Committed for more than 10 years

Transcription

1 Committed for more than 10 years 2017 BTB Real Estate Investment Trust Second quartely report

2 Profile BTB is a real estate investment trust listed on the Toronto Stock Exchange. It owns and manages a portfolio of 71 commercial, industrial and office properties, located primarily in the Montréal, Québec City and Ottawa areas. Its portfolio comprises more than 5.1 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 $654 million, making BTB the second-largest 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 44 Audited Consolidated Financial Statements 69 Corporate Information 70 Unitholder Information BTB Rapport annuel

3 Highlights $17.7 M $654 M Rental income Total assets M 89.8% Number of properties Number of square feet Payout ratio on distributable income 57.7% 88.6% Mortgage debt ratio Occupancy rate BTB Second Quaterly Repport

4 Highlights Evolution of rental income for the quaters ending June 30 (in thousands of dollars) , , , , , ,723 Evolution of net operating income for the quaters ending June 30 (in thousands of dollars) , , , , , ,708 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 June 30 (in thousands of dollars) , , , , , ,071 Evolution of total leasable area for the quaters ending June 30 (in thousands square feet) , , , , , ,610 6,000 6,000 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1, BTB Second Quaterly Repport

5 Highlights Performance on the markets 125 Relative Value Jul 1, 2016 Aug 1, 2016 Sep 1, 2016 Oct 1, 2016 Nov 1, 2016 Dec 1, 2016 Jan 1, 2017 Feb 1, 2017 Mar 1, 2017 Apr 1, 2017 May 1, 2017 Jun 1, 2017 Jun 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 June 30, 2017 (per leasable area) Greater Montreal area 48% Greater Quebec city area 24% Ottawa area 19% Sherbrooke 5% London area 4% Breakdown by asset type at June 30, 2017 (per leasable area) Office 39% Retail 23% Industrial 30% Mixed-use 8% Total 100 % Total 100 % BTB Second Quaterly 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 Second 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 St-Martin Blvd. West, 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 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 Thibeau Blvd, 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 Second Quaterly Repport

8 145 Saint-joseph Blvd, Saint-Jean-sur-Richelieu, Quebec

9 Management Discussion and Analysis Quarter ended June 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 June 30, Selected Financial Information 14 Selected Quarterly Information 14 Real Estate Portfolio 15 Real Estate Operations 18 Operating Results 22 Operating Results Same Property Portfolio 23 Distributable Income and Distributions 24 Funds from Operations (FFO) 25 Adjusted Funds from Operations (AFFO) 26 Segmented Information 27 Sustainable Development 27 Financial Position 28 Assets 30 Capital Resources 36 Income Taxes 36 Taxation of Unitholders 36 Accounting Policies and Estimates 37 New Accounting Policies 37 Risks and Uncertainties 38 Disclosure Controls and Procedures and Internal Control Over Financial Reporting 39 Appendix 1 Performance Indicators 40 Appendix 2 Definitions BTB Real Estate Investment Trust Management Discussion and Analysis June 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 June 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 August 4, 2017 should be read together with the unaudited condensed consolidated interim financial statements and accompanying notes for the quarter ended June 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 June 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 June 30,

12 NON IFRS FINANCIAL MEASURES Net operating income, net operating income of the same property portfolio, distributable income, funds from operations ("FFO"), adjusted funds from operations ("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 June 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 June 30, 2017, it has acquired and owns 71 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 71 properties held as at June 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 June 30, 2017 (1) 71 5,108, ,305 (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 June 30,

