Timbercreek U.S. Multi-Residential Opportunity Fund #1

Transcription

1 Timbercreek U.S. Multi-Residential Opportunity Fund #1 Annual Report

2 The Fund targets a 15% net internal rate of return, inclusive of a 4-5% pre-tax quarterly distribution. (the Fund) provides investors with the opportunity to invest in an asset class that has historically generated strong and stable long-term cash flows. The Fund targets mismanaged or undervalued multi-unit residential assets in the southeast United States. With an active, value-add investment strategy, it aims to capitalize on compelling investment opportunities through the purchase, improvement and sale of multi-residential real estate assets to generate significant gains for investors.

3 Key Achievements Repositioning Program Timbercreek s repositioning program is designed to increase revenue and cash flows at the asset level by improving property conditions in order to generate rental growth that outpaces the market while maintaining strong occupancy. At the same time Timbercreek focuses on reducing operating costs through improved property management in order to further enhance the overall value of the asset. $26 million in total revenue, up 46% over The Fund s portfolio consists of eight properties located in four states in the southeastern United States. Renovations and enhancements have been completed across the portfolio and each asset is achieving above market rental growth. Three of the assets from the initial portfolio acquisition have been listed for sale in order to crystalize the value that has been created. Timbercreek will continue to monitor each remaining asset in the portfolio to determine the appropriate disposition strategy to optimize returns for investors. 2,696 units across four states Portfolio Summary Property Location Acquisition Date No. of Units Capital Expenditure (in $ millions) 4.0% increase in weighted-average rents over 58.3% portfolio leverage Lynden Square Saratoga Ridge Granite Park Chelsea Commons Eagle Landing Watercrest Lake Ellenor Alexander Pointe Charlotte, NC Austin, TX Charlottesville, VA Chapel Hill, NC Cary, NC Cary, NC Orlando, FL Jacksonville, FL Dec. 20, 2012 Dec. 20, 2012 Dec. 20, 2012 Dec. 20, 2012 May 6, May 6, Nov. 26, Dec. 10, $2.73 $0.51 $2.63 $1.83 $2.32 $2.09 $1.21 $ % average rent growth vs. market average of 3.7% year-to-date 93.5% portfolio occupancy Property Lynden Square Saratoga Ridge Granite Park Chelsea Commons Eagle Landing Watercrest Lake Ellenor Alexander Pointe Market Cumulative Rent Growth 7.7% 11.3% 3.4% 7.5% 6.0% 6.0% 4.8% 3.8% 1,2,3 Asset Cumulative Rent Growth 10.3% 13.5% 10.5% 13.8% 12.0% 14.4% 9.1% 4.4% Current Status Divesting Divesting Divesting Stabilizing/Divesting Stabilizing/Divesting Stabilizing/Divesting Stabilizing Stabilizing 1. Source - RBC Capital Markets Multi-Family High-Rise, January 2. Marcus & Millichap 2015 National Apartment Report 3. Source - JLL Multifamily Outlook, United States, Fall Divesting Stabilizing/Divesting Stabilizing 1 2

4 Assets for Sale in 2015 Management s Discussion and Analysis and Financial Statements Property Location Number of Suites Purchase Price Capital Expenditure Hold Period Expected Disposition Lynden Square Charlotte, NC 476 $28.8 million $2.7 million 28 months Q Property Location Number of Suites Purchase Price Capital Expenditure Hold Period Expected Disposition Granite Park Charlottesville, VA 425 $32.2 million $2.6 million 30 months Q Property Location Number of Suites Purchase Price Capital Expenditure Hold Period Expected Disposition Saratoga Ridge Austin, TX 229 $17.1 million $0.5 million 29 months Q

5 Management s Discussion and Analysis For the year ended BASIS OF PRESENTATION This MD&A has been prepared to provide information about the financial results of the Fund for the year ended. This MD&A should be read in conjunction with the Fund s audited consolidated financial statements for the years ended and which are prepared in accordance with International Financial Reporting Standards (IFRS). The functional and reporting currency of the Fund is U.S. dollars and unless otherwise specified, all amounts in this MD&A are in thousands of U.S. dollars, except per share and other non-financial data. FORWARD-LOOKING STATEMENTS Caution regarding forward-looking statements The terms the Fund, we, us and our in this Management s Discussion and Analysis ( MD&A ) refer to (the Fund ) and its consolidated financial position and results of operations for the year ended (the Year ). This MD&A may contain forward-looking statements relating to anticipated future events, results, circumstances, performance or expectations that are not historical facts but instead represent our beliefs regarding future events. These statements are typically identified by expressions like believe, expects, anticipates, would, will, intends, projected, in our opinion and other similar expressions. By their nature, forward-looking statements require us to make assumptions which include, among other things, that (i) the Fund will have sufficient capital under management to effect its investment strategies and pay its targeted distributions to Unitholders, (ii) the investment strategies will produce the results intended by Timbercreek Asset Management Inc. (the Manager ), (iii) the markets will react and perform in a manner consistent with the investment strategies and (iv) the Fund is able to invest in assets of a quality that will generate returns that meet and/or exceed the Fund s targeted investment returns. Forward-looking statements are subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will prove not to be accurate. We caution readers of this MD&A not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including but not limited to, general market conditions, interest rates, regulatory and statutory developments, the effects of competition in areas that the Fund may invest in and the risks detailed from time to time in the Fund s public disclosures. For more information on risks, please refer to the Risks and Uncertainties section in this MD&A. We caution that the foregoing list of factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to investing in the Fund, investors and others should carefully consider these factors, as well as other uncertainties and potential events and the inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, the Fund and the Manager do not undertake, and specifically disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. This MD&A is dated March 30, Disclosure contained in this MD&A is current to that date, unless