total proceeds of these dispositions total approximately $11.5 million. For fiscal 2017, the Trust had budgeted a total NOI of $590,000 for these three properties. In line with its asset repositioning, the Trust purchased during the third quarter a property located on F.X. Sabourin Blvd., in St Hubert (a suburb of Montreal), for $23.2 million. It is expected that this property will generate an annualized NOI of approximately $1.7 million. The Trust is reinvesting the proceeds of the sale of these assets in more lucrative buildings. Summary of significant items as at September 30, properties Approximately 5.2 million leasable square feet $679 million in assets $201 million in market capitalization Subsequent events In October 2017, the Trust issued 5,561,400 units, including the overallotment option, at a price of $4.55 per unit, for net proceeds of $24.1 million, net of underwriting and professional fees. The proceeds of issue were allocated to the repayment of the acquisition lines of credit and to the acquisition of the property mentioned below. In November 2017, the Trust acquired a commercial property located in the Quebec City area for a purchase price of $35.9 million. The transaction was financed by a 10 year first ranking mortgage loan of $23.2 million bearing interest at an effective rate of 3.88%. The balance of the purchase price was paid from surplus cash and the acquisition line of credit. In November, the Trust concluded the refinancing of some properties for a total amount of $38.9 million, at an average interest rate of 4.10%. The proceeds were used to repay mortgage loans totalling $27.8 million that were maturing. BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

15 SELECTED FINANCIAL INFORMATION As at September 30, 2017, the Trust owns 70 properties generating, on an annualized basis, revenues of close to $75 million. The following table presents highlights and selected financial information for the three and nine month periods ended September 30, 2017 and 2016: Periods ended September 30 Quarter Cumulative (9 months) (in thousands of dollars, except for ratios and per unit data) Reference $ $ $ $ Financial information Rental income Page 18 17,507 18,264 53,584 55,114 Net operating income (1) Page 19 10,044 10,633 29,934 31,218 Net income and comprehensive income Page 22 4,327 5,422 12,673 12,955 Net property income from the same property portfolio (1) Page 23 6,285 6,840 18,858 19,930 Recurring distributable income (1) Page 23 4,883 5,285 14,805 14,664 Distributions Page 23 4,483 4,449 13,407 12,002 Recurring funds from operations (FFO) (1) Page 26 4,902 3,994 14,397 12,902 Recurring adjusted funds from operations (AFFO) (1) Page 27 4,516 4,733 13,229 12,906 Total assets Page , ,820 Investment properties Page , ,432 Mortgage loans payable Page , ,266 Convertible debentures Page 34 48,057 47,575 Mortgage debt ratio Page % 57.6% Debt equity ratio convertible debentures Page % 7.6% Debt equity ratio acquisition line of credit Page % 0.9% Total debt ratio Page % 66.1% Weighted average interest rate on mortgage debt Page % 3.81% Unitholders equity Page , ,766 Market capitalization 201, ,648 Financial information per unit Units outstanding (000) Page 36 42,724 42,223 Weighted average number of units outstanding (000) Page 36 42,662 41,605 42,541 37,139 Net income and comprehensive income Page Recurring distributable income (1) Page Distributions Page Recurring payout ratio on distributable income (1) Page % 84.2% 90.6% 81.8% Recurring FFO (1) Page Recurring payout ratio on FFO (1) Page % 111.4% 93.1% 93.0% Recurring AFFO (1) Page Recurring payout ratio on AFFO (1) Page % 94.0% 101.3% 93.0% Unitholders equity Page Market price Tax on distributions Revenue Page % 0.0% Tax deferral Page % 100% Operational information Number of properties Page Leasable area (thousands of sq. ft.) Page 30 5,181 5,144 Occupancy rate Page % 91.0% Increase in average lease renewal rate Page % 3.71% 7.67% 4.21% Retention rate Page % 55.5% (1) Non IFRS financial measures. See appropriate sections for definition and reconciliation to the closest IFRS measure. BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

