CALGARY, May 13 /CNW/ - Northern Property REIT (NPR.UN - TSX) announced its financial results for the three months ended March 31, 2008.
HIGHLIGHTS: - Q1 2008 DIPU of $0.46 compared to $0.39 in Q1 2007 - FFO per unit of $0.47 compared to $0.41 in Q1 2007 - Substantial same door NOI growth of 10% over Q1 2007 - Payout ratio 80.5% of distributable income - Acquisitions of $30.3 million in Q1 - REIT expands into Lloydminster and Nanaimo, B.C.
Total property revenue in the first quarter of 2008 increased 33.9% to $30.5 million from $22.8 million in the first quarter of 2007. During the same period Net Operating Income rose to $19.8 million from $14.2 million, an increase of 39.3%. The total assets of the REIT increased by 34.7% to $826.0 million at the end of Q1, 2008 compared to $613.2 million a year ago.
"Q1 2008 was a very strong quarter for the REIT," said Jim Britton, Northern Property President & CEO. "Our Q1 results are always subject to higher costs during the cold seasons and the winter of 2007/2008 was one of the coldest in recent memory. Results are further tempered by rapid increases in the cost of heating fuel in the NWT. Notwithstanding, our portfolios are performing well and the REIT's financial results reflect that strength."
Northern Property has acquired a significant number of net leased commercial buildings and seniors' housing in recent years. This lessens the REIT's exposure to the current volatile utility market.
Rental market conditions were buoyant in the quarter particularly in Fort McMurray, Yellowknife, Iqaluit and St. John's. Overall market vacancy rate for the REIT increased slightly from 3.2% to 3.3% compared to the same quarter a year ago. Renovation vacancy was also up from 0.6% to 1.3%. The vacancy increases reflect the acquisition of properties in Fort Nelson, B.C. which normally operate at a vacancy level higher than Canadian norms - in the order of 12%. This high vacancy factor was reflected in the portfolio's acquisition price.
NPREIT's CEO went on to say, "Four of our five operating Regions experienced banner conditions in Q1 reflecting highly positive local economic conditions. At the same time we have experienced a bit of a slowdown in our north eastern B.C./Grande Prairie Region related to difficult forestry industry conditions. We are hopeful that resurgent coal, natural gas and agriculture industries in this Region will offset much of this in the coming years."
During Q1 the REIT closed on $30.3 million in acquisitions. Included were a total of 311 residential units: 99 multifamily units in Nanaimo, 151 in Lloydminster and 48 master leased seniors units in Newfoundland. Two Yellowknife commercial buildings with a total of 25,124 square feet completed the quarter's acquisition program.
"Northern Property slowed up its acquisition activity during Q1," Mr. Britton reported. "We entered 2008 with an aggressive business plan but were greeted with capital and credit market conditions which dictated a much greater level of caution. Now that real estate capital markets appear to have returned to a semblance of health we will continue our quest for accretive real estate."
The REIT continued to benefit from low residential interest rates. Weighted average interest costs declined to 5.29% compared to 5.47% at the end of Q1, 2007 and 5.39% at December 31, 2007. Approximately $42 million of mortgages with an average rate of 6.15% are expected to be renewed during the remainder of 2008 in a debt market which presently offers substantially lower rates. To date in 2008, approximately $60 million in mortgages have been financed or refinanced at rates ranging from 3.87% to 6.48%.
Trust administration costs at $1,869,000 were unusually high in Q1, reflecting approximately $400,000 of non-recurring costs booked during the quarter.
The REIT distributed 80.5% of its distributable income to unit-holders in Q1 thus maintaining one of the lowest payout ratios in the industry.
NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST
Consolidated Balance Sheets
(Thousands of dollars)
-------------------------------------------------------------------------
March 31, December 31,
2008 2007
Unaudited Audited
$ $
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ASSETS
Rental properties and other capital
assets (Note 4) 790,310 765,447
Capital improvements in progress 2,908 1,957
Capital assets under development 5,048 1,257
Prepaid expenses and other assets (Note 5) 8,989 12,893
Accounts receivable 4,463 5,059
Tenant security deposits 3,907 2,917
Deferred rent receivable 2,380 2,039
Loans receivable 697 479
Intangible assets (Note 6) 7,269 7,062
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825,971 799,110
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LIABILITIES
Mortgages and loans payable (Note 7) 417,606 401,909
Bank indebtedness (Note 8) 38,539 25,304
Accounts payable and accrued liabilities 14,509 13,993
Distributions payable 3,085 3,083
Future income tax liability (Note 11) 36,103 36,183
Intangible liabilities (Note 6) 498 571
Non-controlling interest 755 -
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511,095 481,043
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UNITHOLDERS' EQUITY 314,876 318,067
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825,971 799,110
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See accompanying notes to the consolidated financial statements.
APPROVED BY THE BOARD
Trustee
--------------------------
Trustee
--------------------------
NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Earnings and Comprehensive Earnings
Three Months Ended March 31
(Thousands of dollars, except per unit amounts)
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2008 2007
Unaudited Unaudited
$ $
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REVENUE
Rental revenue 29,852 22,345
Other property income 658 444
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30,510 22,789
Operating expenses (10,757) (8,605)
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NET OPERATING INCOME 19,753 14,184
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EXPENSES
Interest on mortgages (5,944) (4,638)
Amortization (6,487) (4,725)
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(12,431) (9,363)
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EARNINGS FROM CONTINUING OPERATIONS BEFORE
THE UNDERNOTED 7,322 4,821
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OTHER INCOME (EXPENSES)
Trust administration costs (1,869) (1,190)
Interest on operating facility (450) (340)
Interest and other income 186 154
Gain on settlement of debt 577 694
Gain on sale of rental properties 136 76
Non-controlling interest (15) -
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(1,435) (606)
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EARNINGS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 5,887 4,215
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INCOME TAXES (Note 11)
Current (86) (117)
Future recovery 80 91
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(6) (26)
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EARNINGS FROM CONTINUING OPERATIONS 5,881 4,189
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EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS - (5)
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NET EARNINGS 5,881 4,184
Other comprehensive earnings 182 -
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COMPREHENSIVE EARNINGS 6,063 4,184
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Net Earnings per unit (Note 13)
Basic and Diluted:
Continuing operations $0.24 $0.21
Discontinued operations - -
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$0.24 $0.21
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See accompanying notes to the consolidated financial statements.
NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Unitholders' Equity
(Thousands of dollars)
-------------------------------------------------------------------------
Cumulative Cumulative Cumulative
Capital Contributed Net Distri-
Unaudited (Note 13) Surplus Earnings butions
-------------------------------------------------------------------------
December 31, 2007 366,789 1,023 63,354 (113,154)
Comprehensive earnings - - 5,881 -
Distributions to
unitholders - - - (9,254)
Issuance of units - - - -
Issuance costs - - - -
Long term incentive
units granted - - - -
Long term incentive
plan units issued 398 (398) - -
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March 31, 2008 367,187 625 69,235 (122,408)
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-----------------------------------------------
Accumulated
Other
Compre-
hensive
Unaudited Earnings Total
-----------------------------------------------
December 31, 2007 55 318,067
Comprehensive earnings 182 6,063
Distributions to
unitholders - (9,254)
Issuance of units -
Issuance costs - -
Long term incentive
units granted - -
Long term incentive
plan units issued - -
-----------------------------------------------
March 31, 2008 237 314,876
-----------------------------------------------
-----------------------------------------------
-------------------------------------------------------------------------
Cumulative Cumulative Cumulative
Capital Contributed Net Distri-
Unaudited (Note 13) Surplus Earnings butions
-------------------------------------------------------------------------
December 31, 2006 261,730 1,249 55,664 (81,463)
Comprehensive earnings - - 4,184 -
Distributions to
unitholders - - - (7,004)
Issuance of units - - - -
Issuance costs - - - -
Long term incentive
units granted - - - -
Long term incentive
plan units issued 580 (580) - -
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March 31, 2007 262,310 669 59,848 (88,467)
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-----------------------------------------------
Accumulated
Other
Compre-
hensive
Unaudited Earnings Total
-----------------------------------------------
December 31, 2006 - 237,180
Comprehensive earnings - 4,184
Distributions to
unitholders - (7,004)
Issuance of units - -
Issuance costs - -
Long term incentive
units granted - -
Long term incentive
plan units issued - -
-----------------------------------------------
March 31, 2007 - 234,360
-----------------------------------------------
-----------------------------------------------
See accompanying notes to the consolidated financial statements.
NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Cash Flows
(Thousands of dollars)
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2008 2007
Unaudited Unaudited
$ $
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CASH FLOWS RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Net earnings from continuing operations 5,881 4,189
Adjustments for:
Deferred rental revenue (341) (275)
Amortization 6,487 4,725
Amortization of fair value of debt 118 31
Amortization of above and below market leases (59) (34)
Gain on settlement of debt (577) (694)
Gain on sale of rental properties (136) (76)
Future income taxes (recovery) (80) (91)
Long-term incentive plan 208 188
Other comprehensive earnings 182 -
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Cash flows from continuing operations 11,683 7,963
Cash flows used in discontinued operations - (5)
Changes in non-cash working capital 3,404 (11,791)
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15,087 (3,833)
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FINANCING
Proceeds from mortgages and loans 38,958 28,031
Proceeds from sale of rental properties 395 538
Repayment of mortgages and loans payable (21,851) (12,856)
Distributions to unitholders (9,252) (7,000)
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8,250 8,713
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INVESTING
Acquisition of rental properties and
other assets (30,852) (1,202)
Capital assets under development and
capital improvements (4,742) (2,197)
Building capital maintenance (978) (529)
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(36,572) (3,928)
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NET DECREASE (INCREASE) IN BANK INDEBTEDNESS (13,235) 952
BANK INDEBTEDNESS, BEGINNING OF PERIOD (25,304) (22,307)
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BANK INDEBTEDNESS, END OF PERIOD (38,539) (21,355)
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SUPPLEMENTARY INFORMATION
Interest paid 6,126 4,875
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Interest received 126 67
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Income taxes paid 80 -
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See accompanying notes to the consolidated financial statements.
NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST
Notes to the Consolidated Financial Statements (unaudited)
Three Months Ended March 31, 2008 and 2007
(Columnar amounts expressed in thousands of dollars except where
indicated)
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1. DESCRIPTION OF THE TRUST
Northern Property Real Estate Investment Trust ("NPREIT" or the
"REIT") is an unincorporated open-ended real estate investment trust
that invests in and owns a portfolio of residential and commercial
income producing properties.
2. BASIS OF PRESENTATION
These unaudited interim consolidated financial statements of NPREIT
have been prepared in accordance with the recommendations of the
Handbook of the Canadian Institute of Chartered Accountants ("CICA")
and are consistent with those used in the audited consolidated
financial statements as at and for the year ended December 31,
2007, except as disclosed in Note 3. These unaudited interim
consolidated financial statements do not include all of the
disclosures required by Canadian generally accepted accounting
principles ("Canadian GAAP") applicable to annual financial
statements; therefore, they should be read in conjunction with the
December 31, 2007 audited consolidated financial statements.
The REIT carries out certain of its activities through partnerships
and records its proportionate share of assets, liabilities, revenue
and expenses of all partnerships in which it participates.
Investments where the REIT exercises significant influence are
accounted for using the equity method.
The preparation of financial statements in accordance with Canadian
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and to make
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and
expenses during the reported period. Actual results may differ from
those estimates.