otherwise noted. Additional information on the Fund is also available on the Manager s website at Additional information about the Fund can be found on the SEDAR website at Copies of these documents have been filed electronically with securities regulators in Canada through the System for Electronic Document Analysis and Retrieval ( SEDAR ) and may be accessed through the SEDAR website at BUSINESS OVERVIEW AND RECENT DEVELOPMENTS About the Fund (the Fund ) is a limited partnership governed by the laws of the Province of Ontario which was formed on August 30, The Fund was established for the primary purpose of acquiring multi-residential investment properties in the southeast United States that are mispriced and/or undermanaged in the view of Timbercreek Asset Management Inc. (the Manager ). The objectives of the Fund are to (i) enhance the value of the investment properties through active management and a stabilization and improvement program with the goal of ultimately disposing of the investment properties to generate significant gains; and (ii) make quarterly cash distributions to Unitholders from Distributable Cash Flow (as defined in the Prospectus). Additional information relating to the investment objectives and investment restrictions of the Fund are contained in the Prospectus. Timbercreek Asset Management Inc. is the Manager of the Fund and provides strategic, advisory, asset management and other services necessary to manage the day-to-day operations of the Fund and the properties. The Manager entered into an operating agreement (the Operating Agreement ) with Elco Landmark Residential Holdings, LLC (together with Elco Landmark Residential Management, LLC, the Operator ) to identify multiresidential property investment opportunities, and ultimately property manage, reposition and redevelop the investment properties, utilizing the Operator s experience and expertise in the Fund s targeted geographic region. The Fund is authorized to issue an unlimited number of Class A units, Class B units and Class C units (the units and holders of such units being Unitholders ). Timbercreek Multi-Residential Opportunity Fund #1 G.P. Inc. is the general partner of the Fund (the General Partner ). The General Partner is a wholly-owned subsidiary of the Manager. As at, the Fund indirectly owns 88.5% ( 88.5%) of the Class A limited partnership units of Timbercreek U.S. Multi-Residential Operating LP ( Operating LP ), a limited partnership formed pursuant to and governed by the laws of the state of Delaware. The remaining interest in Operating LP is held by Timbercreek U.S. Multi-Residential (U.S.) Holding L.P. ( U.S. Holding LP ), a controlling interest of which is held by an affiliated entity of the Operator. The assets of the Fund are indirectly held by Operating LP, which carries out the business of the Fund. The Fund and its controlled subsidiaries are collectively referred to as the Fund in this MD&A. The term of the Fund is four years beginning on October 25, 2012, the closing date of the Fund s initial public offering (the IPO ), subject to a single one-year extension at the discretion of the General Partner (the Term ) or subject to earlier termination upon the sale of the Fund s final investment property. The Term may only be further extended by special resolution of the Unitholders. NON-IFRS MEASURES The Fund prepares and releases consolidated financial statements in accordance with IFRS. In this MD&A, as a complement to results provided in accordance with IFRS, the Fund discloses certain financial measures not recognized under IFRS and that do not have standard meanings prescribed by IFRS (collectively the non-ifrs measures ). These non-ifrs measures are further described below. The Fund has presented such non-ifrs 5 6

6 measures because the General Partner believes they are relevant measures of the ability of the Fund to earn and distribute cash dividends to Unitholders and to evaluate the Fund s performance. These non-ifrs measures should not be construed as alternatives to net income and comprehensive income or cash flows from operating activities as determined in accordance with IFRS as indicators of the Fund s performance. Weighted Average Interest Rate represents the weighted average of interest rates of the individual mortgages payable, including mortgages payable transferred to liabilities related to assets held for sale, at the reporting date; Funds From Operations ( FFO ) is a measure of operating performance based on the funds generated by the business before reinvestment or provision for other capital needs. A reconciliation between net income (loss) of the Fund and FFO is included in the Analysis of Financial Information section. Distributable Cash Flow ( DCF ) is defined as cash flow generated by the Fund, less any amounts the General Partner may reasonably decide necessary for the payment of any costs or reserves that have been or are reasonably expected to be incurred. A reconciliation between net income (loss) of the Fund and DCF is included in the Analysis of Financial Information section. FINANCIAL HIGHLIGHTS Statement of Financial Position Highlights KEY FINANCIAL POSITION INFORMATION Year ended Year ended Period Ended 2012 Total assets $ 244,348 $ 216,928 $ 111,585 Assets held for sale 98, Investment properties 139, ,062 95,922 Total liabilities, excluding net liabilities attributable to Unitholders and U.S. Holding LP 164, ,942 72,248 Liabilities related to assets held for sale 58, Mortgages payable, net of financing costs 80, ,919 71,133 CAPITAL STRUCTURE Net liabilities attributable to Unitholders 69,051 60,526 36,403 Net liabilities attributable to U.S. Holding LP $ 10,355 $ 8,460 $ 2,934 Total debt to fair value of investment properties 58.3% 66.9% 67.0% Total debt to assets 56.7% 65.1% 63.7% UNITHOLDER INFORMATION Number of General Partner units outstanding Number of Class A units outstanding 3,345,096 3,345,096 2,244,350 Number of Class B units outstanding 66,500 66,500 - Number of Class C units outstanding 2,736,275 2,736,275 1,605,000 FINANCIAL HIGHLIGHTS OPERATIONS For the three months ended Year ended Period Ended 2012 Portfolio occupancy rate 92.2% 93.5% 93.5% 93.3% 96.0% Weighted average in-place rent per suite/month $ 780 $ 739 $ 762 $ 733 $ 906 Total number of suites acquired in the period 528 1,316 1,380 Total number of suites (as at) 2,696 2,696 2,696 2,696 1,380 OPERATING RESULTS Revenue from rental operations 6,733 5,537 26,494 18, Net rental income 3,862 3,428 14,019 10, Net income (loss) and comprehensive income (loss) (4,131) 1,591 14,585 4,742 (514) Cash flow from operating activities 3,485 3,424 14,203 13,143 (1,872) Funds from operations ( FFO ) 1,527 1,310 7,014 4,022 (157) FFO per unit: Class A unit (0.04) Class B unit Class C unit (0.04) FFO payout ratio 258.4% 129.1% 84.6% 78.9% - DISTRIBUTIONS Declared distributions 3,947 1,691 5,931 3,172 - Class A unit Class B unit Class C unit U.S. Holding LP unit $ $ $ $ $ - FINANCING Weighted average interest rate 4.1% 4.0% 4.1% 4.0% 3.8% Weighted average mortgage term (years) For the years ended (the Year or ) and ( ) The Fund generated revenue from rental operations of $26,494 ( $18,087), an increase of $8,407, or 46%, from. The increase is due to a full year of revenues included in from the acquisition of the Cary Portfolio and Florida Portfolio in Q2 and Q4 respectively, which resulted in incremental revenue of $7,615. The remaining increase is due to growth of average in-place rents resulting from the completion of the rehabilitation program of the Colonial Portfolio and Cary Portfolio. Net rental income was $14,019 ( $10,184), an increase of $3,835, or 38%, from. The increase is mainly due to the impact of $3,284 from the acquisition of the Cary Portfolio and Florida Portfolio in Q2 and Q4 respectively. In, the Fund incurred capital expenditures of $4,966 ( $11,351) relating to the rehabilitation program and other improvements. The fair value of the investment properties increased due to a fair value adjustment of $27,622 during ( $3,049), mainly as a result of compression in capitalization rates coupled with continued growth of market rents in the portfolio. 7 8

7 Net income and comprehensive income was $14,585 ( $4,742), an increase of $9,843, or 208%, from. The increase is mainly a result of a full year of net rental income generated from the acquisition of investment properties in, fair value adjustment of investment properties and the appreciation of the U.S. dollar by approximately 8.3% against the Canadian dollar. This was offset by the provisions for the carried interest fee and income tax. The Fund declared distributions of $5,931 during on FFO of $7,014 ( $3,172 on FFO of $4,022) or an FFO payout ratio of 84.6% ( 78.9%). The increase in distributions over is mainly related to operating cash flow from newly acquired properties and is in excess of the Fund s stated target distribution. On September 30, the Fund repaid promissory notes payable of $3,319. In October, the investment period ended and the Fund is no longer pursuing acquisitions of additional investment properties. During the Year, the Fund has recorded a provision of carried interest fee of $9,972 ( nil), as the General Partner has assessed that it is probable that the Fund will achieve cumulative preferred returns over the thresholds outlined in the Distributions section. This reflects Management s best estimate in light of the current status of the redevelopment programs and the fair value of the investment properties. The carried interest fee is payable to the Manager and the Operator. U.S. MULTI-RESIDENTIAL REAL ESTATE MARKET OUTLOOK Steady domestic demand accelerated hiring and strengthened business investments which provided strong tailwinds for the U.S. economy in. The U.S. economy had its strongest year of economic growth since 2010, expanding 2.4% in over. 1 The U.S. economy more than recovered the jobs lost during the recession, outpacing the 8.2 million jobs added in the previous economic expansion last decade. Monthly job gains have exceeded 200,000, dropping the unemployment rate to 5.6% as of December the lowest level since the financial crisis. 2 The U.S. economy remained resilient in despite facing numerous challenges. The Polar Vortex, which saw record freezing temperatures and mountains of snow blanket many part of the U.S. during the first quarter, kept many shoppers indoors, grounded flights, reduced travel and made many business functions both more difficult and costly, hampering growth in the first quarter. Global instability in the Middle East, Ukraine and slower growth in Asian and Europe negatively impacted the U.S. economy. More recently, although the drop in the price of oil may potentially reduce investments in energy-related businesses, lower gasoline prices should increase discretionary spending, helping offset a decline in growth in other areas of the economy. Despite these headwinds, consumer confidence reached its highest level since As at, the Fund has reclassified three investment properties as held for sale. The Fund has entered into an agreement for the sale of Lynden Square, subsequent to year-end, and Management has committed to a plan of sale for two other investment properties Saratoga Ridge and Granite Park. On February 25, 2015, the Fund entered into an agreement for the sale of one investment property, Lynden Square, for the sale price of $37,127. The sale is expected to close in April The investment property was acquired as part of the Colonial Portfolio in December 2012 for a purchase price of $28,827, excluding transaction costs. CURRENT PORTFOLIO Source: Marcus & Millichap, 2015 National Apartment Report Portfolio/Property Florida Portfolio: State Size (sq. ft.) No. of suites Occupancy at Purchase Price Strong job growth is positively influencing the overall demand for housing as new household formations for 2015 is anticipated to reach nearly 1.5 million. 3 The number of 18 to 34-year-olds living at home remains 3.3 million above the long-term average. As this cohort benefits from employment gains and obtains the economic means to move out of their parents homes or reduce the number of roommates they are currently residing with, strong rental demand is anticipated to continue. Lake Ellenor Florida 247, % $ 18,658 Alexander Pointe Florida 244, % 15,949 Cary Portfolio: Eagle Landing North Carolina 344, % 30,219 Watercrest North Carolina 317, % 25,706 Colonial Portfolio: Granite Park Virginia 369, % 32,186 Lynden Square North Carolina 437, % 28,827 Chelsea Commons North Carolina 262, % 17,814 Saratoga Ridge Texas 179, % 17,095 Total/Average 2,402,935 2, % $ 186,454 Source: Marcus & Millichap, 2015 National Apartment Report 9 1. Forbes, U.S. 2.4% Economic Growth in Strongest Since Recession, January United States Department of Labor, Bureau of Labor Statistics 3. Marcus & Millichap, 2015 National Apartment Report 10

