INSTORAGE REAL ESTATE INVESTMENT TRUST

Transcription

1 Interim Consolidated Financial Statements (Restated - Note 1(a)) INSTORAGE REAL ESTATE INVESTMENT TRUST period from January 12, 2006 to September 30, 2006

2 Interim Consolidated Balance Sheet September 30, 2006 Assets Income-producing properties (note 3) $ 110,320,295 Cash and cash equivalents 28,567,092 Mezzanine financing receivable (note 4(b)) 10,525,070 Other assets 1,593,155 Deferred financing costs, net 362,116 Liabilities and Unitholders' Equity $ 151,367,728 Liabilities: Mortgage payable (note 5) $ 40,105,254 Bridge facility (note 6) 25,285,000 Accounts payable and accrued liabilities 725,969 Distribution payable 641,286 66,757,509 Unitholders' equity 84,610,219 Contingencies (note 9) Subsequent events (notes 6 and 10) $ 151,367,728 See accompanying notes to interim consolidated financial statements. 1

3 Interim Consolidated Statements of Operations (Restated - Note 1(a)) Period from Three months January 12, ended 2006 to September 30, September 30, Revenue: Rental property $ 1,127,830 $ 1,214,046 Interest 184, ,041 1,312,490 1,399,087 Expenses: Property operating 420, ,621 Interest (notes 5 and 6) 393, ,304 Unit-based compensation (note 8) 373,108 General and administrative 476, ,792 Depreciation and amortization: Income-producing properties (note 3) 529, ,932 Deferred financing 11,339 11,339 1,831,444 2,421,096 Loss for the period $ (518,954) $ (1,022,009) Basic and diluted loss per unit (note 7) (0.01) (0.04) See accompanying notes to interim consolidated financial statements. 2

4 Interim Consolidated Statement of Unitholders' Equity (Restated - Note 1(a)) Period from January 12, 2006 to SCOSS September 30, Units issued conversion Loss Distributions 2006 SCOSS Capital Corp. offerings, net of issuance costs $ $ 6,163,359 $ $ $ 6,163,359 Units issued on establishment of the REIT Loss for the period (1,022,009) (1,022,009) Issuance of trust units pursuant to private placement 75,000,000 75,000,000 Issuance of Class C Units of InStorage Limited Partnership 9,400,000 9,400,000 Issuance costs - private placement (4,338,863) (4,338,863) Exercise of options 48,888 48,888 Distributions (641,286) (641,286) Unitholders' equity, end of period $ 80,110,155 $ 6,163,359 $ (1,022,009) $ (641,286) $ 84,610,219 See accompanying notes to interim consolidated financial statements. 3

5 Interim Consolidated Statements of Cash Flows (Restated - Note 1(a)) Cash provided by (used in): Period from Three months January 12, ended 2006 to September 30, September 30, Operating activities: Loss for the period $ (518,954) $ (1,022,009) Items not involving cash: Depreciation and amortization 540, ,271 Unit-based compensation 373,108 Change in non-cash operating items: Other assets (952,725) (1,593,155) Accounts payable and accrued liabilities 300, ,969 (630,006) (941,816) Financing activities: Mortgage principal repayments (30,546) (30,546) Mortgage financing 17,214,630 23,214,630 Bridge financing 25,285,000 25,285,000 Deferred financing costs (360,101) (372,065) Issuance of units, net of issuance costs 70,710,025 76,501, ,819, ,598,504 Investing activities: Income-producing properties acquired (75,896,127) (84,564,526) Mezzanine debt (10,426,537) (10,426,537) Mezzanine interest receivable (98,533) (98,533) (86,421,197) (95,089,596) Increase in cash 25,767,805 28,567,092 Cash and cash equivalents, beginning of period 2,799,287 Cash and cash equivalents, end of period $ 28,567,092 $ 28,567,092 Supplemental cash flow information: Interest paid $ 24,993 $ 24,993 Supplemental disclosure of non-cash investing and financing activities: Value of units issued for acquisition of income-producing properties 9,400,000 9,400,000 Mortgages assumed on acquisition 16,918,701 16,918,701 See accompanying notes to interim consolidated financial statements. 4