3. CHANGE IN ACCOUNTING POLICY AND RECENT ACCOUNTING PRONOUNCEMENTS
Change in accounting policy
Effective January 1, 2008, NPREIT adopted CICA Handbook Section 1535,
Capital Disclosures. This section requires the disclosure of (i) an
entity's objectives, policies and process for managing capital; (ii)
quantitative data about an entity's managed capital; (iii) whether an
entity has complied with capital requirements; and (iv) if an entity
has not complied with such capital requirements, the consequences of
such non-compliance. This information has been presented in Note 17.
Effective January 1, 2008, NPREIT adopted CICA Handbook Section 3862,
Financial Instruments - Disclosures and 3863 Financial Instruments -
Presentation. These sections require incremental disclosures
regarding the significance of financial instruments for the REIT's
financial position and performance; and the nature, extent and
management of risks arising from financial instruments to which the
REIT is exposed. This information has been presented in Note 17.
Effective January 1, 2008, NPREIT adopted CICA Handbook Section 3031,
Inventory. This section establishes standards for the measurement of
inventories, allocation of overhead, accounting for write-downs and
disclosures.
The new standards have no material impact on the REIT's consolidated
statement of earnings beyond additional disclosure in the notes to
the financial statements.
Recent accounting pronouncements
New accounting standards are anticipated regarding the accounting for
business combinations. The proposed CICA Exposure draft regarding
business combinations may result in a decrease in NPREIT's earnings
during periods in which acquisitions are completed as the proposed
accounting standards would require the expensing of acquisition costs
(such as legal costs) in connection with a business combination in
the period in which they are incurred. Currently these costs are
allocated to the cost of the assets acquired under the business
combination and amortized over the expected useful life of the
assets.
In February 2008, the CICA issued Section 3064, Goodwill and
Intangible Assets, replacing Section 3062, Goodwill and Other
Intangible Assets and Section 3450, Research and Development Costs.
Various changes have been made to other sections of the CICA Handbook
for consistency purposes. The new Section will be applicable to
financial statements relating to fiscal years beginning on or after
October 1, 2008. Accordingly, the REIT will adopt the new standards
for its fiscal year beginning January 1, 2009. It establishes
standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and of
intangible assets by profit-oriented enterprises. Standards
concerning goodwill are unchanged from the standards included in the
previous Section 3062. NPREIT is currently evaluating the impact of
the adoption of this new Section on its consolidated financial
statements. NPREIT does not expect that the adoption of this new
Section will have a material impact on its consolidated financial
statements.
4. RENTAL PROPERTIES AND OTHER CAPITAL ASSETS
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March 31, 2008 December 31, 2007
Accumulated Net Accumulated Net
Amortiz- Book Amortiz- Book
Cost ation Value Cost ation Value
$ $ $ $ $ $
---------------------------------------------------------------------
Land 87,100 - 87,100 82,332 - 82,332
Buildings 748,903 60,494 688,409 724,355 55,525 668,830
Furniture,
fixtures and
equipment 7,387 2,996 4,391 6,942 2,767 4,175
Vehicles 1,108 612 496 1,050 561 489
Capital and
leasehold
improvements 17,382 7,514 9,868 16,317 6,758 9,559
Equipment under
capital lease 212 166 46 212 150 62
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862,092 71,782 790,310 831,208 65,761 765,447
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NPREIT periodically reviews the carrying value of its rental
properties and, if it is determined that the carrying value of a
building exceeds the undiscounted estimated future net cash flow
expected to be received from the ongoing use and residual worth of
the property, the carrying value of the building is reduced to its
estimated fair value.
NPREIT acquired properties in the three months ended March 31, 2008
for a total purchase price of $30.3 million (2007 - $1.8 million).
The acquisitions were financed as follows:
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Three months Three months
ended ended
March 31, March 31,
2008 2007
$ $
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Property acquisitions:
Cash paid 30,343 1,835
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Total purchase price of property acquisitions 30,343 1,835
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Residential - units
Rental 263 1
Seniors' 48 -
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311 1
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Commercial - Sq ft 25,124 43,701
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During the quarter, the REIT disposed of two properties for gross
proceeds of $395,000 and a gain on sale of $136,000.
5. PREPAID EXPENSES AND OTHER ASSETS
---------------------------------------------------------------------
March 31, December 31,
2008 2007
$ $
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Refundable deposits and mortgage
proceeds held in trust 2,708 7,998
Prepaid equity leases 2,296 2,339
Prepaid expenses 3,452 2,047
Other 533 509
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8,989 12,893
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6. INTANGIBLE ASSETS AND LIABILITIES
Intangible assets are comprised of the value of above-market leases,
in-place leases and lease origination costs for rental property
acquisitions completed. Intangible liabilities are comprised of the
value of below-market leases for rental property acquisitions
completed.
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March 31, 2008 December 31, 2007
Accumulated Net Accumulated Net
Amortiz- Book Amortiz- Book
Cost ation Value Cost ation Value
$ $ $ $ $ $
---------------------------------------------------------------------
Above-market
leases 313 111 202 313 97 216
In-place leases 6,565 890 5,675 6,134 672 5,462
Lease origination
costs 1,669 277 1,392 1,570 186 1,384
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8,547 1,278 7,269 8,017 955 7,062
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Below-market
leases 1,203 705 498 1,203 632 571
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7. MORTGAGES AND LOANS PAYABLE
---------------------------------------------------------------------
March 31, December 31,
2008 2007
$ $
---------------------------------------------------------------------
Mortgages and loans payable 434,006 416,334
Fair value adjustment (9,103) (8,379)
Deferred financing costs (7,297) (6,046)
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417,606 401,909
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Mortgages and loans payable bear interest at rates ranging from 3.83%
to 12.13% and have a weighted average rate of 5.29% as at March 31,
2008 (December 31, 2007 - 5.39%). Mortgages and loans are payable in
monthly installments of blended principal and interest of
approximately $3.1 million. The mortgages mature between 2008 and
2025 and are secured by charges against specific properties. Land and
buildings with a carrying value of $625.4 million have been pledged
to secure mortgages and loans payable of the REIT. The fair value of
mortgages payable at March 31, 2008 is approximately $441.4 million
(December 31, 2007 - $408.9 million).