8 The millennial cohort has a 68% propensity to rent and with another 1.6 million millennials coming of age over the next five years the demand for multi-family housing is anticipated to remain strong, especially in markets such as Austin, San Antonio, Orlando, Jacksonville and Atlanta as well as others in the Southeastern U.S., where occupancy rates and rent growth are expected to remain favourable. Although new supply increased in with 238,000 units being added to the multi-family market, net absorption was also near historic highs (270,000 units) as much of the new supply that came online was in reaction to pent-up demand stemming from the financial crisis. Required lead time for a multi-family development is typically months from initiation to completion. Few projects were initiated in 2008 and 2009 resulting in 2010, 2011 and 2012 being the lowest years in over a decade for additions to multi-family supply. As rental demand has continued to gain momentum since the financial crisis, new multi-family projects were initiated in response, many of which were delivered in. When comparing the average level of supply over the past five years, additions to supply are in-line with long-term historical averages. New supply is anticipated to be lower in 2015 than with nearly 210,000 new units expected to come to market. Further, national vacancy rates are anticipated to increase by only 0.1% to 4.8%. Although the vacancy is forecasted to grow slightly, rent growth is anticipated to be 3.5% nationally in 2015, up from 3.0% in. 4 Leading up to the financial crisis, the number of completed units in the U.S. far surpassed the number of household formations. This was a contributing factor to the oversupply seen in the housing market. As global credit markets froze and investor demand faded, the significant imbalance between demand and supply precipitated a severe correction in the housing market. With new construction levels coming out of the recession at 15-year lows and household formations recovering, the supply and demand dynamic quickly reverted back to normalized levels. ownership, particularity among the millennial cohort, is representative of a shift in preference to renting versus owning a home. Seemingly, the millennial cohort prefers the lifestyle preference and mobility that renting offers. Although job growth has been strong in the millennial cohort, increases in the average home price, difficulty in obtaining financing, mounting student debts and delaying major life decisions such as starting a family has delayed many millennials from transitioning into home ownership. Although the Federal Housing Administration is trying to stimulate modest increases in home ownership by expanding mortgage credit and reducing mortgage insurance premiums from 0.85% to 0.50%, these measure are anticipated to impact higher quality apartment operators. According to Green Street Advisors, home ownership rates are anticipated to increase slightly in 2015 to 64.2% but expected to revert back to 64.0% by the end of The multi-family sector continues to generate significant demand from a wide variety of investor profiles. Multi-family values now measure 13% above the 2007 peak and capitalization rates continued to compress in, ending the Year at an average of 5.7%. 8 Although multi-family values have surpassed the pre-financial crisis levels, strong demand, undeniable demographic support and balanced supply and demand characteristics have continued to make the asset sector highly desirable to a variety of investors. A favourable financing market, combined with a low interest rate environment has continued to drive investor demand for the multi-family sector. The financing market is anticipated to remain favourable for the foreseeable future and with the spread between capitalization rates and the 10 Year Treasury rate remaining at historically wide levels, that should insulate any movement in capitalization rates from the eventual rise in interest rates. Source: Marcus & Millichap, 2015 National Apartment Report Source: Marcus & Millichap, 2015 National Apartment Report In, the majority of new supply was centered in urban locations and high-demand gateway cities such as Houston, Dallas, New York City, San Francisco, Washington and Los Angeles. Although demand in these major gateway locations was strong enough to satisfy the increase in supply, many markets that are less supplyconstrained experienced relatively muted new development. New rental projects generally require high rental rates as they are typically built to Class A specifications. However, demand is continuing to mount in markets that are less supply-constrained and that offer a more affordable rental option. Source: Marcus & Millichap, 2015 National Apartment Report Although job growth has increased over the past three years, wage growth has not kept up at the same pace. On average, wages grew approximately 2.0% as of Q4. 5 As stronger job growth fuels demand for housing, slower wage growth will require people to look for more affordable rental options. These factors led to noncoastal markets posting stronger rental growth in, nearly 4.0%, compared to urban locations (2.6%). 6 Source: Marcus & Millichap, 2015 National Apartment Report In, home ownership in the U.S. continued to decline and is currently at its lowest level since In, the home ownership rate dropped to 64%, a 1.2% decline year-over-year. Furthermore, the home ownership rate among the millennial cohort declined to 35.3% in, down 8.3% from its peak in This drop in home 4. Marcus & Millichap, 2015 National Apartment Report 5. Wall Street Journal; Job Growth Rebounds but Wages Lag; October 6. Marcus & Millichap, 2015 National Apartment Report Green Street Advisors, Pace of Homeownership Rate Declines Accelerates, February Marcus & Millichap, 2015 National Apartment Report 12