6 Notes to Interim Consolidated Financial Statements (Restated - Note 1(a)) InStorage Real Estate Investment Trust ("InStorage" or the "REIT") is an open-ended real estate investment trust formed under the laws of the Province of Ontario pursuant to the Declaration of Trust dated June 20, 2006 when 10 trust units were issued for cash consideration of $130. The REIT had no operations or changes in financial position during the 10 day period ended June 30, The REIT is authorized to issue an unlimited number of trust units. The trust units trade on the TSX Venture Exchange under the symbol IS.UN. The REIT entered into a plan of arrangement (the "Arrangement") on August 4, 2006, whereby SCOSS Capital Corp. ("SCOSS") was continued as the REIT and all of SCOSS's common shares were exchanged for a similar number of REIT units. SCOSS was incorporated on January 12, 2006 and its common shares were listed for trading on the TSX Venture Exchange on March 27, 2006 as a "Capital Pool Corporation". SCOSS completed its qualifying transaction on May 29, 2006 and was approved as a real estate issuer on the TSX Venture exchange. 1. Significant accounting policies: (a) Basis of presentation: The REIT is considered to be a continuation of SCOSS following the continuity of interest method of accounting. These financial statements reflect the results of operations of SCOSS from January 12, 2006 to August 4, 2006 and the REIT from that date forward. The REIT's previously released financial statements for the third quarter did not include the results of SCOSS from January 12, 2006 to August 4, 2006 and accordingly, these financial statements have been restated to reflect the operations of SCOSS for the abovementioned period. The interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. The interim consolidated financial statements include the financial position of InStorage and its subsidiaries, including InStorage Limited Partnership (the "LP"). (b) Cash and cash equivalents: The REIT considers deposits in banks, certificates of deposit and short-term investments with original maturities of three months or less as cash and cash equivalents. 5

7 1. Significant accounting policies (continued): (c) Revenue recognition: Rental income, which is generally earned pursuant to month-to-month leases for selfstorage space, is recognized as earned. Late charges and administrative fees are recognized as income when collected. Revenue from merchandise sales is recognized when earned. (d) Income-producing properties: Income-producing properties are carried at cost. If events or circumstances indicate that the carrying value of the income-producing properties may be impaired, a recoverability analysis is performed based on the estimated undiscounted cash flows to be generated from the income-producing properties. If the analysis indicates that the carrying values are not recoverable from future cash flows, the income-producing properties are written down to estimated fair value and an impairment loss is recognized. Buildings are depreciated on a straight-line basis over the estimated useful lives of the assets, not to exceed 25 years. Furniture and equipment are depreciated on a straight-line basis over five years. (e) Intangible assets: Value of in-place leases and value of above- and below-market leases on acquisition are included in intangible assets and are amortized over the remaining term of the associated tenant leases. 6

8 1. Significant accounting policies (continued): (f) Earnings (loss) per unit: Basic earnings (loss) per unit is computed by dividing earnings (loss) for the period by the weighted average number of units outstanding during the period. Diluted earnings (loss) per unit is calculated based on the weighted average number of units outstanding during the period, plus the effect of dilutive unit equivalents such as unit options and warrants. The diluted amounts are calculated using the treasury method as if all the unit equivalents in respect of which average market prices exceed issue price have been exercised at the beginning of the reporting period, or the period of issue, as the case may be, and that the funds obtained thereby were used to purchase units of InStorage at the average trading price of the units during the period. (g) Unit-based compensation: InStorage accounts for unit options issued under its unit option plan using the fair value method. Under this method, compensation expense is measured at fair value at the grant date using the Black-Scholes option pricing model and is recognized over the vesting period. (h) Income taxes: InStorage is a Canadian unincorporated open-ended real estate investment trust created by a Declaration of Trust. InStorage is taxed as a mutual fund trust for income tax purposes. Pursuant to the terms of the Declaration of Trust, InStorage intends to make distributions not less than the amount necessary to ensure that InStorage is not liable to pay Canadian income taxes. Therefore, no provision for income taxes is required on income earned by InStorage or its subsidiary trusts and flow-through entities. (i) Variable interest entities: The Canadian Institute of Charted Accountants' Accounting Guideline 15, Consolidation of Variable Interest Entities, requires an assessment of whether control of an entity exists through interests other than voting control and, if so, to consolidate the entity in the financial results. InStorage has reviewed its interests, specifically its relationship with InScotia Developments Limited Partnership ("InScotia"), and has determined that they do not qualify as variable interests and are not consolidated in the financial statements. 7