Minimum future principal payments required are as follows:
-------------------------------------------------------
$
-------------------------------------------------------
2008 42,352
2009 48,178
2010 29,371
2011 24,943
2012 42,672
Subsequent 246,490
-------------------------------------------------------
434,006
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8. BANK INDEBTEDNESS
NPREIT has a revolving line of credit in the amount of $40.0 million
for acquisition and operating purposes, bearing interest at prime or
bankers acceptance rate with a maturity of May 31, 2008. Specific
properties with a carrying value of $88.9 million have been pledged
as collateral security for the line of credit. At March 31, 2008,
NPREIT had utilized $38.5 million (December 31, 2007 -
$25.3 million). NPREIT has obtained a temporary increase in its
revolving line of credit of $5.0 million to $45.0 million to bridge
the timing between completion of acquisitions and obtaining mortgage
financing.
NPREIT has an acquisition facility in the amount of $30.0 million for
acquisition and general corporate purposes to a maximum of 75% of the
appraised value of the acquisition, bearing interest at prime with a
maturity date of July 31, 2008. At March 31, 2008, NPREIT had
utilized $ nil (December 31, 2007 - $ nil).
9. LONG-TERM INCENTIVE PLAN AND UNIT OPTION PLAN
NPREIT has a Long-Term Incentive Plan ("LTIP") for the executives of
NPREIT, based on the results of each fiscal year. Units granted and
issued under the LTIP are as follows:
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Number
of Units
---------------------------------------------------------------------
Balance - December 31, 2007 43,586
Units vested and issued - January, 2008 (6,033)
Units vested and issued - February, 2008 (11,592)
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Balance - March 31, 2008 25,961
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The total amount of LTIP awards are determined at the end of each
fiscal year by the Board of Trustees based on an assessment of the
performance of the REIT and the individual performance of the
executives. The number of units issued is based on the trading price
on December 31 of each year. Pursuant to the policy, rights to units
vest in 1/3 tranches: immediately upon award, then 12 and 24 months
following. As at March 31, 2008, a total of 143,288 LTIP units had
vested and been issued (December 31, 2007 - 125,663).
The REIT has a Unit Option Plan (the "Option Plan"), which is subject
to the rules of the Toronto Stock Exchange ("TSX"). In accordance
with the Option Plan, the REIT may grant options to acquire units up
to a total of 1,830,429 units. All options to acquire units expire
after 5 years and vest as determined by the Governance and
Compensation Committee of the REIT. No options to acquire units have
been granted under the Option Plan.
10. EMPLOYEE UNIT PURCHASE PLAN
Under the terms of the Employee Unit Purchase Plan (the "EUPP"),
employees may invest a maximum of 5% of their salary in NPREIT trust
units and the REIT will contribute one unit for every three units
acquired by an employee. The units are purchased on the TSX at market
prices. During the three months ended March 31, 2008, employees
invested a total of $25,937 (2007 - $22,108) and the REIT contributed
$8,646 (2007 - $7,369). During the three months ended March 31, 2008,
1,795 units (2007 - 1,195 units) were purchased at an average cost of
$20.57 per unit (2007 - $26.07 per unit).
11. INCOME TAXES
NPREIT has certain corporate subsidiaries which are subject to income
tax on their respective taxable income at the applicable legislated
tax rates.
On June 22, 2007, the Budget Implementation Act, 2007, Bill C-52
("Bill C-52") received Royal Assent. Bill C-52 will not apply to an
entity that qualifies for the real estate investment trust exemption
(the "REIT Exemption"). Where an entity does not qualify for the REIT
Exemption certain distributions will not be deductible in computing
income for tax purposes and will be subject to tax on such
distributions at a rate comparable to the general corporate income
tax rate. Bill C-52 provides for a transition period for publicly
traded entities that existed prior to November 1, 2006 and is not
expected to apply to NPREIT until 2011.
GAAP requires NPREIT to recognize future income tax assets and
liabilities based on estimated temporary differences expected as at
January 1, 2011. Under the current legislation, NPREIT does not
appear to qualify for the REIT Exemption. The future income tax
provision arises from temporary differences between the estimated
accounting and tax values of NPREIT's assets and liabilities at
January 1, 2011 and has been calculated using the expected tax rates
of 28.0% to 29.5%.
NPREIT has certain capital assets which have a lower tax value than
their applicable accounting value. NPREIT has therefore recorded a
future tax liability of $36.1 million (March 31, 2007 -
$10.2 million) using an expected income tax rate ranging from 19.63%
to 29.5% (2007 - 19.63% - 29.5%).