14 HIGHLIGHTS OF THE QUARTER ENDED JUNE 30, 2017 Increase in net income and comprehensive income from $4.0 million in 2016 to $4.4 million for the quarter and from $7.5 million to $8.3 million for the first six months of 2017; Increase in funds from operations (FFO) from $4.7 million to $4.9 million for the quarter and from $8.9 million to $9.4 million for the first six months of 2017; Increase in adjusted funds from operations (AFFO) from $4.3 million to $4.5 million for the quarter and from $8.2 million to $8.7 million for the first six months of 2017; Increase in equity from $204 million to $214 million and in market capitalization from $185 million to $201 million; Decrease in convertible debenture debt from $69.3 million to $47.9 million; Reduction in overall debt rate (excluding cash) of 4%; Strong quarter for rental activities: 258,000 square feet were renewed (69% retention rate for the quarter). The average lease rate for leases that matured and were renewed during the second quarter increased by 12.1% and 6.9% on a cumulative basis for the first half of The Trust leased 124,000 square feet to new tenants. It should be noted that due to the issuance of units in June 2016 that was used, among other things, for the early redemption of Series D debentures, the dilutive effect of this issuance affected the results per unit for the quarter by approximately 1.2 per unit. Property sales and purchases Following a strategic portfolio analysis, the Trust decided to sell certain properties, and the net proceeds of sale will be used to purchase properties more in line with the Trust s repositioning. The Trust accepted purchase offers (all conditions being removed) on two properties: Saint Martin Blvd., Laval and Thibeau Blvd., Trois Rivières. The Trust already sold a property located at Des Sources Blvd., Dollard des Ormeaux during the first quarter. The total proceeds of these sales amount to approximately $11.5 million. For fiscal 2017, the Trust budgeted NOI of $590,000 for these three properties. As part of its asset repositioning, the Trust agreed to purchase a property located on F.X. Sabourin Blvd., St Hubert, for $23.2 million. This property will generate annualized NOI of approximately $1.7 million. The purchase will close in the third quarter of This property is producing a better return on investment as compared to the properties sold. Summary of significant items as at June 30, properties More than 5.1 million leasable square feet $654 million in assets $201 million in market capitalization BTB Real Estate Investment Trust Management Discussion and Analysis June 30,