9 ANALYSIS OF FINANCIAL INFORMATION Statements of Income and Comprehensive Income Three months ended Year ended Revenue from rental operations $ 6,733 $ 5,537 $ 26,494 $ 18,087 Total rental expenses 2,871 2,109 12,475 7,903 Net rental income 3,862 3,428 14,019 10,184 General and administrative expenses Asset management fees ,180 1,113 Net income (loss) before undernoted items 3,441 3,110 12,839 9,071 Foreign exchange gain (loss) 1,955 1,871 4,911 3,172 Net finance costs* (6,032) (3,024) (13,774) (8,233) Net income (loss) before undernoted items (636) 1,957 3,976 4,010 Fair value adjustment of investment properties 4,424 (366) 27,622 2,746 Provision for carried interest fee 9,972-9,972 - Current and deferred tax expense (recovery) (2,053) - 7,041 2,014 Net income (loss) and comprehensive income (loss) $ (4,131) $ 1,591 $ 14,585 $ 4,742 * Net finance costs includes distributions to Unitholders The significant revenue and expense items are as follows: Net Rental Income Revenue from rental operations for Q4 and was $6,733 and $26,494 (Q4 $5,537; $18,087), respectively and predominately represents the revenue earned from the leasing of suites. The increase in rental revenue in Q4 over the comparable period is primarily due to revenue of $875 which was generated from the acquisition of the Florida Portfolio in Q4. The increase in rental revenue in over the comparable period is primarily due to revenue of $7,615 which was generated from the acquisition of the Cary Portfolio and Florida Portfolio in. The remaining increase for Q4 and was mainly due to an increase in average rents in-place for these properties. Rental expenses for Q4 these properties. and were $2,871 and $12,475 (Q4 $2,109; $7,903), respectively. The increase in the comparable periods is mainly due to the acquisition of the Cary Portfolio and the Florida Rental expenses for Q4 and were $2,871 and $12,475 (Q4 $2,109; $7,903), respectively. Portfolio in. The rental expenses for Q4 and include property taxes of $78 and $2,126 (Q4 nil; The increase $1,181), in the property comparable management periods is mainly fees of due $270 to and the acquisition $1,060 (Q4 of the Cary $226; Portfolio and $723), the Florida repairs and maintenance of $569 and $2,062 (Q4 $371; $1,088), utilities of $495 and $1,895 (Q4 $418; $1,436), insurance of $240 and $744 (Q4 $112; $365), and salaries and benefits of $739 and $2,837 (Q4 $575; $1,942), incurred at the property level. General and Administrative Expenses General and administrative expenses consist primarily of audit fees, legal fees, Unitholder reporting, filing fees and other corporate administration expenses of the Fund. For, general and administrative expenses were in-line with as these expenses did not vary significantly with changes in operations. Asset Management Fees Asset Management Fees Three months ended Year ended Asset management fees $ 158 $ 180 $ 644 $ 587 Property management fees , Acquisition fees Carried interest fee 9,972-9,972 - Total $ 10,588 $ 517 $ 12,276 $ 1,676 Pursuant to the Asset Management Agreement, the Manager is responsible for the strategic, advisory, asset management, property management, leasing, construction management and administration services necessary to manage the day-to-day operations of the Fund and the investment properties. The Manager is entitled to asset management fees, property management fees, acquisition fees and capital management fees. However these fees shall not exceed, on an aggregate basis, 1% per annum of the Fund s total assets, excluding carried interest fees, provided that if such fees exceed 1% per annum of the Fund s total assets, the excess amount shall be carried forward and paid in the first subsequent year in which the total fees paid do not exceed 1% per annum of the Fund s total assets up to an amount that, together with the total fees paid in such year, is equal to 1% of the Fund s total assets for such year. Any excess carried forward at the end of the Term shall not be paid. The excess amount carried forward as at is $1,449 ( $1,783). The description of the individual fees is as follows: (i) An asset management fee equal to 1.0% per annum of the gross subscription proceeds of any one or more subsequent offerings, plus applicable taxes, calculated and payable monthly in arrears; (ii) A property management fee equal to 4% per annum of the effective gross rental income of Operating LP, plus applicable taxes, payable monthly in arrears; (iii) An acquisition fee equal to 1% of the gross purchase price of each property (or interest in a property), which shall also include, but is not limited to, due diligence costs, closing costs, legal fees and any additional capital costs incurred in connection with the acquisition of the property, plus applicable taxes, payable on the completion of each acquisition; and (iv) A capital project management fee equal to 4% of the total costs of the applicable rehabilitation programs, plus applicable taxes, payable as to 50% of such fee at the beginning of the program and the remaining 50% at the completion of the program. In addition, the Manager and the Operator are entitled to a carried interest fee based on the performance of the Fund, as described in the Distributions section below. The year-over-year increase in asset management fees, property management fees and acquisitions fees is due to the acquisition of the Cary Portfolio and Florida Portfolio throughout, which in represented a full year of operations from these investment properties. During the Year, the General Partner assessed that it is probable that the Fund will achieve cumulative preferred returns over the thresholds outlined above and as a result has recorded a liability with respect to the carried interest fee in the amount of $9,972 ( nil). This reflects management s best estimate in light of the current status of the redevelopment programs and the fair value of the investment properties

10 Foreign Exchange Gain (Loss) Foreign exchange gains of $1,955 and $4,911 for Q4 and respectively (Q4 $1,871; $3,172) are mainly due to the functional and reporting currency of the Fund in U.S. dollars and the liabilities to Unitholders that are in Canadian dollars. As a result, net liabilities to Unitholders are translated into U.S. dollars at the end of each reporting period which results in a foreign exchange gain or loss depending upon the foreign exchange conversion rates between the Canadian dollar and the U.S. dollar. In addition, the Fund had a foreign currency gain of $95 on a portion of promissory notes which were payable in Canadian dollars. During Q4 and, the U.S. dollar appreciated by approximately 3.5% and 8.3% respectively (Q4 3.3%; 6.5%) against the Canadian dollar. Net Finance Costs Three months ended Year ended Interest expense $ 1,310 $ 1,236 $ 5,324 $ 4,270 Fair value adjustment of interest rate swaps 468 (190) 1,299 (190) Trailer fees related to Class A units Amortization of mortgage financing costs Amortization of unit offering costs Net finance costs before distributions to Unitholders and U.S. Holding LP 2,085 1,333 7,843 5,061 Distributions to Unitholders and U.S. Holding LP 3,947 1,691 5,931 3,172 Total $ 6,032 $ 3,024 $ 13,774 $ 8,233 The increase in interest expense for Q4 and the Year is due to mortgages relating to the investment properties acquired in, which were outstanding for only a portion of Q4 and. The units are classified as liabilities attributable to Unitholders in the consolidated financial statements and therefore distributions declared are recorded as finance costs. The Fund pays