The future tax liabilities arise from the temporary differences
summarized below:
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March 31, December 31,
2008 2007
$ $
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Future tax liabilities arising from
temporary differences between accounting
and tax basis of:
Rental property assets in corporate
subsidiaries 9,927 10,007
Acquisition of rental property assets in
a business combination 9,476 9,476
Rental properties 14,771 14,771
Other assets 1,929 1,929
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36,103 36,183
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The provision for income taxes differs from the results which would
be obtained by applying the combined federal and provincial income
tax rate to net income before taxes. The difference results from the
following:
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Three months Three months
ended ended
March 31, March 31,
2008 2007
$ $
---------------------------------------------------------------------
Current income taxes 86 117
Future income taxes (recovery) (80) (91)
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Total income tax expense 6 26
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12. UNITHOLDERS' CAPITAL
Total NPREIT Trust units and Class B units issued, as the result of
an exchange of Class B limited partnership units of Northern Property
Limited Partnership (the "Class B LP Units"), outstanding and
eligible for distributions at March 31, 2008 is 25,021,714
(December 31, 2007 - 25,004,089), representing net proceeds of
$367.2 million, net of issue costs of $19.6 million (December 31,
2007 - $366.8 million, net of issue costs of $19.6 million). The
number of units issued and outstanding is as follows:
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Trust Issue Class B
Date Description Units Price LP Units
---------------------------------------------------------------------
December 31,
2007 22,536,988 2,467,101
January 02, LTIP units
2008 issued 6,033 $23.12 -
February 16, LTIP units
2008 issued 11,592 $22.35 -
Class B LP units exchanged 70,515 - (70,515)
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March 31,
2008 22,625,128 2,396,586
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Issue
Date Description Price Total Units $
---------------------------------------------------------------------
December 31,
2007 25,004,089 366,789
January 02, LTIP units
2008 issued - 6,033 139
February 16, LTIP units
2008 issued - 11,592 259
Class B LP units exchanged - - -
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March 31,
2008 25,021,714 367,187
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Trust units
Total number of trust units of the REIT outstanding as at March 31,
2008 is 22,625,128 (December 31, 2007 - 22,536,988) representing a
net book value of $336.3 million (December 31, 2007 -
$334.5 million), net of issue costs.
Class B Exchangeable Limited Partnership Units and Special Voting
Units
Total number of Class B LP Units and special voting units of Northern
Property Limited Partnership, a controlled limited partnership
outstanding as at March 31, 2008, is 2,396,586 (December 31, 2007 -
2,467,101) representing a net book value of $30.9 million
(December 31, 2007 - $32.3 million).
13. NET EARNINGS PER UNIT INFORMATION
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Three months Three months
ended ended
March 31, March 31,
2008 2007
$ $
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Earnings from continuing operations 5,881 4,189
Earnings (loss) from discontinued operations - (5)
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Net Earnings 5,881 4,184
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Weighted average units for basic
earnings per unit 25,016,934 20,299,465
Effect of dilutive units to be issued in
respect of the long-term incentive plan 30,741 32,301
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Weighted average units for diluted
Earnings per unit 25,047,675 20,331,766
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Basic and Diluted Net Earnings per unit:
Continuing operations $0.24 $0.21
Discontinued operations - -
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$0.24 $0.21
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14. GUARANTEES, COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, NPREIT may provide
indemnification commitments to counterparties in transactions such as
credit facilities, leasing transactions, service arrangements,
director and officer indemnification agreements and sales of assets.
These indemnification agreements may require NPREIT to compensate the
counterparties for costs incurred as a result of changes in laws and
regulations (including tax legislation) or as a result of litigation
claims or statutory sanctions that may be suffered by counterparties
as a consequence of the transaction. The terms of these
indemnification agreements may vary based on the contract and do not
provide any limit on the maximum potential liability. To date, NPREIT
has not made any significant payments under such indemnifications and
no amount has been accrued in the financial statements with respect
to these indemnification commitments.
In the normal course of operations, NPREIT becomes subject to various
legal and other claims. Management and its legal counsel evaluate
these claims and where required, accrue its best estimate of costs
relating to these claims. Management believes the outcome of these
claims will not have a material impact on NPREIT.
During the normal course of operations, NPREIT provided guarantees
for mortgages and loans payable relating to investments in
corporations and joint ventures where NPREIT owns less than 100%. The
mortgages and loans payable are secured by specific charges against
the properties owned by the corporations and joint ventures. In the
event of a default of the corporation or joint venture, NPREIT may be
liable for 100% of the outstanding balances of these mortgages and
loans payable. At March 31, 2008, NPREIT has provided guarantees
totalling $14.2 million (December 31, 2007 - $14.4 million). Of this
amount, $7.1 million has been included in mortgages and loans payable
(December 31, 2007 - $7.2 million). The mortgages bear interest at
rates ranging from 4.54% to 7.50% and mature June, 2008 to January,
2012 (December 31, 2007 - 4.54% to 7.50% and mature June, 2008 to
January, 2012). Land and buildings with a carrying value of
$10.4 million have been pledged to secure these mortgage and loans
payable.
NPREIT has entered into agreements for the development of the
following projects:
- A 48 unit multi-family residential apartment building located in
Dawson Creek, BC on land previously acquired by NPREIT.
Construction commenced in September 2007 and is expected to be
completed in Q3 2008. The estimated total cost of construction,
including the original cost of the land is approximately
$5.1 million.
- A 79 unit multi-family residential property building located in
Fort St. John, BC on land previously acquired by NPREIT.
Construction commenced in September 2007 and is expected to be
completed in Q4 2008. The estimated total cost of construction,
including the original cost of land, is approximately
$11.4 million.
- NPREIT commenced the development of a commercial property in
Yellowknife, NWT for a national retail tenant in September 2007
and is expected to be completed in Q3 2008. The estimated total
cost of construction is approximately $4.1 million.
- The development of a 189 unit multi-family residential apartment
building located in Grande Prairie, Alberta on land previously
acquired by NPREIT is expected to begin in 2008. The estimated
total cost of construction, including the original cost of land,
is approximately $22.9 million.