15 SELECTED FINANCIAL INFORMATION As at June 30, 2017, the Trust owns 71 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 six month periods ended June 30, 2017 and 2016: Periods ended June 30 Quarter Cumulative (6 months) (in thousands of dollars, except for ratios and per share amounts) Reference $ $ $ $ Financial information Rental income Page 18 17,712 18,300 36,077 36,850 Net operating income (1) Page 19 10,042 10,466 19,890 20,585 Net income and comprehensive income Page 21 4,362 3,982 8,346 7,533 Net property income from the same property portfolio (1) Page 22 6,369 6,609 12,550 13,066 Distributable income (1) Page 23 4,979 4,924 9,922 9,379 Distributions Page 23 4,469 3,898 8,925 7,552 Funds from operations (FFO) (1) Page 24 4,884 4,692 9,495 8,908 Adjusted funds from operations (AFFO) (1) Page 25 4,463 4,333 8,713 8,173 Total assets Page , ,825 Investment properties Page , ,117 Mortgage loans payable Page , ,150 Convertible debentures Page 32 47,932 69,332 Mortgage liability ratio Page % 58.3% Debt equity ratio convertible debentures Page % 11.2% Debt equity ratio acquisition line of credit Page % % Total debt ratio Page % 66.9% Weighted average interest rate on mortgage debt Page % 3.84% Unitholders equity Page , ,854 Market capitalization 201, ,306 Financial information per unit Units outstanding (000) Page 34 42,599 41,548 Weighted average number of units outstanding (000) Page 34 42,541 34,977 42,480 34,881 Net income and comprehensive income Page Distributable income (1) Page Distributions Page Payout ratio on distributable income (1) Page % 79.1% 90.0% 80.5% FFO (1) Page Payout ratio on FFO (1) Page % 83.1% 94.0% 84.8% AFFO (1) Page Payout ratio on AFFO (1) Page % 89.9% 102.4% 92.4% 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 28 5,108 5,144 Occupancy rate Page % 91.0% Increase in average lease renewal rate Page % 8.0% 6.9% 4.3% Retention rate Page % 44.8% (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 June 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 3 $ $ $ $ $ $ $ $ Rental income 17,712 18,365 18,270 18,264 18,300 18,550 18,539 18,421 Net operating income (1) 10,042 9,848 10,121 10,633 10,466 10,119 10,020 10,958 Net income (loss) and comprehensive income 4,362 3,984 9,130 5,422 3,982 3,551 (2,124) 3,669 Net income (loss) and comprehensive income per unit (6.1 ) 10.6 Distributable income (1) 4,979 4,943 5,047 5,285 4,924 4,455 4,211 5,286 Distributable income per unit (1) Funds from operations (FFO) (1) 4,884 4,611 4,808 3,994 4,692 4,216 3,710 4,321 FFO per unit (1) Adjusted funds from operations (AFFO) (1) 4,463 4,250 4,485 4,733 4,333 3,840 3,588 4,663 AFFO per unit (1) Distributions 4,469 4,456 4,442 4,449 3,897 3,655 3,640 3,628 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 71 quality properties which have a fair value of $642 million representing a total leasable area of more than 5.1 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 June 30, 2017 Number of Leasable area Occupancy rate Operating segment properties (sq. ft.) (%) Office 27 1,920, Retail 17 1,107, Industrial 19 1,499, Mixed use 5 406, Subtotal 68 4,934, Properties under redevelopment 3 173,665 Total 71 5,108,133 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 June 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. Four more properties could be put on the market before the end of the year. In July 2017, the Trust entered into two binding agreements under which the Trust is committed to sell two of the investment properties put on the market for a total consideration of $4,450 million. The transactions are expected to close in the third quarter of b) Potential transactions In these strategic deliberations, the Trust agreed to allocate the net proceeds of sale of the properties to the acquisition of accretive properties. Accordingly, in July 2017, the Trust entered into a binding agreement under which the Trust is committed to acquire an investment property for a consideration of $23.2 million. The transaction is expected to close in the third quarter of REAL ESTATE OPERATIONS Leasing activities Approximately 400,000 square feet of leasable area expired during the second quarter. Of this total, nearly 259,000 square feet were renewed. In addition, 124,500 square feet were leased to new tenants. The following table summarizes changes in available leasable area during the periods ended June 30, 2017 and Periods ended June 30 (in square feet) Quarter Cumulative (6 months) Available leasable area at beginning of period 515, , , ,243 Available leasable area purchased (sold) (4,825) Leasable area of expired leases 400, , , ,387 Leasable area of leases terminated before term 24,546 33,694 61,578 45,505 Leasable area of renewed leases (258,551) (61,206) (406,131) (219,991) Leasable area of new leases signed (124,458) (58,885) (179,763) (85,428) Other 4,503 3, (1,617) Available leasable area at end of period 562, , , ,333 The average rental rate of expired and renewed leases rose 12.1% during the second quarter (2016: 8.0%). For the cumulative six month period, the average rate rose 6.9% (2016: 4.3%). BTB Real Estate Investment Trust Management Discussion and Analysis June 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 60,700 square feet of rental space is currently subject to firm lease agreements. Operating segment June 30, 2017 March 31, 2017 December 31, 2016 September 30, 2016 June 30, 2016 % % % % % Office Retail Industrial Mixed use Total portfolio Geographic sector June 30, 2017 March 31, 2017 December 31, 2016 September 30, 2016 June 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 June 30, 2017 March 31, 2017 December 31, 2016 September 30, 2016 June 30, 2016 % % % % % Québec Ontario Total portfolio The overall occupancy rate is down by 0.9% since March 31, 2017 and 2.4% since June 30, It stood at 88.6% at the end of the second quarter of Three of the four operating segments that make up the Trust s portfolio and five of the six geographic sectors had higher occupancy rates due to significant leasing activity in the Trust s properties and the sustained efforts of resources assigned to the leasing of rental spaces. Only the industrial segment for properties located in the geographic area of Ottawa and surroundings had a lower occupancy rate. Approximately 165,000 square feet of industrial space became vacant during the quarter, upon expiry of the tenants leases. Although accounting for 3% of the Trust s rental spaces, these newly vacated spaces in industrial properties in Cornwall, Ontario generated a shortfall of approximately $270, or 1.5% of quarterly revenues. Currently, 31,000 square feet of these spaces is temporarily leased. Retention rate The renewal rate for leases that expired during the second quarter of 2017 was 60.9% (2016: 44.8%). As at June 30, 2017, 59.7% of the area expiring in 2017 was renewed. BTB Real Estate Investment Trust Management Discussion and Analysis June 30,