an annual trailer fee equal to 0.5% of the gross subscription proceeds received for the Class A units to registered dealers from cash available for distribution to holders of Class A units based on the number of Class A units held by clients of such registered dealers at the end of the relevant quarter, calculated and paid at the end of each calendar quarter commencing on March 31,. Fair Value Adjustment of Investment Properties As the Fund has elected to record its investment properties at fair value in accordance with IAS 40: Investment Properties, at each reporting date the Fund records the fair value adjustment in profit or loss. In Q4 and, the Fund recorded a gain of $4,424 and $27,622 respectively (Q4 $81; $3,049), excluding the impact of IFRIC 21, relating to a fair value adjustment of its investment properties, which includes investment properties reclassified to assets held for sale during the Year. The increase in fair value of the investment properties is mainly a result of compression in capitalization rates coupled with continued growth of market rents in the portfolio resulting from rehabilitation programs. Income Tax Expense The Fund is not subject to Canadian income taxes on income earned and gains realized by the Fund as those amounts are included in the taxable income of Unitholders. The Fund has a subsidiary which is subject to U.S. corporate taxes. The current income tax expense of the subsidiary is available as a tax credit to the Unitholders. The effective US tax rate of 33% ( 30%) differs from the statutory tax rate of 38% ( 39%) as a portion of the Fund s income is not subject to U.S. income tax. The tax expense for of $7,041 ( $2,014) is comprised of $7,033 ( $1,900) of deferred tax and $7 ( $114) of current tax. As at, the Fund recorded a net deferred tax liability of $8,934 ( - $1,900) due to temporary differences between the book carrying amount and the tax cost of investment properties, net of losses available for carry forward. Distributions Distributions are made by Operating LP indirectly to Unitholders and holders of U.S. Holding LP units on a quarterly basis as determined appropriate by the General Partner, in its sole discretion, in accordance with the following: (i) First, 100% to the holders of Operating LP units (pro rata), until they have received cumulative distributions equal to their aggregate contributed capital; (ii) Second, 100% to the holders of Operating LP units (pro rata) until they have been paid an 8% annual preferred return on all amounts contributed; (iii) Third, 75% to the holders of Operating LP units (pro rata) and 25% to the Manager and the Operator (each as to 50% of such amount) for any distributions until the holders of Operating LP units have been paid a cumulative 14% annual preferred return on all amounts contributed by them ( Carried Interest Fee ); and (iv) Thereafter, 65% to the holders of Operating LP units (pro rata) and 35% to the Manager and the Operator (each as to 50% of such amount). The applicable preferred return thresholds shall be calculated on a pre-tax basis and in U.S. dollars. The amortization of mortgage payable financing costs relate to legal costs and other fees incurred on the placement of the mortgages and are amortized over the Term of the Fund. Amortization of unit offering costs relate to costs incurred for agency commissions, legal fees and other issuance costs in connection with the IPO and subsequent offerings. As the Class A, Class B, Class C, General Partner and U.S. Holding LP units meet the definition of a liability under IFRS, the unit offering costs are amortized over the Term of the Fund

11 During the Year, the General Partner assessed that it is probable that the Fund will achieve cumulative preferred returns over the thresholds outlined above and as a result has recorded a liability with respect to the carried interest fee in the amount of $9,972 ( nil). This reflects Management s best estimate in light of the current status of the redevelopment programs and the fair value of the investment properties. The Fund intends to pay distributions to Unitholders on a quarterly basis within 15 days following the end of each quarter. Three months ended Per Unit Year ended Per Unit Class A $ $ 1,803 $ $ 2,667 Class B Class C , ,308 U.S. Holding LP Total $ 3,947 $ 5,931 Three months ended Per Unit Year ended Per Unit Class A $ $ 769 $ $ 1,475 Class B Class C ,273 U.S. Holding LP Total $ 1,691 $ 3,172 Funds From Funds Operations From Operations ( FFO ) and ( FFO ) Distributable and Distributable Cash Flow ( DCF ) Cash Flow ( DCF ) FFO is a measure of operating performance based on the funds generated by the business before reinvestment or provision FFO is for a measure other capital of operating needs. performance FFO as presented based on is the based funds on generated the recommendations by the business of before the Real reinvestment Property Association or provision of Canada, for other except capital for needs. the add-back FFO as presented of the provision based on for the carried recommendations interest fees. of It the may Real not, Property however, be comparable Association to similar of Canada, measures except for presented the add-back by other of the real provision estate trusts for carried or companies interest fees. in It similar may not, or however, different be industries. comparable The Fund to similar considers measures FFO a presented useful measure by other when real estate determining trusts or companies the cash flow in similar available or different for distribution to Unitholders industries. as outlined The Fund above considers in Distributions. FFO a useful measure when determining the cash flow available for distribution to Unitholders as outlined above in Distributions. The FFO payout ratio, a non-ifrs financial measure, compares distributions declared to FFO. The Fund considers The this FFO ratio payout to be ratio, an a important non-ifrs financial measure measure, of the sustainability compares distributions of distributions declared relative to FFO. to The its Fund targeted yield. considers this ratio to be an important measure of the sustainability of distributions relative to its targeted yield. DCF is defined as cash flow generated by the Fund, less any amounts the General Partner may reasonably decide it considers DCF is necessary defined as for cash the flow payment generated of any by the costs, Fund, or less reserves, any amounts that have the General been or Partner are reasonably may reasonably expected decide to be incurred. it considers necessary for the payment