15. SEGMENTED INFORMATION
NPREIT considers residential rental, execusuites, seniors' and
commercial income producing properties to be separate segments
operating in five provinces and territories in Canada. The accounting
policies of the segments are as described in Note 2. Discontinued
operations are not allocated to individual segments. NPREIT has not
provided a reconciliation from Earnings from continuing operations
before other items to Net Earnings as all other items, except gain on
sale of rental properties and gain on settlement of debt, included in
the Consolidated Statement of Earnings are related only to the REIT
and are not allocated to the defined segments. In 2007 and 2008, gain
on sale of rental properties was earned in the residential rental and
commercial business segments in Nunavut and the Northwest
Territories, respectively. Gain on settlement of debt was earned in
the residential rental business segments in Alberta and the Northwest
Territories. Segmented information for NPREIT is provided below:
---------------------------------------------------------------------
March 31, Alberta BC Nfld NWT Nunavut Total
2008 $ $ $ $ $ $
---------------------------------------------------------------------
Residential
Rental 130,099 74,126 56,359 88,741 118,164 467,489
Execusuites - - 9,964 8,326 9,945 28,235
Seniors' 125,468 14,213 39,516 - - 179,197
---------------------------------------------------------------------
255,567 88,339 105,839 97,067 128,109 674,921
Commercial 10,279 21,705 1,272 91,713 21,596 146,565
Trust 4,485 - - - - 4,485
---------------------------------------------------------------------
TOTAL ASSETS 270,331 110,044 107,111 188,780 149,705 825,971
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
December 31, Alberta BC Nfld NWT Nunavut Total
2007 $ $ $ $ $ $
---------------------------------------------------------------------
Residential
Rental 119,189 60,875 55,963 88,633 122,730 447,390
Execusuites - - 9,921 7,438 10,015 27,374
Seniors' 126,006 14,238 32,923 - - 173,167
---------------------------------------------------------------------
245,195 75,113 98,807 96,071 132,745 647,931
Commercial 11,423 21,872 1,273 87,980 23,281 145,829
Trust 5,350 - - - - 5,350
---------------------------------------------------------------------
TOTAL ASSETS 261,968 96,985 100,080 184,051 156,026 799,110
---------------------------------------------------------------------
---------------------------------------------------------------------
Geographic Segments
---------------------------------------------------------------------
Three months
ended
March 31, Alberta BC Nfld NWT Nunavut Total
2008 $ $ $ $ $ $
---------------------------------------------------------------------
Rental revenue 7,943 3,202 3,618 8,909 6,180 29,852
Other income 166 81 100 266 45 658
Operating
expenses (1,692) (1,381) (1,421) (4,449) (1,814) (10,757)
---------------------------------------------------------------------
Net operating
income 6,417 1,902 2,297 4,726 4,411 19,753
Interest on
mortgages (2,290) (521) (600) (1,362) (1,171) (5,944)
Amortization (1,709) (789) (789) (1,758) (1,442) (6,487)
---------------------------------------------------------------------
EARNINGS FROM
CONTINUING
OPERATIONS
BEFORE OTHER
ITEMS 2,418 592 908 1,606 1,798 7,322
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months
ended
March 31, Alberta BC Nfld NWT Nunavut Total
2007 $ $ $ $ $ $
---------------------------------------------------------------------
Rental revenue 6,197 2,003 2,373 5,780 5,992 22,345
Other income 121 68 102 87 66 444
Operating
expenses (1,220) (828) (1,519) (3,233) (1,805) (8,605)
---------------------------------------------------------------------
Net operating
income 5,098 1,243 956 2,634 4,253 14,184
Interest on
mortgages (1,861) (330) (402) (960) (1,085) (4,638)
Amortization (1,283) (343) (439) (1,161) (1,499) (4,725)
---------------------------------------------------------------------
EARNINGS FROM
CONTINUING
OPERATIONS
BEFORE OTHER
ITEMS 1,954 570 115 513 1,669 4,821
---------------------------------------------------------------------
---------------------------------------------------------------------
Business Segments
---------------------------------------------------------------------
Three months Total
ended Execu- Residen- Commer-
March 31, Rental suites Seniors' tial cial Total
2008 $ $ $ $ $ $
---------------------------------------------------------------------
Rental revenue 18,505 1,929 3,979 24,413 5,439 29,852
Other income 529 32 - 561 97 658
Operating
expenses (7,578) (1,016) (5) (8,599) (2,158) (10,757)
---------------------------------------------------------------------
Net operating
income 11,456 945 3,974 16,375 3,378 19,753
Interest on
mortgages (3,468) (208) (1,603) (5,279) (665) (5,944)
Amortization (3,990) (281) (1,030) (5,301) (1,186) (6,487)
---------------------------------------------------------------------
EARNINGS FROM
CONTINUING
OPERATIONS
BEFORE OTHER
ITEMS 3,998 456 1,341 5,795 1,527 7,322
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months Total
ended Execu- Residen- Commer-
March 31, Rental suites Seniors' tial cial Total
2007 $ $ $ $ $ $
---------------------------------------------------------------------
Rental revenue 15,112 1,605 3,151 19,868 2,477 22,345
Other income 418 22 - 440 4 444
Operating
expenses (6,811) (962) (3) (7,776) (829) (8,605)
---------------------------------------------------------------------
Net operating
income 8,719 665 3,148 12,532 1,652 14,184
Interest on
mortgages (2,665) (202) (1,500) (4,367) (271) (4,638)
Amortization (3,236) (237) (744) (4,217) (508) (4,725)
---------------------------------------------------------------------
EARNINGS FROM
CONTINUING
OPERATIONS
BEFORE OTHER
ITEMS 2,818 226 904 3,948 873 4,821
---------------------------------------------------------------------
---------------------------------------------------------------------
16. RELATED PARTY TRANSACTIONS
A trustee of NPREIT leases space from NPREIT under normal commercial
terms. NPREIT earned rental revenue of $119,200 for the three months
ended March 31, 2008 (2007 - $107,921). Amounts outstanding in
accounts receivable pertaining to this lease were $ nil at March 31,
2008 (December 31, 2007 - $ nil).
A trustee of NPREIT is a senior partner of a law firm that provides
legal services to NPREIT in the ordinary course of business. Fees
paid for the three months ended March 31, 2008 were $9,325 (2007 -
$760).