16 SELECTED QUARTERLY INFORMATION The following table summarizes the Trust s financial information for the last eight quarters. (in thousands of dollars except for per unit data) 2017 Q Q Q Q Q Q Q Q 4 $ $ $ $ $ $ $ $ Rental income 17,507 17,712 18,365 18,270 18,264 18,300 18,550 18,539 Net operating income (1) 10,044 10,045 9,848 10,121 10,633 10,466 10,119 10,020 Net income (loss) and comprehensive income 4,327 4,362 3,984 9,130 5,422 3,982 3,551 (2,124) Net income (loss) and comprehensive income per unit (6.1 ) Distributable income (1) 4,883 4,979 4,943 5,047 5,285 4,924 4,455 4,211 Distributable income per unit (1) Funds from operations (FFO) (1) 4,902 4,884 4,611 4,808 3,994 4,692 4,216 3,710 FFO per unit (1) Adjusted funds from operations (AFFO) (1) 4,516 4,463 4,250 4,485 4,733 4,333 3,840 3,588 AFFO per unit (1) Distributions 4,483 4,469 4,456 4,442 4,449 3,897 3,655 3,640 Distributions per unit (1) Non IFRS financial measures. See appropriate sections for definition and reconciliation to the closest IFRS measure. PERFORMANCE INDICATORS The indicators used to measure BTB s financial performance are presented and explained in Appendix 1. REAL ESTATE PORTFOLIO BTB owns 70 quality properties which have a fair value of $664 million representing a total leasable area of approximately 5.2 million square feet. A concise description of the properties owned as at December 31, 2016, can be found in the Trust s Annual Information Form available at Summary of properties as at September 30, 2017 Number of Leasable area Occupancy rate Operating segment properties (sq. ft.) (%) Office 27 1,920, Retail 17 1,180, Industrial 19 1,499, Mixed use 4 406, Subtotal 67 5,007, Properties under redevelopment 3 173,665 Total 70 5,181,329 On January 1, 2016, the Trust reclassified some properties to better reflect the current mix of tenant activities. BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

17 Strategic deliberations a) Sale of properties Following strategic deliberations, the Trust has agreed to sell certain assets when the circumstances are right. The proceeds of disposal from the sale of these assets will be used to repay related mortgages and any remaining proceeds will be allocated to the acquisition of accretive properties. Nine properties representing a leasable area of approximately 256,000 square feet have been put on the market. The proceeds of disposal are estimated at $30 million. Following repayment of mortgage financings and payment of transaction costs, the Trust expects to recover a net amount of approximately $12 million. In March 2017, the Trust sold an investment property for a total consideration of $7.0 million. In September 2017, the Trust sold two investment properties put on the market for a total consideration of $4.450 million. b) Property acquisitions In these strategic deliberations, the Trust agreed to allocate the net proceeds of sale of the properties (as explained in more detail on page 21 to the acquisition of accretive properties. Accordingly, in August 2017, the Trust acquired an investment property for a consideration of $23.2 million. This property is expected to generate annual net operating income of $1.7 million. REAL ESTATE OPERATIONS Leasing activities Approximately 131,000 square feet of leasable area expired at or before lease end during the third quarter. Of this total, nearly 73,000 square feet were renewed. In addition, 113,000 square feet were leased to new tenants. The following table summarizes changes in available leasable area during the periods ended September 30, 2017 and Periods ended September 30 (in square feet) Quarter Cumulative (9 months) Available leasable area at beginning of period 562, , , ,243 Available leasable area purchased (sold) (4,769) (9,594) Leasable area of expired leases 115,813 59, , ,772 Leasable area of leases terminated before term 14,945 10,625 76,523 56,130 Leasable area of renewed leases (73,251) (28,635) (479,382) (248,626) Leasable area of new leases signed (112,713) (41,500) (292,476) (126,928) Other (1,430) (209) (756) 1,408 Available leasable area at end of period 500, , , ,999 The average rental rate of expired and renewed leases rose 11.35% during the third quarter (2016: 3.71%). For the cumulative nine month period, the average rate rose 7.67% (2016: 4.21%). BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