19 Lease maturity The following table shows the lease maturity profile for the next five years: Office Leasable area (sq. ft.) 113, , , , , ,737 Average lease rate/square foot ($) $13.55 $12.56 $13.84 $9.86 $12.90 $11.79 % of office portfolio 6.9% 11.8% 20.0% 7.3% 17.1% 9.0% Retail Leasable area (sq. ft.) 70, , ,822 68,956 93,087 54,882 Average lease rate/square foot ($) $10.87 $12.73 $12.62 $14.12 $15.81 $16.19 % of retail portfolio 6.8% 14.1% 17.9% 6.7% 9.0% 5.3% Industrial Leasable area (sq. ft.) 200,699 5,399 94,482 24, ,803 9,340 Average lease rate/square foot ($) $3.61 $7.80 $4.33 $5.43 $6.76 n.a. % of industrial portfolio 15.0% 0.4% 7.1% 1.8% 33.0% 0.7% Mixed use Leasable area (sq. ft.) 19,496 31,938 44,510 78, ,505 34,733 Average lease rate/square foot ($) $13.40 $11.76 $13.07 $19.91 $13.53 $11.34 % of mixed use portfolio 5.0% 8.2% 11.5% 20.4% 28.0% 9.0% Total portfolio Leasable area (sq. ft.) 403, , , , , ,692 Average lease rate/square foot ($) $8.05 $12.49 $12.06 $13.22 $10.33 $12.26 % of total portfolio 8.2% 7.6% 13.2% 5.9% 18.7% 5.0% Top 10 tenants As at June 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%, 2.1% and 2.0% 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 June 30,

20 The following table shows the contribution of the Trust s top 10 tenants as a percentage of revenues as at June 30, This contribution accounts for 23.1% of rental income for the quarter for 22.7% 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 Strongco ,442 Société québécoise des infrastructures (SQI) ,003 Le Groupe SM inc ,185 Germain Larivière Inc ,194 CSSS Haut Richelieu Rouville , OPERATING RESULTS The following table summarizes financial results for the periods ended June 30, 2017 and June 30, The table should be read in conjunction with our condensed consolidated interim financial statements and the notes thereto. Periods ended June 30 (in thousands of dollars) Quarter Cumulative (6 months) Reference $ $ $ $ Rental income Page 18 17,712 18,300 36,077 36,850 Operating expenses Page 19 7,670 7,834 16,187 16,265 Net operating income (1) Page 19 10,042 10,466 19,890 20,585 Other income (15) (28) (27) (49) Financial expenses Page 20 4,519 5,572 9,395 11,148 Trust administration expenses Page 20 1, ,308 1,953 Net gain on disposal of an investment property Page 21 0 (132) Net income and comprehensive income Page 21 4,362 3,982 8,346 7,533 (1) Non IFRS financial measure Rental income BTB disposed of a property at the end of the first quarter of 2017, generating a shortfall of approximately $200 in the second quarter of BTB hopes to cover this shortfall through the acquisition of accretive properties in Combined with the net effect of this transaction, rental income decreased by $588 for the second quarter compared to the same quarter of In addition to the shortfall from the disposal, this decrease reflected the portfolio s higher vacancy rate compared to the same quarter of 2016, as well as lower operating expenses which slightly reduced tenant chargebacks. In the second quarter of 2017, rent payable adjustments of $112 (2016: $90) were recorded on a straight line basis. For the six month period, these adjustments totalled $167 (2016: $190). BTB also recorded amortization of $604 (2016: $535) as a reduction in rental income, which represents amortization of lease incentives afforded to lessees. For the six month period, these adjustments totalled $1,189 (2016: $1,014). BTB Real Estate Investment Trust Management Discussion and Analysis June 30,

21 Operating expenses BTB recorded a decrease in operating expenses of $164, or 2.1%, between the second quarter of 2017 and the second quarter of 2016 and $78, or 0.5%, 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 June 30, 2017 and 2016, the decrease in operating expenses related mainly to property taxes and public utilities. Periods ended June 30 (in thousands of dollars) Operating expenses Quarter Cumulative (6 months) $ $ $ $ Maintenance, repairs and other operating costs 2,868 2,848 5,960 5,810 Property taxes and public utilities 4,802 4,986 10,227 10,455 Total operating expenses 7,670 7,834 16,187 16,265 % of rental income As a percentage of rental income, operating costs in the second quarter of 2017 increased by 0.5% to 43.3% and by 0.8% to 44.9% for the cumulative period. Net operating income Periods ended June 30 (in thousands of dollars) Quarter Cumulative (6 months) $ $ $ $ Net operating income (1) 10,042 10,466 19,890 20,585 % 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 June 30 (in thousands of dollars) Quarter Cumulative (6 months) $ $ $ $ Net operating income 10,042 10,466 19,890 20,585 Straight line rental income adjustments (112) (90) (167) (190) Adjustments related to amortization of lease incentives ,189 1,014 Net operating income before rental income adjustments (1) 10,534 10,911 20,912 21,409 % of rental income on the basis of in place leases (1) Non IFRS financial measure BTB Real Estate Investment Trust Management Discussion and Analysis June 30,