9 1. Significant accounting policies (continued): (j) Use of estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. 2. Acquisitions: On May 29, 2006, SCOSS purchased two self-storage facilities in Toronto, Ontario for a total acquisition cost of $8,668,399. The acquisition was funded by a first mortgage loan of $6,000,000 with the balance paid in cash. On August 25, 2006, InStorage purchased three self-storage properties. The properties were acquired for a total cost of acquisition of $4,668,055 and are located in Aylmer, Ontario and St. Thomas, Ontario. The acquisition was funded by first mortgage financing of $3,510,000, with the balance paid in cash. On September 1, 2006, InStorage purchased six self-storage properties. The properties were acquired for a total cost of acquisition of $60,592,878 and are located in the Toronto, Ontario area. The acquisition was funded by first mortgage financing in the amount of $5,345,000, a draw on the bridge facility in the amount of $16,695,000, the assumption of debt in the amount of $8,587,847 and by the issuance of 7,000,000 Class C LP units of the LP for $7,000,000, with the balance paid in cash. On September 6, 2006, InStorage purchased four self-storage properties. The properties were acquired for a total cost of acquisition of $34,754,103. Two of the properties are located in London, Ontario, while the other two are located in Toronto, Ontario. The acquisition was funded by first mortgage financing in the amount of $8,359,500, a draw on the bridge facility in the amount of $8,590,000, the assumption of debt in the amount of $8,330,855 and by the issuance of 2,400,000 Class C LP units of the LP for $2,400,000, with the balance paid in cash. On September 20, 2006, InStorage purchased a self-storage property located in Bellville, Ontario. The total cost of acquisition was $2,199,792. The acquisition was funded entirely with cash. 8

10 2. Acquisitions (continued): The assets acquired were as follows: Period from Three months January 12, ended 2006 to September 30, September 30, Income-producing properties: Land $ 15,043,215 $ 16,302,003 Building 85,244,882 92,457,915 Furniture and equipment 50, ,288, ,809,918 Intangible assets: Value of in-place leases on acquisitions 1,926,731 2,073,309 $ 102,214,828 $ 110,883,227 Consideration: Issuance of Class C LP units $ 9,400,000 $ 9,400,000 Mortgages assumed on acquisition 16,918,701 16,918,701 Purchase price paid in cash 75,896,127 84,564,526 $ 102,214,828 $ 110,883,227 The allocation of the purchase price to the fair value of the assets acquired has not been finalized and may be subject to adjustment. 3. Income-producing properties: Accumulated depreciation and Net book Cost amortization value Land $ 16,302,003 $ $ 16,302,003 Buildings 92,457, ,111 92,078,804 In-place leases 2,073, ,079 1,892,230 Furniture and equipment 50,000 2,742 47,258 $ 110,883,227 $ 562,932 $ 110,320,295 9

11 4. Related party balances and transactions: (a) In August 2006, InStorage entered into an exclusive five-year agreement with Carttera Management Inc. ("Carttera"), whereby Carttera has been engaged as the exclusive provider of management services to InStorage. These services include the provision of the services of three executive officers and other staff. Two of the officers of the REIT are shareholders of Carttera and also hold units of the REIT. (i) During the three months ended September 30, 2006, the REIT incurred advisory fees of $47,075, which has been accrued in the accounts. No advisory fees were incurred in prior periods. The annual advisory fee is calculated at 0.25% of the Gross Book Value of the REIT's assets as defined in the agreement. (ii) SCOSS was charged $90,000 in the three months ended September 30, 2006 and $135,000 in the for the management of the operations of SCOSS and the conversion of SCOSS into the REIT. (iii) The REIT incurred and paid $484,131 in acquisition fees to Carttera for the three months ended September 30, No acquisition fees were incurred in prior periods. The acquisition fee is calculated on the date of closing of a purchase or acquisition, as 0.50% of the total cost of acquisition. (b) In August 2006, InStorage entered into a Development Agreement with InScotia, a related party of the REIT by virtue of common management and an ownership interest by certain members of management of the REIT. Under the terms of the agreement, InStorage shall have the first right of opportunity to provide mezzanine financing to InScotia in respect of the development cost of a development property or the acquisition cost of a property. In addition to charging interest on the mezzanine financing, InStorage has the first right to purchase the development property from InScotia. At September 30, 2006, InStorage had funded InScotia with a total principal amount of $10,426,537, at market value, in mezzanine loans that is open for prepayment without penalty, bears interest at 14% and for a term not to exceed five years. Interest for the three months ended September 30, 2006, in the amount of $98,533, has been accrued. No interest was incurred in prior periods. 10