18 Occupancy rates The following tables provide occupancy rates by operating segment and geographic sector based on firm lease agreements signed as at the date of this report. Approximately 120,000 square feet of rental space is currently subject to firm lease agreements for occupancy over the next few months. Operating segment September 30, 2017 June 30, 2017 March 31, 2017 December 31, 2016 September 30, 2016 % % % % % Office Retail Industrial Mixed use Total portfolio Geographic sector September 30, 2017 June 30, 2017 March 31, 2017 December 31, 2016 September 30, 2016 % % % % % Laval and North Shore Island of Montréal Montréal South Shore Québec City and surrounding area Ottawa and surrounding area Sherbrooke and surrounding area Central Ontario By province September 30, 2017 June 30, 2017 March 31, 2017 December 31, 2016 September 30, 2016 % % % % % Québec Ontario Total portfolio The overall occupancy rate is up by 1.4% since June 30, 2017 and down by 1.0% since September 30, It stood at 90.0% at the end of the third quarter of Two of the four operating segments that make up the Trust s portfolio and five of the six geographic sectors were stable or had higher occupancy rates in the third quarter due to significant leasing activity in the Trust s properties and the sustained efforts of resources assigned to the leasing of rental spaces. The effective occupancy rate as at September 30, 2017, without the effect of the firm lease agreements, is at 87.6% (2016: 90.5%). It was at 87.4% at June 30, 2017 (2016: 90.5%). Currently vacant space totalling 120,000 square feet is subject to firm lease agreements and will generate income in the next few months. Retention rate The renewal rate for leases that expired during the third quarter of 2017 was 56.0%. As at September 30, 2017, 59.1% of the area expiring in 2017 was renewed (2016: 55.5%). BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

19 Lease maturity The following table shows the lease maturity profile for the next five years: Office Leasable area (sq. ft.) 46, , , , , ,443 Average lease rate/square foot ($) $14.26 $13.39 $13.96 $13.94 $12.19 $13.72 % of office portfolio 2.93% 11.23% 20.75% 7.58% 13.82% 13.95% Retail Leasable area (sq. ft.) 35, , ,381 43, ,616 61,920 Average lease rate/square foot ($) $10.02 $13.09 $12.42 $17.95 $13.03 $15.74 % of retail portfolio 3.25% 11.75% 19.35% 3.98% 13.90% 5.64% Industrial Leasable area (sq. ft.) 80,000 70,347 87,684 30, , ,382 Average lease rate/square foot ($) $5.93 $4.20 $4.20 $5.40 $5.72 $8.66 % of industrial portfolio 5.94% 5.22% 6.51% 2.29% 44.55% 8.78% Mixed use Leasable area (sq. ft.) 6,356 20,964 45,338 57, ,403 27,209 Average lease rate/square foot ($) $15.56 $16.60 $13.15 $15.15 $10.51 $14.76 % of mixed use portfolio 1.73% 5.71% 12.34% 15.77% 35.50% 7.41% Total portfolio Leasable area (sq. ft.) 168, , , ,916 1,104, ,954 Average lease rate/square foot ($) $9.47 $11.84 $12.16 $13.87 $8.59 $12.69 % of total portfolio 3.40% 8.06% 13.65% 5.11% 22.25% 8.68% Top 10 tenants As at September 30, 2017, BTB managed more than 600 leases, with an average area of more than 8,000 square feet. The three largest tenants are Public Works Canada, Provigo Distribution Inc. and Atis Portes et Fenêtres Corp., accounting respectively for 6.9%, 2.2% and 1.9% of revenues, generated by a number of leases whose maturities are spread over time. More than 30.5% of the Trust s total revenues are generated by leases entered into with government agencies (federal, provincial and municipal) and public companies, ensuring stable and high quality cash flows for the Trust s operating activities. BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