22 Financial expenses The following table shows the breakdown of financial expenses for the reporting periods: Periods ended June 30 (in thousands of dollars) Quarter Cumulative (6 months) $ $ $ $ Interest expense on mortgage loans payable 3,584 3,639 7,236 7,297 Interest expense on debentures 874 1,288 1,748 2,579 Interest expense on acquisition line of credit Interest expense on operating line of credit and other interest expenses Interest expenses 4,498 5,147 9,062 10,279 Accretion of effective interest Accretion of non derivative liability component of convertible debentures Financial expenses before following item: 4,748 5,507 9,580 10,988 Fair value adjustment on derivative financial instruments (debenture conversion options and interest rate swap) (229) 65 (185) 160 Financial expenses 4,519 5,572 9,395 11,148 Financial expenses decreased by $649 during the second quarter of 2017 compared to the same period of 2016, and by $1,217 during the cumulative period, mainly due to the repayment of Series D debentures on August 2, 2016 and partial repayment of the acquisition line of credit using the proceeds of the unit issue in June Financial expenses can be allocated among interest expenses amounting to $4,498 for the quarter (2016: $5,147) and $9,062 for the six month period (2016: $10,279) 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 instrument of $229 for the quarter and $185 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 June 30, 2017, the average weighted contractual rate of interest on mortgage loans payable was 3.79%, 5 basis points lower than the rate in effect at June 30, For 35 consecutive quarters, the weighted average interest rate has remained stable or declined. Interest rates on first ranking mortgage financings ranged from 2.00% to 6.80% as at June 30, The weighted average term of financing in place as at June 30, 2017 was 5.56 years (5.27 years as at June 30, 2016). Trust administration expenses Periods ended June 30 (in thousands of dollars) Quarter Cumulative (6 months) $ $ $ $ Administrative expenses 1, ,137 1,859 Amortization Unit based compensation Trust administration expenses 1, ,308 1,953 The increase in administrative expenses for the current quarter reflected a bad debt expense of $127 (2016: $19) and the write off of abandoned project costs amounting to $41 (2016: $0). 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 June 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 second 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 June 30, 2017 Retail Office Industrial Mixed use Capitalization rate 6.25% 10.00% 6.50% 8.50% 6.50% 9.75% 6.75% 7.75% 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% 8.50% 7.50% 8.25% As at June 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% 7.75% 9.75% 7.50% 8.00% Discount rate 7.75% 9.00% 7.25% 8.50% 8.25% 10.50% 8.00% 8.50% The weighted average capitalization rate for the entire portfolio as at June 30, 2017 was 7.20% (June 30, 2016: 7.33%), the same as at December 31, 2016 and down 13 basis points since June 30, As at June 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 $22 million. Net gain on disposal of an investment property 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. Net income and comprehensive income BTB generated net income of $4.4 million for the second quarter of 2017, up $0.4 million from $4.0 million in the second quarter of Periods ended June 30 (in thousands of dollars, except for per unit data) Quarter Cumulative (6 months) $ $ $ $ Net income and comprehensive income 4,362 3,982 8,346 7,533 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. BTB Real Estate Investment Trust Management Discussion and Analysis June 30,