12 5. Mortgage payable: Mortgage payable bears interest at a weighted average rate of 5.67% with an average term to maturity of 7.3 years. The debt is secured by first charges on the REIT's properties. The fair value of the mortgages approximated carrying values since the mortgages were recently entered into. Principal repayments for the next five years are as follows: 2006 remainder $ 240, , , , ,047,566 Thereafter 36,004,260 $ 40,105, Bridge facility: During the three months ended September 30, 2006, to facilitate the acquisition of certain properties, InStorage arranged a three-month bridge facility with the Royal Bank of Canada (the "Bank") in the amount of $25,285,000. This facility was fully drawn by September 5, The bridge loan bears interest at prime plus 1.5% and is repayable upon one week's written notice to the Bank. Interest of $152,316 was accrued during the period. No interest was incurred in prior periods. InStorage has an option to renew the facility for a further three months. Subsequent to the quarter, InStorage repaid $12,610,000 of the bridge facility and replaced it with long-term mortgage financing. InStorage is currently working to replace the remainder of the facility with long-term financing. 11

13 7. Units: The following table presents the number of units issued and outstanding, and the related carrying value of unitholders' equity for the period from January 12, 2006 to September 30, 2006 Number of units Carrying amount Class B LP Class C LP Class B LP Class C LP Units units units Total Units units units Total SCOSS Capital Corp. offerings, net of issuance costs converted into REIT units 8,475,904 13,024,096 21,500,000 $ 2,429,769 $ 3,733,590 $ $ 6,163,359 Units issued on establishment of the REIT Private placement of units, August 31, ,000,000 75,000,000 70,661,137 70,661,137 Issuance of units 9,400,000 9,400,000 9,400,000 9,400,000 Units issued from conversion of unit options 244, ,444 48,888 48,888 Balances, September 30, ,720,358 13,024,096 9,400, ,144,454 $ 73,139,924 $ 3,733,590 $ 9,400,000 $ 86,273,514 Pursuant to a special resolution passed by shareholders of SCOSS at a meeting held on July 25, 2006, SCOSS converted into a real estate investment trust as of August 4, The shareholders of SCOSS have exchanged their common shares, on a one for one basis for either units of the REIT or exchangeable Class B LP units of the LP. On August 31, 2006, InStorage completed a private placement offering of units. InStorage issued 75,000,000 units at a price of $1 per unit. Net proceeds, after deducting costs associated with the financing, were $70,661,

14 7. Units (continued): Authorized securities: (a) REIT units: The REIT is authorized to issue an unlimited number of voting units, each of which represents an equal undivided interest in the REIT. All REIT units outstanding from time to time shall be entitled to participate pro rata in any distributions by the REIT and, in the event of termination or winding up of the REIT, in the net assets of the REIT. In addition, the REIT is entitled to issue an unlimited number of special voting units ("Special Voting Units"). Special Voting Units may only by issued in connection with securities that are exchangeable, directly or indirectly, into REIT units. Special Voting Units are non-transferable, do not entitle a holder thereof to receive distributions from the REIT, but do provide a holder with the right to vote at meeting of the unitholders of the REIT. (b) LP units: The LP is authorized to issue an unlimited number of general partnership interest Class A LP units, Class B LP units, Class C LP units and unlimited number of limited partnership units of any other class (as the same may be created from time to time by the general partner). Class B LP units and Class C LP units are exchangeable into units of the REIT on a one-for-one basis (subject to customary anti-dilution provisions) and entitle holders to receive distributions that are equivalent to distributions made on units of the REIT and do not entitle holders to vote on matters to be considered by all the limited partners of the LP. However, holders of Class B LP units are also holders of Special Voting Units of the REIT, which entitle them to vote at meetings of the unitholders of the REIT. The terms of the Class B LP units and the Class C LP units are governed by the limited partnership agreement of the LP and the applicable exchange agreement in respect of such units. (c) Weighted average units: Per unit information is calculated based on the weighted average number of units outstanding for the three months ended September 30, 2006 of 49,719,816 and for the of 24,825,568. The unit options are currently anti-dilutive. 13