A trustee of NPREIT is the Chairman of AgeCare Investments Ltd.
("AgeCare"), which leases six seniors' properties from NPREIT. For
the year ended March 31, 2008, NPREIT earned rental income, including
rental income earned on a straight-line basis over the term of the
lease, from AgeCare totalling $3.2 million (2007 - $3.2 million).
Amounts outstanding in accounts receivable pertaining to this lease
were $ nil at March 31, 2008 (December 31, 2007 - $ nil). In
addition, AgeCare is paid an annual advisory fee of $120,000 for
advisory services provided to NPREIT respecting prospective
acquisitions of seniors' properties. For the three months ended
March 31, 2008, NPREIT paid $30,000 for these services (2007 -
$30,000).
17. FINANCIAL INSTRUMENTS
Management has determined that the majority of the NPREIT's financial
assets are designated as loans and receivables, as defined by Section
3855 of the CICA Handbook, and are carried at amortized cost.
Management has also determined that all of its financial liabilities
have been designated as other financial liabilities and are carried
at amortized cost utilizing the effective interest method. Financial
instruments include loans receivable, other assets, accounts
receivable, tenant security deposits, mortgages payable, loans
payable, accounts payable and accrued liabilities, income taxes
payable and bank indebtedness. Unless otherwise specified, the fair
value of these instruments approximates their carrying values.
Utility cost risk
The REIT is exposed to utility cost risk, which results from the
fluctuation in utility prices for fuel oil, natural gas and
electricity, the primary utilities used to heat the REIT's
properties. The exposure to utility cost risk is restricted primarily
to the REIT's residential rental and execusuites portfolio. The
leases in the remainder of the REIT's portfolio generally provide for
recovery of operating costs, including utilities. Because of the
northern location of a portion of the REIT's portfolio, the exposure
to utility price fluctuations is more pronounced in the first and
last fiscal quarter of the year. The following discussion focuses on
the REIT's exposure in its residential portfolio.
NPREIT manages its exposure to utility risk through a number of
preventative measures, including retrofitting properties with energy
efficient appliances, fixtures and windows. With the exception of a
fixed price utility contract in place on certain residential rental
units in Alberta, NPREIT does not utilize hedges or forward contracts
in the management of exposure to utility risk. Management continues
to implement programs to reduce its utility risk exposure such as the
environmentally friendly wood pellet boilers installed in 2
properties in Yellowknife in 2006. Over the course of the next 18 to
24 months, management intends to install up to 6 more boilers in 16
additional buildings. Management expects the investment in these wood
pellet boilers to reduce the REIT's usage of fossil fuels which will
result in lower heating costs and reduce the impact on the
environment.
Exposure to Heating oil prices
Heating oil is the primary source of fuel for heating properties
located in Nunavut and the Northwest Territories. Exposure to
increases in the cost of heating oil is partially offset by the
ability to recover these increases from a significant proportion of
its commercial and some residential tenants. In Nunavut, the price of
heating oil is set by the Territorial government, which in 2008
resulted in the price of fuel oil being substantially lower than the
spot price. The Nunavut territorial government sets the price of
heating in the fall of each calendar year for the following 12
months. The sensitivity analysis below was completed assuming an
increase in the cost of heating oil in both Nunavut and the Northwest
Territories to 5% over the average price of heating oil in the
Northwest Territories for the three months ended March 31, 2008. If
the cost of heating oil increased by that percentage, net earnings
for the quarter would have decreased by $155,000.
Exposure to Natural gas prices
Natural gas is the significant source of fuel for heating properties
located in Alberta, northern BC and Inuvik. In Alberta, the
provincial government implemented a natural gas rebate program for
energy costs incurred from October through March. In addition, the
REIT has fixed price contracts for certain of its properties which
account for approximately 38% of the REIT's usage in Alberta. Natural
gas prices in Inuvik and BC are not subject to regulated price
control and the REIT does not use financial instruments to manage the
exposure to the price risk. For the properties in which NPREIT is
exposed to price exposure for natural gas, a 5% increase in the price
of natural gas will result in a $17,000 decrease in net earnings.
The fair value of the fixed price contracts is $12,000 (December 31,
2007 - ($180,000)) and is included in accounts payable and accrued
liabilities on the balance sheet. The adjustment to current market
price for the remaining commitment under the fixed price contracts is
included in other comprehensive income.
Exposure to Electricity prices
Electricity is the primary source of fuel for heating properties
located in Newfoundland as well as part of northern BC. In
Newfoundland, electricity is purchased from the provincially
regulated utility and is directly paid by the tenants for a
significant portion of the REIT's units. As there is not a
significant direct risk to NPREIT regarding the price of electricity,
a sensitivity analysis has not been prepared.
Liquidity risk
Ultimate responsibility for liquidity risk management lies with
management and the Board of Trustees of the REIT. The REIT manages
liquidity risk by managing mortgage and loan maturities to ensure a
relatively even amount of mortgage maturities in each year. The REIT
has a revolving line of credit in the amount of $40.0 million and an
acquisition facility in the amount of $30.0 million. Cash flow
projections are completed on a regular basis to ensure there is
adequate liquidity to maintain operating and investment activities in
addition to making monthly distributions to unitholders. The Board of
Trustees reviews the current financial results and the annual
business plan in determining appropriate distribution levels.
Credit risk
Credit risk arises from the possibility that tenants may not be able
to fulfill their lease commitments. The REIT's credit risk is
primarily attributable to tenant receivables. Tenant receivables are
comprised of a large number of tenants spread across the geographic
areas in which the REIT operates. There are no significant exposures
to single tenants with the exception of the Government of Canada,
which leases a large number of rental units in the Northwest
Territories and Nunavut. The Government of Canada is considered to be
a somewhat credit-worthy tenant with low to moderate risk of default.