24 The following table presents adjusted net income and comprehensive income before these volatile non monetary items. Periods ended June 30 (in thousands of dollars, except for per unit data) Quarter Cumulative (6 months) $ $ $ $ Net income and comprehensive income 4,362 3,982 8,346 7,533 Volatile non monetary items ± Fair value adjustment on derivative financial instruments (229) 65 (185) 160 Adjusted net income and comprehensive income (1) 4,133 4,047 8,161 7,693 Per unit (1) Non IFRS financial measure This table shows an increase of 2.1% in quarterly adjusted net income and 6.1% for the cumulative period, before the non monetary items mentioned above. However, quarterly adjusted net income per unit decreased 16.4%. 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 June 30 (in thousands of dollars) Quarter Cumulative (6 months) % % $ $ $ $ Rental income 17,375 17,595 (1.2) 35,258 35,791 (1.5) Operating expenses 7,523 7, ,754 15, Net operating income (1) 9,852 10,115 (2.6) 19,504 20,138 (3.1) Interest expense on mortgage loans payable 3,483 3,506 (0.7) 6,954 7,072 (1.7) Net property income (1) 6,369 6,609 12,550 13,066 Decrease in net property income from the same property portfolio (3.6) (3.9) (1) Non IFRS financial measure A lower occupancy rate in the office segment largely explains the decrease in the same property portfolio s performance. In addition, some premises subject to firm lease agreements have yet to generate income. Based on current rental activities, management is optimistic that the same property portfolio will post stable or increasing rental income as of the fourth quarter of BTB Real Estate Investment Trust Management Discussion and Analysis June 30,

25 DISTRIBUTABLE INCOME AND DISTRIBUTIONS The following table shows the calculation of distributable income. Periods ended June 30 (in thousands of dollars) Quarter Cumulative (6 months) $ $ Net income (loss) and comprehensive income (IFRS) 4,362 3,982 8,346 7,533 + Amortization of property and equipment ± Unit based compensation expense Accretion of the liability component of convertible debentures ± Fair value adjustment on derivative financial instruments (229) 65 (185) Amortization of lease incentives ,189 1,014 Straight line rental income adjustment (112) (90) (167) (190) + Accretion of effective interest Distributable income (1) 4,979 4,924 9,922 9,379 (1) Non IFRS financial measures Distributions and per unit data Periods ended June 30 (in thousands of dollars, except for per unit data) Quarter Cumulative (6 months) $ $ $ $ Distributions Cash distributions 3,925 3,432 7,856 6,594 Distributions reinvested under the distribution reinvestment plan , Total distributions to unitholders 4,469 3,898 8,925 7,553 Percentage of reinvested distributions 12.2% 12.0% 12.0% 12.7% Per unit data Distributable income Distributions Payout ratio (1) 89.8% 79.1% 90.0% 80.5% Cash payout ratio (2) 78.8% 69.7% 79.2% 70.3% (1) The payout ratio corresponds to total distributions divided by distributable income. (2) The cash payout ratio corresponds to cash distributions divided by distributable income. Distributable income for the second quarter increased by $55, from $4,924 to $4,979, between 2016 and Distributable income per unit for the second quarter of 2017 was 11.7 compared to 14.1 in 2016, a 17% decrease. For the cumulative period, distributable income increased $543 or 5.8%. Distributions to unitholders totalled 10.5 per issued unit for each quarter of 2017 and The payout ratio for distributable income was 89.8% in the second quarter of 2017 compared to 79.1% in the second quarter of 2016, and 90.0% for the 2017 cumulative period compared to 80.5% for 2016, reflecting a surplus of distributable income over distributions. The decrease in distributable income per unit and the increase in the payout ratios were partially due to the issuance of 7.2 million units at $4.55 for net proceeds of $31 million and the early repayment of Series D debentures in the amount of $23 million, bearing interest at 7.25%, and $6.1 million of the acquisition line of credit bearing interest at 5.95%. Management considers that these transactions reduced the per unit ratios by 1.2 per quarter and significantly increased the payout ratios. BTB Real Estate Investment Trust Management Discussion and Analysis June 30,