20 The following table shows the contribution of the Trust s top 10 tenants as a percentage of revenues as at September 30, This contribution accounts for 23.0% of rental income for the quarter for 22.3% of leased area. Client % of revenue % of leased area Leased area (square feet) Public Works Canada ,836 Provigo Distribution Inc. (Loblaws) ,642 Atis Portes et Fenêtres Corp ,878 Shoppers Realty Inc ,304 Flextronics ,731 Société québécoise des infrastructures (SQI) 1,8 1,5 76,003 Strongco ,442 Le Groupe SM inc ,185 Germain Larivière Inc ,194 CSSS Haut Richelieu Rouville , ,116,458 OPERATING RESULTS The following table summarizes financial results for the periods ended September 30, 2017 and September 30, The table should be read in conjunction with our condensed consolidated interim financial statements and the notes thereto. Periods ended September 30 (in thousands of dollars) Quarter Cumulative (9 months) Reference $ $ $ $ Rental income Page 18 17,507 18,264 53,584 55,114 Operating expenses Page 19 7,463 7,631 23,650 23,896 Net operating income (1) Page 19 10,044 10,633 29,934 31,218 Other income (6) (199) (33) (248) Financial expenses Page 20 4,598 6,195 13,993 17,343 Trust administration expenses Page ,200 3,243 3,153 Fair value adjustment on investment properties Page 20 (1,985) (1,985) Costs related to disposals of investment property Page Net income and comprehensive income Page 22 4,327 5,422 12,673 12,955 (1) Non IFRS financial measure Rental income BTB disposed of properties during the year, generating a shortfall of approximately $200 in the third quarter of BTB will cover this shortfall through the acquisition of accretive properties in The recent acquisition of the F.X. Sabourin property generated additional income of $221 during the quarter. Combined with the net effect of these transactions, rental income decreased by $755 for the third quarter compared to the same quarter of This decrease mainly reflected lower operating expenses which slightly reduced tenant chargebacks and the portfolio s higher in place vacancy rate compared to the same quarter of Several spaces that had been vacated were released and will generate rental income over the next few months. In the third quarter of 2017, rent payable adjustments of $94 (2016: $58) were recorded on a straight line basis. For the nine month period, these adjustments totalled $261 (2016: $248). BTB also recorded amortization of $624 (2016: $553) as a reduction in rental income, which represents amortization of lease incentives afforded to lessees. For the nine month period, these adjustments totalled $1,813 (2016: $1,567). BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

21 Operating expenses BTB recorded a decrease in operating expenses of $168, or 2.2%, between the third quarter of 2016 and the third quarter of 2017 and $246, or 1.0%, for the cumulative period. Approximately half of the decrease reflects the impact of a property disposal at the end of the first quarter. As seen in the following table showing the breakdown of operating expenses for the periods ended September 30, 2017 and 2016, the decrease in operating expenses related mainly to property taxes and public utilities. Periods ended September 30 (in thousands of dollars) Operating expenses Quarter Cumulative (9 months) $ $ $ $ Maintenance, repairs and other operating costs 2,675 2,690 8,635 8,500 Property taxes and public utilities 4,788 4,941 15,015 15,396 Total operating expenses 7,463 7,631 23,650 23,896 % of rental income As a percentage of rental income, operating costs in the third quarter of 2017 increased by 0.8% to 42.6% and by 0.7% to 44.1% for the cumulative period. Net operating income Periods ended September 30 (in thousands of dollars) Quarter Cumulative (9 months) $ $ $ $ Net operating income (1) 10,044 10,633 29,934 31,218 % of rental income (1) Non IFRS financial measure Net operating income is reduced by non cash rental income adjustments. Before adjustments, net operating income was as follows: Periods ended September 30 (in thousands of dollars) Quarter Cumulative (9 months) $ $ $ $ Net operating income 10,044 10,633 29,934 31,218 Straight line rental income adjustments (94) (58) (261) (248) Adjustments related to amortization of lease incentives ,812 1,567 Net operating income before rental income adjustments (1) 10,573 11,128 31,485 32,537 % of rental income on the basis of in place leases (1) Non IFRS financial measure BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