of any costs, or reserves, that have been or are reasonably expected to be incurred. A reconciliation of net income and comprehensive income to FFO and DCF is as follows: Three months ended Year ended Net income and comprehensive income $ (4,131) $ 1,591 $ 14,585 $ 4,742 Adjustments: Fair value adjustment of investment properties (4,424) 366 (27,622) (2,746) IFRIC 21 realty taxes adjustment (502) (447) - (303) Fair value adjustment of interest rate swaps 468 (190) 1,299 (190) Amortization of unit offering costs Foreign exchange (gain) loss (1,955) (1,871) (4,911) (3,172) Distributions to Unitholders and U.S. Holding LP 3,947 1,691 5,931 3,172 Deferred tax expense (2,029) 7,033 1,900 Provision for carried interest fee 9,972 9,972 Funds from operations ( FFO ) $ 1,527 $ 1,310 $ 7,014 $ 4,022 Interest expense mark-to-market adjustment (115) (115) (458) (300) Amortization of mortgages payable financing costs Mortgage principal repayment (202) (136) (767) (295) Distributable Cash Flow $ 1,292 $ 1,132 $ 6,116 $ 3,632 FFO per unit: Class A unit Class B unit Class C unit Total distributions declared to Unitholders and U.S. Holding LP $ 3,947 $ 1,691 $ 5,931 $ 3,172 FFO payout ratio 258.4% 129.1% 84.6% 78.9% Distributable cash flow payout ratio 305.3% 149.4% 97.0% 87.3% The Fund has targeted a total return objective of a 15% IRR (or average annualized rate of return) on a pre-tax basis, net of all fees and expenses, inclusive of an annual cash distribution yield of 4% to 5% (which includes the allocation to Unitholders of U.S. taxes paid by a subsidiary of the Fund). In October, the investment period ended and the Fund is no longer pursuing the acquisition of additional investment properties, therefore, the General Partner can reduce its cash reserves. As a result, in Q4 the General Partner approved an amount that exceeded the annual targeted cash distribution yield of 4% to 5% and achieving DCF of over 90% for the Year, which resulted in DCF of over 300% in Q4. In addition, for the purposes of FFO, the provision for the carried interest fee has been removed as it is the intention of the Fund to pay this amount predominantly from the net proceeds on disposition of the investment properties

12 Statements of Financial Position Cash and cash equivalents $ 5,553 $ 8,516 Other assets 997 4,350 Assets held for sale 98,298 - Investment properties 139, ,062 Total assets $ 244,348 $ 216,928 Accounts payable and accrued liabilities 2,504 2,292 Distributions payable 3,947 1,691 Promissory notes payable - 3,380 Tenant rental deposits and prepaid rents Current tax liability Liabilities held for sale 58,433 - Mortgages payable 80, ,919 Deferred tax liability 8,934 1,900 Carried interest fee liability 9,972 - Net liabilities attributable to Unitholders 69,051 60,526 Net liabilities attributable to U.S. Holding LP 10,355 8,460 Total liabilities including net liabilities attributable to Unitholders and U.S. Holding LP $ 244,348 $ 216,928 ASSETS Investment Properties As at the fair value of the investment properties was $139,500 ( $204,062) and reflects a fair value gain of $16,541 ( $3,049) recognized during the Year. As at, the Fund reclassified three investment properties as held recognized for sale during with the a fair Year. value As at of December $97,150 ( 31,, nil). the Fund Fair value gains of $11,081 reclassified ( three nil) were investment recognized properties during as held the for Year sale in with relation a fair to value the of assets $97,150 held ( for sale. nil). Fair During value the gains Year, of the Fund invested $11,081 ( $4,966 nil) ( were recognized $11,351) into during the the investment Year relation properties to the assets part held of its for rehabilitation sale. During the programs. Year, the Fund invested $4,966 ( $11,351) into the investment properties as part of its rehabilitation programs. The Fund s assets continue to perform consistent with the initial underwriting. The rehabilitation programs at the Colonial The Fund s and assets Cary Portfolios continue to are perform complete consistent and the with Fund the initial anticipates underwriting. that the The increased rehabilitation cash programs flows, which at are mainly the Colonial attributable and Cary to the Portfolios rehabilitation are complete program, and the will Fund continue anticipates to increase that the increased asset value. cash The flows, rehabilitation which are programs at Lake Ellenor and Alexander Pointe are substantially complete and are producing increased rental rates in a manner consistent, or in some cases higher, than our initial underwriting. Assets held for sale As at, the Fund has reclassified three investment properties as held for sale. The Fund has entered into an agreement for the sale of Lynden Square, subsequent to year-end and Management has committed to a plan of sale for two other investment properties Saratoga Ridge and Granite Park. These assets are available for immediate sale and the sale is highly probable. Other Assets Other assets as at are $997 ( $4,350), which includes tenant and other receivables, fair value of interest rate swaps, prepaid expenses and other assets, holdbacks in escrow and due from Operator. LIABILITIES Mortgages Payable Prepaid expenses and other assets $ 356 Holdbacks in escrow 792 Investment properties 97,150 Assets held for sale 98,298 Accounts payable and accrued liabilities 316 Tenant rental deposits and prepaid rents 233 Mortgages payable 57,884 Liabilities related to assets held for sale 58,433 Net assets held for sale $ 39,865 Minimum future principal repayments $ 78,626 $ 135,933 Mark-to-market adjustment 2,449 2,907 Unamortized financing costs (424) (921) $ 80,651 $ 137,919 The Fund takes a conservative approach to leverage and actively manages its mortgage portfolio to reduce interest costs while ensuring it is not exposed to interest rate volatility risk. Currently the risk-free interest rates underlying mortgage financings are at historically low levels. This provides an opportunity for the Fund to reduce the risk of increased interest rates by securing long-term, fixed interest rate mortgages. Mortgages payable at fixed interest rates bear interest at rates ranging between 3.79% and 5.78% at December 31, ( 3.75% and 5.78%) with a weighted average rate of 5.16% at ( 4.45%), and mature between 2020 and Mortgages payable at variable interest rates bear interest at rates of one-month LIBOR plus 1.70% which at, is 1.86% ( 1.87%) with a weighted average rate of 1.85% at ( 1.87%) and mature in Collectively, the weighted average interest rate on mortgages payable as at is 4.11% ( 4.00%). The Fund has entered into two swap agreements for a notional amount of $13,975 and $12,000 maturing on November 26, 2020 and December 10, 2020 respectively, which commercially fixes the interest rate on two of the Fund s mortgages at 4.14% and 4.27%. The effective dates for the interest rate swaps are November 26, 19 20