15 8. Unit options: InStorage has adopted a unit option plan (the "Plan"). Under the terms of the Plan, the Board of Trustees of the REIT may from time to time, in its discretion, and in accordance with TSX Venture Exchange requirements, grant trustees, officers, employees and consultants, including all persons acting in such capacity regardless of whether they are employed by the REIT or its subsidiaries or affiliates or by another person or entity, non-transferable options to purchase trust units, exercisable for a period of up to 10 years from the date of grant. The maximum number of units reserved for issuance under the plan is 10% of the total number of issued and outstanding units. On March 21, 2006, SCOSS granted 1,250,000 options at an exercise price of $0.20 per share expiring March 21, These options vested immediately upon granting. On May 29, 2006, SCOSS granted 900,000 options at an exercise price of $0.94 per share expiring May 29, These options vested immediately upon granting. The compensation expense was determined based on the fair value of the options at the grant date using the Black-Scholes option pricing model with the following assumptions: Expected option life 3 years Risk-free interest rate 4.08% Expected volatility 40.00% Dividend yield 5.00% On conversion, the SCOSS options were converted into unit options of the REIT at a weighted exercise price of $0.51 per unit. During the three months ended September 30, 2006, 244,444 options were exercised at $0.20 per unit. Weighted average Unit exercise options price Options vested, end of period 1,905,556 $ 0.55 Weighted average life remaining in years

16 9. Contingencies: (a) Under the terms of the Purchase and Sale Agreement dated June 30, 2006 between Access Self Storage Inc., Ontario Inc. and InStorage LP, InStorage LP agreed to a post-closing purchase price adjustment on the three properties known as 1776 O'Connor Drive, 542 Evans Avenue and 3429 Kennedy Road. Based on the operating income for the period commencing 12 months after closing and ending 24 months after closing, an adjustment will be made to the purchase price if operating income exceeds certain specified levels. The maximum contingent amount of the increase in the purchase price for these properties if all conditions are satisfied, would be $8,467,286. (b) Under the terms of the Purchase and Sale Agreement dated June 30, 2006 between Access Self Storage Inc., Ontario Inc. and InStorage LP, it was agreed that if at any time prior to the second anniversary of the closing date, the purchaser sells 1776 O'Connor Drive, 542 Evans Avenue, or 3429 Kennedy Road, the purchaser will pay to the vendor an adjustment to the purchase price. The adjustment to the purchase price for Evans Avenue will be in the amount of $2,068,837, O'Connor Drive, $3,358,112 and Kennedy Road, $1,915, Subsequent events: (a) On October 13, 2006, InStorage completed the purchase of a storage facility in Calgary, Alberta, for the purchase price of $8,450,000. The purchase was financed with first mortgage financing of $4,345,000, with the balance paid in cash. (b) On October 13, 2006, InStorage waived conditions in respect of the acquisition of two selfstorage properties located in Edmonton, Alberta. The total purchase price for these properties is $5,500,000 and the transaction is expected to close on November 17, InStorage anticipates financing the transaction with a first mortgage financing of $3,975,000, with the balance paid in cash. (c) InStorage agreed to provide a mezzanine loan to InScotia and Talus Capital Corporation in the principal amount of $5,552,000 to be funded in two tranches. The expected date of closing of the first tranche is November 15, The interest rate payable under the loan is 10% per annum. The maximum term of the loan is five years. 15