22 Financial expenses The following table shows the breakdown of financial expenses for the reporting periods: Periods ended September 30 (in thousands of dollars) Quarter Cumulative (9 months) $ $ $ $ Interest expense on mortgage loans payable 3,651 3,627 10,887 10,924 Interest expense on debentures 874 1,018 2,622 3,597 Interest expense on acquisition line of credit Interest expense on operating line of credit and other interest expenses Interest expenses 4,680 4,761 13,742 15,040 Impact of early redemption of Series D convertible debentures 1,088 1,088 Accretion of effective interest Accretion of non derivative liability component of convertible debentures Financial expenses before following item: 4,949 6,155 14,529 17,143 Fair value adjustment on derivative financial instruments (debenture conversion options and interest rate swap) (351) 40 (536) 200 Financial expenses 4,598 6,195 13,993 17,343 Interest expenses decreased by $81 during the third quarter of 2017 compared to the same period of 2016, and by $1,298 during the cumulative period, mainly due to the repayment of Series D debentures on August 2, 2016 using the proceeds of the June 2016 unit issue. Financial expenses can be allocated among interest expenses amounting to $4,680 for the quarter (2016: $4,761) and $13,742 for the nine month period (2016: $15,040) and non monetary items. Non monetary items include the accretion of effective interest and the liability component of convertible debentures and fair value adjustments on financial instruments. BTB recognized an increase in the value of derivative financial instruments of $351 for the quarter and $536 for the cumulative period. The increase, which generated the equivalent in income, was due to rising interest rates in Canadian markets over the last few months. As at September 30, 2017, the average weighted contractual rate of interest on mortgage loans payable was 3.83%, 2 basis points higher than the rate in effect at September 30, For the first quarter in more than nine years, the Trust had a higher average weighted interest rate on its mortgage loan portfolio. Interest rates on first ranking mortgage financings ranged from 2.0% to 6.83% as at September 30, The weighted average term of financing in place as at September 30, 2017 was 5.8 years (5.0 years as at September 30, 2016). Trust administration expenses Periods ended September 30 (in thousands of dollars) Quarter Cumulative (9 months) $ $ $ $ Administrative expenses 851 1,130 2,988 2,988 Amortization Unit based compensation Trust administration expenses 935 1,200 3,243 3,153 The decrease in administrative expenses for the current quarter mainly reflected the reversal of bad debt expenses of $23, whereas in 2016, the Trust had recognized an expense of $125. Fair value adjustment on investment properties Under IAS 40, the Trust accounts for its investment properties at fair value and recognizes the gain or loss arising from a change in the fair value in profit or loss for the periods in which it arises. The fair value of investment properties is determined using the discounted cash flow method, the capitalized net operating income method or the comparable method, which are generally accepted valuation methods. BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

23 Management receives quarterly capitalization rate and discount rate data from external chartered valuators and independent experts. The capitalization rate reports provide a range of rates for various geographic regions and for various types and qualities of properties within each region. The Trust utilizes capitalization and discount rates within ranges provided by external valuators. To the extent that the externally provided capitalization rate ranges change from one reporting period to the next, or should another rate within the provided ranges be more appropriate than the rate previously used, the fair value of the investment properties would increase or decrease accordingly. Market conditions in the Trust s geographic market remained relatively stable during the third quarter of Management therefore determined that no fair value adjustment to the Trust s properties was required. The following tables highlight the significant assumptions used in the modelling process for both internal and external appraisals: As at September 30, 2017 Retail Office Industrial Mixed use Capitalization rate 6.25% 10.00% 6.50% 8.50% 6.50% 9.75% 6.75% 7.50% Terminal capitalization rate 6.75% 8.25% 6.50% 8.75% 7.00% 7.75% 7.00% 7.75% Discount rate 7.25% 8.75% 7.25% 9.25% 7.50% 8.00% 7.50% 8.25% As at September 30, 2016 Capitalization rate 6.25% 10.00% 6.50% 9.25% 6.50% 9.75% 7.25% 8.25% Terminal capitalization rate 7.00% 8.50% 6.75% 7.75% 7.00% 9.75% 7.50% 8.00% Discount rate 7.75% 9.00% 7.25% 8.50% 7.50% 10.50% 8.00% 8.50% The weighted average capitalization rate for the entire portfolio as at September 30, 2017 was 7.18% (September 30, 2016: 7.32%; December 31, 2016: 7.20%), and was down 14 basis points in the past year and 2 basis points since December 31, As at September 30, 2017, BTB has estimated that a 0.25% change in the capitalization rate applied to the overall portfolio would change the fair value of the investment properties by approximately $23 million. Investment property disposal costs On March 28, 2017, the Trust disposed of the investment property Des Sources in Dollard des Ormeaux for $7.0 million. The Trust realized a $482 gain on disposal of this property and incurred transaction and early mortgage repayment fees amounting to $350. This property had been acquired in February 2007 at a cost of $4.7 million, including acquisition costs. On September 5, 2017, the Trust disposed of the investment property Thibeau Blvd. in Trois Rivières for $1.825 million. The Trust realized a $97 loss on disposal of this property and incurred transaction costs amounting to $74. This property had been acquired in August 2008 at a cost of $1.851 million, including acquisition costs. On September 11, 2017, the Trust disposed of the investment property St Martin Blvd. West in Laval for $2.625 million. The Trust realized a $6 loss on disposal of this property and incurred transaction and early mortgage repayment fees amounting to $116. This property had been acquired in February 2007 at a cost of $2.480 million, including acquisition fees. BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