NPREIT mitigates this risk through conducting thorough credit checks
on prospective tenants, requiring rental payments on the first of the
month, obtaining security deposits approximating one month's rent
from tenants where legislation permits, and geographic
diversification in its portfolio. The REIT records a specific bad
debt provision on balances owed to the REIT from past tenants and
provides an allowance for receivables from current tenants where the
expected amount to be collected is less than the actual accounts
receivable.
The amounts disclosed on the balance sheet are net of allowances for
uncollectible accounts, estimated by Management based on prior
experience and current economic conditions. Tenants are required to
pay rent on the first of each month, with the exception of certain
government leases where rent is due at the end of the month and
certain commercial tenants where operating cost recoveries are billed
in arrears. As such, the majority of tenant receivables are past due
at the balance sheet date.
The following is an aging of tenant and other receivables:
---------------------------------------------------------------------
March 31, December 31,
2008 2007
---------------------------------------------------------------------
0-30 days 1,253 1,068
31-60 days 269 186
61-90 days - 375
Over 90 days - 80
---------------------------------------------------------------------
Tenant receivables 1,522 1,709
Other receivables 3,191 3,600
Allowance for bad debts (250) (250)
---------------------------------------------------------------------
4,463 5,059
---------------------------------------------------------------------
---------------------------------------------------------------------
The reconciliation of changes in allowance for bad debts is as
follows:
---------------------------------------------------------------------
Three months
ended
March 31,
2008
---------------------------------------------------------------------
Balance, beginning of period 250
Amounts written off as uncollectible (41)
Additional allowance 41
---------------------------------------------------------------------
Balance, end of period 250
---------------------------------------------------------------------
---------------------------------------------------------------------
Interest rate risk
The REIT is exposed to interest rate risk on mortgages and loans
payable and does not hold any financial instruments to mitigate that
risk. The REIT utilizes both fixed and floating rate debt. Interest
rate risk related to floating interest rates is limited primarily to
the utilization of the credit facility. Management mitigates interest
rate risk by utilizing fixed rate mortgages, ensuring access to a
number of sources of funding and staggering mortgage maturities with
the objective of achieving relatively even annual debt maturities. To
the extent possible, the REIT maximizes the amount of mortgages on
residential rental properties where it is possible to lower interest
rates through Canada Mortgage and Housing Corporation mortgage
insurance.
The sensitivity analysis below has been completed based on the
exposure to interest rates for floating rate debt at the balance
sheet date. Floating rate debt includes all mortgage and loans
payable which are not subject to fixed interest rates, the revolving
line of credit and the acquisition facility. If interest rates
changed by 0.50% and all other variables remained constant, the
REIT's net earnings for the three months ended March 31, 2008 would
have changed by $42,000.
18. CAPITAL MANAGEMENT
The REIT's objective when managing its capital is to safeguard its
assets while maximizing the growth of its business, returns to
unitholders and maintaining the sustainability of cash distributions.
The REIT's capital consists of mortgages and loans payable, operating
and acquisition facilities, Trust Units and Class B LP Units.
Management monitors the REIT's capital structure on an ongoing basis
to determine the appropriate level of mortgage debt and loans payable
to be placed on specific properties at the time of acquisition or
when existing debt matures. The REIT follows conservative guidelines
which are set out in the Trust Declaration. In determining the most
appropriate debt, consideration is given to strength of cash flow
generated from the specific property, interest rate, amortization
period, maturity of the debt in relation to the existing debt of the
REIT, interest and debt service ratios, and limits on the amount of
floating rate debt. The REIT has operating and acquisition facilities
which are used to fund acquisitions and capital expenditures until
specific mortgage debt is placed or additional equity is raised.
Consistent with others in the industry, the REIT monitors capital on
the basis of debt to gross book value ratio. The Declaration of Trust
provides for a maximum debt to gross book value ratio of 70%. The
REIT does not anticipate operating above a debt to gross book value
ratio of 60%. The REIT's debt to gross book value is as follows:
---------------------------------------------------------------------
March 31, December 31,
2008 2007
---------------------------------------------------------------------
Bank indebtedness 38,539 25,304
Mortgages and loans payable 434,006 416,334
---------------------------------------------------------------------
Debt 472,545 441,638
---------------------------------------------------------------------
Rental properties and other capital assets 790,310 765,447
Capital assets improvements in progress 2,908 1,957
Capital assets under development 5,048 1,257
Refundable deposits and mortgage proceeds
held in trust 3,196 7,998
Accumulated amortization 71,782 65,761
Future income taxes arising on acquisitions (21,458) (21,458)
---------------------------------------------------------------------
Gross Book Value 851,789 820,962
---------------------------------------------------------------------
Debt to Gross Book Value 55.5% 53.8%
---------------------------------------------------------------------
---------------------------------------------------------------------
The REIT is subject to three principal financial covenants in its
mortgage and loans payable, operating facility and acquisition
facilities. The financial covenants are described as follows:
- Debt Service Coverage - calculated as Net earnings before
interest, taxes and amortization divided by the debt service
payments (interest expense and principal repayments);
- Interest Coverage - calculated as Net earnings before interest,
taxes and amortization divided by the interest expense;
- Debt to Gross Book value as calculated above.
During the three months ended March 31, 2008, the REIT complied with
all externally imposed capital requirements and all covenants
relating to its debt facilities.
19. SUBSEQUENT EVENTS
Subsequent to March 31, 2008, NPREIT completed the acquisition of 50
long term care units for a total purchase price of $5.4 million. This
acquisition was financed through a combination of mortgage financing
and the operating facility.
Subsequent to March 31, 2008, NPREIT completed mortgage financings
totalling $20.6 million with interest rates from 4.21% to 5.20% and
terms to maturity ranging from 5 to 10 years. Proceeds from the
financings were used to repay existing debt and a portion of the
operating facility.