26 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 June 30 (in thousands of dollars) Quarter Cumulative (6 months) $ $ $ $ Cash flows from operating activities (IFRS) 8,749 9,549 14,166 16,258 + Financial revenues Net gain on disposal of an investment property 132 ± Net change in non cash operating items ,659 3,351 Interest expense on mortgage loans payable (3,584) (3,639) (7,236) (7,297) Interest expense on convertible debentures (874) (1,288) (1,748) (2,579) Interest expense on acquisition line of credit (17) (192) (32) (348) Interest expense on operating line of credit and other interest expenses (23) (28) (46) (55) Distributable income 4,979 4,924 9,922 9,379 Distribution reinvestment plan In the second quarter of 2017, 12.2% of distributions (2016: 12.0%) and 12.0% (2016: 12.7%) since the beginning of the year were reinvested under the distribution reinvestment plan implemented by BTB in Approximately $1.1 million (2016: $1.0 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. FUNDS FROM OPERATIONS (FFO) The following table provides a reconciliation of net income and comprehensive income established according to IFRS and FFO for the periods ended June 30, 2017 and 2016: Periods ended June 30 (in thousands of dollars, except for per unit data) Quarter Cumulative (6 months) $ $ $ $ Net income and comprehensive income (IFRS) 4,362 3,982 8,346 7,533 Net gain on disposal of an investment property (132) + Amortization of a property recognized at cost Amortization of lease incentives , ± Fair value adjustment on derivative financial instruments (229) 65 (185) Leasing payroll expenses FFO (1) 4,884 4,692 9,495 8,908 FFO per unit FFO payout ratio (2) 91.5% 83.1% 94.0% 84.8% FFO cash payout ratio (3) 80.4% 73.1% 82.7% 74.0% (1) Non IFRS financial measure (2) The FFO payout ratio corresponds to total distributions divided by FFO. (3) The FFO cash payout ratio corresponds to cash distributions divided by FFO. For the second quarter of 2017, FFO increased by 4.1% compared to the second quarter of FFO per unit were 11.5 in 2017 (compared to 13.4 in 2016), a 14.2% decrease. The payout ratio stood at 91.5% for the second quarter of 2017 compared to 83.1% for the same quarter of BTB Real Estate Investment Trust Management Discussion and Analysis June 30,

27 The decrease in FFO per unit and the increase in the different payout ratios were partially due to the issuance of 7.2 million units at $4.55 for net proceeds of $31 million and the early repayment of Series D debentures in the amount of $23 million, bearing interest at 7.25%, and $6.1 million of the acquisition line of credit bearing interest at 5.95%. Management considers that these transactions reduced the per unit ratios by 1.2 per quarter and significantly increased the payout ratios. The following table provides a reconciliation of FFO (non IFRS financial measure) and cash flows from operating activities presented in the financial statements. Periods ended June 30 (in thousands of dollars) Quarter Cumulative (6 months) $ $ $ $ Cash flows from operating activities (IFRS) 8,749 9,549 14,166 16,258 + Straight line rental income adjustment Financial revenues Amortization of a property recognized at cost Leasing payroll expenses ± Net change in non cash operating items ,659 3,351 Unit based compensation expenses (65) (27) (141) (64) Interest on mortgage loans payable (3,584) (3,639) (7,236) (7,297) Interest on convertible debentures (874) (1,288) (1,748) (2,579) Interest on the acquisition line of credit (17) (192) (32) (348) Other interest expense and operating line of credit (23) (28) (46) (55) Accretion of the liability component of convertible debentures (11) (75) (22) (149) Accretion of effective interest (239) (285) (496) (560) Amortization of other property and equipment (39) (45) (80) (89) FFO (1) 4,884 4,692 9,495 8,908 (1) Non IFRS financial measure ADJUSTED FUNDS FROM OPERATIONS (AFFO) The following table provides a reconciliation of FFO and AFFO for the periods ended June 30, 2017 and 2016: Periods ended June 30 (in thousands of dollars, except for per unit data) Quarter Cumulative (6 months) $ $ $ $ FFO 4,884 4,692 9,495 8,908 ± Straight line rental income adjustment (112) (90) (167) (190) + Accretion of effective interest Accretion of the liability component of convertible debentures Amortization of other property and equipment Unit based compensation expenses Provision for maintenance expenditures (355) (366) (722) (736) Provision for rental fees (300) (320) (616) (640) AFFO (1) 4,463 4,333 8,713 8,173 AFFO per unit AFFO payout ratio (2) % 89.9 % % 92.4 % AFFO cash payout ratio (3) 87.9 % 79.2 % 90.2 % 80.7 % (1) Non IFRS financial measure (2) The AFFO payout ratio corresponds to total distributions divided by AFFO. (3) The AFFO cash payout ratio corresponds to cash distributions divided by AFFO. AFFO per unit amounted to 10.5 in the second quarter of 2017 compared to 12.4 in 2016, a 15.3% decrease. The AFFO payout ratio stood at 100.0% at the end of the second quarter of 2017 compared to 89.9% at the end of the second quarter of BTB Real Estate Investment Trust Management Discussion and Analysis June 30,