24 Net income and comprehensive income BTB generated net income of $4.3 million for the third quarter of 2017, down $1.1 million from $5.4 million in the third quarter of Periods ended September 30 (in thousands of dollars, except for per unit data) Quarter Cumulative (9 months) $ $ $ $ Net income and comprehensive income 4,327 5,422 12,673 12,955 Per unit Adjusted net income and comprehensive income Net income and comprehensive income fluctuate from one quarter to another based on certain highly volatile monetary items. Consequently, the fair value of derivative financial instruments and the fair value of the property portfolio fluctuate based on the stock market volatility of BTB units, the forward interest rate curve and the discount and capitalization rates of the property portfolio. The following table presents adjusted net income and comprehensive income before these volatile non monetary items. Periods ended September 30 (in thousands of dollars, except for per unit data) Quarter Cumulative (9 months) $ $ $ $ Net income and comprehensive income 4,327 5,422 12,673 12,955 Volatile non monetary items ± Fair value adjustment on investment properties (1,985) (1,985) ± Fair value adjustment on derivative financial instruments (351) 40 (536) 200 Adjusted net income and comprehensive income (1) 3,976 3,477 12,137 11,170 Per unit (1) Non IFRS financial measure This table shows an increase of 14.4% in quarterly adjusted net income and 10.9% for the cumulative period, before the non monetary items mentioned above. However, for the third quarter of 2017, adjusted net income per unit increased 10.7%. BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

25 OPERATING RESULTS SAME PROPERTY PORTFOLIO Same property portfolio The same property portfolio includes all the properties owned by BTB as at January 1, 2016, but does not include the financial spin offs of disposals, acquisitions and developments completed in 2016 and The following table summarizes the results of the same property portfolio. Periods ended September 30 (in thousands of dollars) Quarter Cumulative (9 months) % % $ $ $ $ Rental income 17,119 17,622 (2.8) 52,362 53,427 (2.0) Operating expenses 7,285 7, ,003 22, Net operating income (1) 9,834 10,313 (4.6) 29,359 30,501 (3.7) Interest expense on mortgage loans payable 3,549 3, ,501 10,571 (0.7) Net property income (1) 6,285 6,840 18,858 19,930 Decrease in net property income from the same property portfolio (8.1) (5.4) (1) Non IFRS financial measure A lower effective occupancy rate largely explains the decrease in the same property portfolio s performance. Currently vacant space totalling 120,000 square feet is subject to firm lease agreements and will generate income in the next few months. Based on current rental activities, management is optimistic that the same property portfolio will soon be stable. DISTRIBUTABLE INCOME AND DISTRIBUTIONS The following table shows the calculation of distributable income. Periods ended September 30 (in thousands of dollars) Quarter Cumulative (9 months) $ $ $ $ Net income (loss) and comprehensive income (IFRS) 4,327 5,422 12,673 12,955 Fair value adjustment on investment properties (1,985) (1,985) + Amortization of property and equipment Unit based compensation expense Accretion of the liability component of convertible debentures ± Fair value adjustment on derivative financial instruments (351) 40 (536) Amortization of lease incentives ,813 1,567 Straight line rental income adjustment (94) (58) (261) (248) + Accretion of effective interest Impact of early redemption of Series D convertible debentures 1,088 1,088 Distributable income (1) 4,883 5,465 14,805 14,844 Unusual item Dispute settlement (2) (180) (180) Recurring distributable income 4,883 5,285 14,805 14,664 (1) Non IFRS financial measures (2) Income from a dispute settlement BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