13 and December 10,. The fair value of the swaps at is a liability of $1,109 ( asset of $190) which resulted in a fair value adjustment of $468 and $1,299 for Q4 and the Year respectively. SUMMARY OF QUARTERLY RESULTS The summary of quarterly results beginning the three month period ended March 31, are as follows: During the Year, the Fund increased mortgage financing by $1,514 ( nil) to fund the rehabilitation programs at two investment properties. Dec 31, Sept 30, Jun 30, Mar 31, Dec 31, Sept 30, Jun 30, Mar 31, (1) (1) (1) (1) Mortgages payable are secured by the investment properties and are guaranteed by the Operator and/or the Operator s key principal. Partners Capital Each unit entitles the holder to the same rights and obligations as all other Unitholders and no Unitholder is Each unit entitles the holder to the same rights and obligations as all other Unitholders and no Unitholder entitled to any privilege, priority or preference in relation to any other holder of units, subject to the is entitled to any privilege, priority or preference in relation to any other holder of units, subject to the proportionate entitlement of the holders of Class A units, Class B units and Class C units to participate in proportionate entitlement of the holders of Class A units, Class B units and Class units to participate in distributions distributions made by made the by Fund the Fund and to and receive to receive proceeds proceeds upon upon termination of of the Fund, in each case case based based on on the proportionate the proportionate share of share each of class each class of units of units (taking (taking into into account the the agents fees incurred in in connection with with the issuance the issuance of such of units, such units, as applicable). as applicable). Class A and Class Class A and B Class units B are units publicly are publicly offered; offered; however, however, there there is is no no market through which these units units may may be sold or be redeemed. sold or redeemed. Class B Class units B units differ differ from from Class Class A units A units in in that that they have a minimum commitment by by an an investor investor of $20 (Canadian of $20 (Canadian dollars), dollars), include include a reduced a reduced agents agents fee fee and and there is is no trailer fee payable in in respect of of the Class the B units. Class B units. The Class C units are offered by private placement and are designed for the Manager, certain institutional, high net worth and other investors. The Class C units differ from Class A and Class B units as there are no agent or trailer fees for the Class C units. The Fund is not required to redeem units prior to the completion of the Term. Class A Unitholders $ 36,658 $ 32,255 Class B Unitholders Class C Unitholders 31,655 27,625 U.S. Holding LP 10,355 8,460 General Partner 8 7 Total net liabilities attributable to Unitholders and U.S. Holding LP $ 79,406 $ 68,986 On March 15,, the Fund completed a subsequent issuance of 567,500 Class C units for net proceeds of $5,568. On May 24,, the Fund completed a follow-on public offering from treasury of 1,100,746 Class A units for net proceeds of $10,499; and 66,500 Class B units for net proceeds of $611. Also on May 24,, the Fund completed a private placement of 270,298 Class C units for net proceeds of $2,723. Included in the net proceeds are issuance costs of $801 on these offerings which includes agents commissions, legal and structuring costs. In May, Operating LP completed a private placement of 500,000 Class A units for net proceeds of $5,000 received from U.S. Holding LP. On December 10,, the Fund completed a subsequent issuance of 293,477 Class C units, for proceeds of $3,061. As at, the outstanding units of the Fund is: Class A 3,345,096; Class B 66,500 and Class C 2,736,275. During the Year, the Fund did not issue any Class A, B or C units. Revenue from rental operations $ 6,733 $ 6,698 $ 6,624 $ 6,439 $ 5,537 $ 5,010 $ 4,294 $ 3,246 Total rental expenses 2,871 2,704 2,525 4,375 2,109 1,859 1,624 2,311 Net rental income 3,862 3,994 4,099 2,064 3,428 3,151 2, General and administrative expenses Asset management fees Net income (loss) before undernoted items 3,441 3,703 3,887 1,808 3,110 2,926 2, Foreign exchange gain (loss) 1,955 2,810 (2,101) 2,247 1,871 (1,348) 1, Net finance costs 6,032 2,274 2,825 2,643 3,024 2,068 1,917 1,224 Net income (loss) before undernoted items (636) 4,239 (1,039) 1,412 1,957 (490) 2, Fair value adjustment of investment properties 4,424 8,678 4,861 9,659 (366) 2,070 (119) 1,161 Provision for carried interest fee 9,972 Deferred and current income tax expense (2,053) 4,356 1,606 3,132 1, Net income (loss) and comprehensive income (loss) $ (4,131) $ 8,561 $ 2,216 $ 7,939 $ 1,591 $ 266 $ 1,959 $ 926 (1) amounts have been restated to include the effect of the property tax adjustment requirements of IFRIC 21, effective January 1,. The fluctuations in the quarterly results of the Fund are directly related to the impact on rental income from the acquisitions of new investment properties, foreign exchange gain/(loss), fair value adjustments recognized on the investment properties and the amount of distributions to Unitholders and U.S. Holding LP. In addition, the Fund recorded a provision for carried interest fees of $9,972 in Q4. CAPITAL STRUCTURE AND LIQUIDITY Capital structure The Fund defines its capital structure as the aggregate of partners equity (as recorded in the statement of financial position as net liabilities attributable to Unitholders and U.S. Holding LP ) and mortgages payable. The Fund manages its capital structure and cash generated from operations to ensure that there are sufficient resources to operate the investment properties, make capital and development expenditures, meet its debt servicing obligations, fund general administrative costs and make distributions to Unitholders and U.S. Holding LP Unitholders. The Manager aims to maintain a targeted loan-to-value of 65% on a consolidated basis, noting that the Fund will not exceed 70% loan-to-value on the incurrence of any new debt on a consolidated basis. As at March 30, 2015, the outstanding units of the Fund were: Class A 3,345,096; Class B 66,500 and Class C 2,736,