26 Distributions and per unit data Periods ended September 30 (in thousands of dollars, except for per unit data) Quarter Cumulative (9 months) $ $ $ $ Distributions Cash distributions 3,920 3,954 11,776 10,547 Distributions reinvested under the distribution reinvestment plan ,631 1,455 Total distributions to unitholders 4,483 4,449 13,407 12,002 Percentage of reinvested distributions 12.5% 11.1% 12.2% 12.1% Per unit data Recurring distributable income Distributions Payout ratio (1) 91.8% 84.2% 90.6% 81.8% Cash payout ratio (2) 80.3% 74.8% 79.5% 71.9% (1) The payout ratio corresponds to total distributions divided by recurring distributable income. (2) The cash payout ratio corresponds to cash distributions divided by recurring distributable income. Distributable income for the third quarter decreased by $402, from $5,285 to $4,883, between 2016 and Recurring distributable income per unit for the third quarter of 2017 was 11.4 compared to 12.7 in 2016, a 10.2% decrease. For the cumulative period, recurring distributable income increased $141 or 1.0%. Distributions to unitholders totalled 10.5 per issued unit for each quarter of 2017 and The payout ratio for recurring distributable income was 91.8% in the third quarter of 2017 compared to 84.2% in the third quarter of 2016, and 90.6% for the 2017 cumulative period compared to 81.8% for 2016, reflecting a surplus of distributable income over distributions. The decrease in recurring distributable income per unit and in recurring distributable income, and the increase in the payout ratios were due to the lower profitability of the same property portfolio and an increase in the portfolio s actual vacancy rate compared to last year. BTB Real Estate Investment Trust Management Discussion and Analysis September 30,

27 The following table shows the reconciliation of distributable income (non IFRS financial measure) and cash flows from operating activities presented in the financial statements. Periods ended September 30 (in thousands of dollars) Quarter Cumulative (9 months) $ $ $ $ Cash flows from operating activities (IFRS) 10,161 10,342 24,327 26,600 + Financial revenues Net gain on disposal of an investment property (190) (58) ± Net change in non cash operating items (414) (135) 4,245 3,216 Interest expense on mortgage loans payable (3,651) (3,627) (10,887) (10,924) Interest expense on convertible debentures (874) (1,018) (2,622) (3,597) Interest expense on acquisition line of credit (114) (77) (146) (425) Interest expense on operating line of credit and other interest expenses (41) (39) (87) (94) Distributable income 4,883 5,465 14,805 14,844 The following table, presented in accordance with CSA instructions, enables readers to assess the performance of distributed funds and reconcile them with cash flows and net income. Nine month periods ended September 30 (in thousands of dollars) $ $ $ Cash flows from operating activities (IFRS) 24,327 26,600 26,081 Interest paid (13,547) (15,811) (16,232) Net cash flows from operating activities 10,780 10,789 9,849 Net income 12,673 12,955 10,793 Total distributions 13,407 12,001 10,839 Cash distributions 11,776 10,547 9,514 Surplus (deficit) of cash flows from operating activities compared to total distributions (2,677) (1,212) (944) Excess (deficiency) of net income over total distributions (734) 954 (46) For the nine month periods ended September 30, net cash flows from operating activities were insufficient to pay total distributions, primarily due to the seasonality of certain disbursements such as property taxes. On an annual basis, net cash flows from operating activities are normally sufficient to pay total distributions and, in recent years, have always been sufficient to pay cash distributions. BTB has access to lines of credit totalling $22 million to cover seasonal fluctuations in certain disbursements. Distribution reinvestment plan In the third quarter of 2017, 12.5% of distributions (2016: 11.1%) and 12.2% (2016: 12.1%) since the beginning of the year were reinvested under the distribution reinvestment plan implemented by BTB in Approximately $1.6 million (2016: $1.4 million) of the Trust s cash has thereby been preserved through unit conversions since the beginning of the year. Until April 15, 2016, the plan s discount rate was 5%. As of May 16, 2016, the rate was lowered to 3% in line with the discount offered by most Canadian REITs. BTB Real Estate Investment Trust Management Discussion and Analysis September 30,