Northern Property reports 2009 financial results
CALGARY, March 17 /CNW/ - Northern Property REIT (NPR.UN - TSX) announced its financial results for the 3 and 12 months ended December 31, 2009.
HIGHLIGHTS:
- 2009 FFO of $2.20 per unit up 3.5% from $2.12 for 2008
- Q4 2009 FFO declined 6.0% from same quarter of 2008 to $0.52
- 2.9% same door revenue decline between full year 2008 to 2009
- higher vacancy, lower rents, accelerated maintenance and capex costs
in Alberta apartments
- NPR's western apartment rental markets improving in late 2009
- 2009 DIPU payout ratio 68.3%
FINANCIAL PERFORMANCE AT A GLANCE:
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In $000's except Three Months Year Ended
per unit amounts Ended December 31 December 31
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2009 2008 2009 2008
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Total revenue 33,200 32,515 134,232 127,759
Net operating income "(NOI") 20,760 21,424 86,793 84,305
Earnings before taxes 5,483 6,803 25,929 26,417
Net earnings 653 6,427 21,316 22,702
Net earnings per unit, basic $0.026 $0.257 $0.850 $0.907
Distribution to unitholders 9,286 9,260 37,100 37,037
Distributions per unit $0.370 $0.370 $1.480 $1.480
Distributable Income ("DI") 12,792 13,560 54,336 52,139
DI per unit, basic $0.510 $0.542 $2.166 $2.083
Payout ratio 72.6% 68.3% 68.3% 71.0%
Funds from operation ("FFO") 12,969 13,758 55,107 53,079
FFO per unit, basic $0.517 $0.550 $2.196 $2.121
FFO payout ratio 71.6% 67.3% 67.3% 69.8%
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"As we expected, NPR's Q4 results declined as the full financial impact of recessionary conditions was experienced. A weak rental market in northern Alberta was the principal culprit. Higher vacancy, lower rents and extraordinary costs associated with a push to catch up with needed maintenance and capex investment took place in these markets during the year," said Jim Britton, NPR's President and CEO.
"Fortunately, outside of Alberta our portfolios weathered the recession very well. We were helped by lower heating oil costs, lower mortgage interest rates and decreased trust administration expense. And the REIT is now experiencing apartment rental market improvement across our system."
Multi-family rental market conditions for NPR began to weaken early in 2009. Apartment vacancy rates increased every month between January and August. The increase was most evident in the northern Alberta cities of Fort McMurray, Grande Prairie and Lloydminster which suffered employment losses due to the sharp decline in activity in the oil and natural gas industries. Business conditions were also more challenging in the NWT, particularly execusuite operations in Yellowknife and Inuvik.
NPR's residential rental operations in Nunavut and Newfoundland showed strength throughout the year. Northeastern British Columbia operations also performed above expectations. Seniors' property leases remained in good standing in 2009 and commercial property occupancy remained consistent with prior years.
The REIT continued to operate in a fiscally conservative fashion during 2009 maintaining a payout ratio of 68.3% of distributable income. Weighted average interest rates decreased to 4.87% compared to 5.13% at the end of 2008. Debt to gross book value was 57.7%, the same as a year ago. Interest service coverage was among the best of Canadian REITs at 3.01 times.
NPR made a sharply higher sustaining capex investment of $11.8 million in 2009, double that of 2008. Much of this investment was directed to improving apartment buildings in northern Alberta, work which had been impossible to carry out in the low vacancy, boom conditions of the years prior to 2009. The accelerated capex investment was accompanied by a marked increase in building maintenance activity which had been deferred because of labour shortages during the boom years. The higher level of capex investment has been expensed for tax purposes in 2009 but amortized for accounting purposes over 5 years resulting in a non-cash, future tax charge of $4.2 million. 2009 cash distributions on trust units will be subject to lower taxation as a result of the temporarily higher capex expense. Approximately 68% of trust unit distributions are tax deferred for 2009, compared to 53% for 2008.
"While 2009 was challenging both operationally and financially, so far 2010 has been a much brighter story," Mr. Britton went on to say. "Apartment occupancy has strengthened every month since September. We are experiencing robust rental market performance in Nunavut, Newfoundland and recently in Yellowknife. Fort McMurray is beginning to improve. We also expect to conclude a modest amount of accretive apartment purchasing activity as the year goes on. We are pleased that NPR's low payout ratio has enabled us to get through a difficult year without conducting a dilutive equity issue."
NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST
Consolidated Balance Sheets
At December 31
(Thousands of dollars)
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2009 2008
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ASSETS
Rental properties and other capital assets (Note 4) 836,251 833,967
Capital improvements in progress 7,046 3,773
Capital assets under development 20,423 8,996
Prepaid expenses and other assets (Note 5) 5,088 5,664
Cash - 731
Accounts receivable (Note 17) 4,158 5,085
Tenant security deposits 3,555 3,575
Deferred rent receivable 4,539 3,248
Loans receivable 2,456 1,742
Intangible assets (Note 6) 4,851 6,141
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888,367 872,922
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LIABILITIES
Mortgages and loans payable (Note 7) 498,996 482,800
Operating facilities (Note 8) 33,698 26,600
Bank indebtedness 1,820 -
Accounts payable and accrued liabilities (Note 17) 15,555 15,111
Distributions payable 3,096 3,092
Future income tax liability (Note 11) 43,751 39,489
Intangible liabilities (Note 6) 94 279
Non-controlling interest 464 441
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597,474 567,812
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UNITHOLDERS' EQUITY 290,893 305,110
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888,367 872,922
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See accompanying notes to the consolidated financial statements.
Guarantees, commitments and contingencies (Note 14)
APPROVED BY THE BOARD
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Trustee "Signed" B. James Britton
Trustee "Signed" Dennis J. Hoffman
NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Earnings and Comprehensive Earnings
Years ended December 31
(Thousands of dollars, except per unit amounts)
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2009 2008
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REVENUE
Rental revenue 130,767 124,626
Other property income 3,465 3,133
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134,232 127,759
Operating expenses (47,439) (43,454)
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86,793 84,305
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OTHER EXPENSES
Interest on mortgages and loans (26,435) (24,499)
Amortization (28,789) (26,447)
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(55,224) (50,946)
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EARNINGS BEFORE THE UNDERNOTED 31,569 33,359
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Trust administration (5,619) (6,796)
Interest on operating facilities (755) (1,286)
Interest and other income 458 509
Gain on settlement of debt 130 558
Gain on sale of rental properties 246 136
Non-controlling interest (100) (63)
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(5,640) (6,942)
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EARNINGS BEFORE INCOME TAXES 25,929 26,417
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INCOME TAXES (Note 11)
Current (373) (409)
Future (4,240) (3,306)
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(4,613) (3,715)
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NET EARNINGS 21,316 22,702
Other comprehensive earnings (loss) (123) 68
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COMPREHENSIVE EARNINGS 21,193 22,770
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Net earnings per unit (Note 13)
Basic $0.850 $0.907
Diluted $0.847 $0.906
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See accompanying notes to the consolidated financial statements.
NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Unitholders' Equity
Year ended December 31
(Thousands of dollars)
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2009 2008
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TRUST UNITS (Note 12)
Balance, beginning of year 367,446 366,789
Issuance of units 65 -
Exercise of unit options 528 -
Units cancelled (13) -
Issue costs (2) (8)
Long term incentive plan units issued 666 665
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Balance, December 31 368,690 367,446
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CONTRIBUTED SURPLUS
Balance, beginning of year 1,676 1,023
Unit-based compensation 504 631
Exercise of unit options (39) -
Long term incentive plan units granted 634 687
Long term incentive plan units issued (666) (665)
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Balance, December 31 2,109 1,676
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CUMULATIVE DEFICIT
CUMULATIVE NET EARNINGS
Balance, beginning of year 86,056 63,354
Units cancelled 13 -
Net earnings 21,316 22,702
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Balance, December 31 107,385 86,056
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CUMULATIVE DISTRIBUTIONS TO UNITHOLDERS
Balance, beginning of year (150,191) (113,154)
Distributions declared to unitholders (37,100) (37,037)
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Balance, December 31 (187,291) (150,191)
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CUMULATIVE DEFICIT, December 31 (79,906) (64,135)
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ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSS)
Balance, beginning of year 123 55
Other comprehensive (loss) earnings (123) 68
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Balance, December 31 - 123
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TOTAL UNITHOLDERS' EQUITY 290,893 305,110
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See accompanying notes to the consolidated financial statements.
NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Cash Flows
Year ended December 31
(Thousands of dollars)
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2009 2008
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CASH FLOWS RELATED TO THE FOLLOWING ACTIVITIES:
OPERATING
Net earnings 21,316 22,702
Adjustments for:
Deferred rental revenue (1,292) (1,209)
Amortization 28,789 26,447
Amortization of fair value of debt 681 560
Amortization of above and below market leases (160) (291)
Amortization of deferred financing fees 1,078 547
Gain on settlement of debt (130) (558)
Gain on sale of rental properties (246) (136)
Non-controlling interest 100 63
Unit-based compensation 1,138 1,318
Future income tax expense 4,240 3,306
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55,514 52,749
Changes in non-cash working capital 679 885
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56,193 53,634
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FINANCING
Proceeds from mortgages and loans 56,563 144,603
Repayment of mortgages and loans (41,716) (58,659)
Proceeds from operating facilities 7,098 1,400
Payments (to) from non-controlling interest (76) 377
Units issued under option plan 489 -
Unit issue costs (2) (8)
Distributions paid to unitholders (37,096) (37,029)
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(14,740) 50,684
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INVESTING
Acquisition of rental properties and other assets (12,764) (65,645)
Proceeds from sale of rental properties 992 395
Capital assets under development (11,426) (25,450)
Building capital maintenance (11,235) (5,902)
Capital improvements (9,571) (6,881)
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(44,004) (103,483)
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NET (DECREASE) INCREASE IN CASH (2,551) 835
CASH (BANK INDEBTEDNESS), BEGINNING OF YEAR 731 (104)
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(BANK INDEBTEDNESS) CASH, END OF YEAR (1,820) 731
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SUPPLEMENTARY INFORMATION
Interest paid 25,346 24,444
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Interest received 282 371
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Income taxes paid 214 727
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See accompanying notes to the consolidated financial statements.
NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST
Notes to the Consolidated Financial Statements
Year ended December 31, 2009 and 2008
(Columnar amounts expressed in thousands of dollars except where
indicated)
1. DESCRIPTION OF THE TRUST
Northern Property Real Estate Investment Trust ("NPR" 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. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
NPR's consolidated financial statements are prepared in conformity with
Canadian generally accepted accounting principles ("GAAP").
Principles of consolidation
The consolidated financial statements include the accounts of NPR and its
wholly-owned subsidiary, together with the proportionate share of the
assets, liabilities, revenue and expenses of joint ventures.
Use of estimates
The preparation of consolidated financial statements in conformity with
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 consolidated
financial statements and revenue and expenses for the consolidated
reported period. Actual results could differ from those estimates.
Estimates are used to determine amounts reported as allowance for
doubtful accounts, estimated useful lives and values of rental
properties, intangible and other assets, accrued liabilities and capital
adequacy. Actual amounts could differ from those estimates.
Capital assets
Rental properties, capital improvements in progress and capital assets
under development are stated at the lower of cost less accumulated
amortization and fair value. Cost of the properties includes the original
acquisition costs of the property and other acquisition related costs.
Costs associated with upgrading the existing facilities, other than
ordinary repairs and maintenance, are capitalized as project
improvements. The fair value represents the undiscounted, estimated
future net cash flow expected to be received from the ongoing use of the
property plus its residual worth and is intended to determine recovery of
an investment and is not an expression of a property's fair market value.
All capital assets are recorded at cost and are amortized using the
following annual rates and methods:
Buildings 30 - 40 years straight-line basis
Furniture, fixtures and
equipment 20% - 30% declining-balance
Vehicles 20% - 30% declining-balance
Capital and leasehold
improvements 3 - 20 years straight-line basis
Revenue and expenses associated with properties under development are
capitalized until the properties achieve a satisfactory level of
occupancy.
Estimated useful lives of capital assets are periodically evaluated by
management and any changes in these estimates are accounted for on a
prospective basis.
NPR reviews its capital assets 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 fair
value. Based on this review, a provision for impairment of $nil has been
recorded for the year ended December 31, 2009 (December 31, 2008 - $nil).
Disposal of long-lived assets
When management considers transactions to be material, amounts related to
the disposal of long-lived assets are classified as held for sale, and
the results of operations and cash flows associated with the assets
disposed are reported separately as discontinued operations, less
applicable income taxes. A long-lived asset is classified as an asset
held for sale at the point in time when it is available for immediate
sale, management has committed to a plan to sell the asset and are
actively locating a buyer for the asset at a sales price that is
reasonable in relation to the current fair value of the asset, and the
sale is probable and is expected to be completed within a one-year
period. For unsolicited interest in a long-lived asset, the asset is
classified as held for sale only if all the conditions of the purchase
and sale agreement have been met, a sufficient purchaser deposit has been
received and the sale is probable and expected to be completed shortly
after the end of the current period.
Land equity leases
Prepaid land equity leases are amortized over the remaining lives of the
related leases ranging from 15 to 30 years.
Deferred financing costs
Deferred financing costs are amortized using the effective interest
method over the amortization period of the related mortgages and loans
payable.
Income taxes
NPR is taxed as a "mutual fund trust" for income tax purposes. Pursuant
to the Declaration of Trust, the trustees of NPR will make distributions
or designate all taxable income earned; including the taxable part of net
realized capital gains, to unitholders and will deduct such distributions
and designations for income tax purposes.
Income taxes are accounted for using the liability method. Under this
method, future income taxes are recognized for the expected future tax
consequences of differences between the carrying amount of balance sheet
items and their corresponding tax values. Future income taxes are
computed using substantively enacted corporate income tax rates for the
years in which tax and accounting basis differences are expected to
reverse.
Future income tax liabilities are primarily in relation to tax and
accounting base differences in corporate subsidiaries of the REIT.
Revenue recognition
Revenue from a rental property is recognized when a tenant commences
occupancy of a property and rent is due. NPR retains all benefits and
risk of ownership of its rental properties, and therefore, accounts for
leases with its tenants as operating leases. Rental revenue includes rent
and other sundry revenue recoveries. Rental revenue to be received from
leases with rental rates varying over the term of the lease is recorded
on a straight-line basis over the term of the associated lease.
Accordingly the difference between the rental revenue recorded on a
straight line basis and the rent that is contractually due from the
tenant has been recorded as deferred rent receivable for accounting
purposes.
Intangible assets and liabilities
NPR allocates the purchase price of real property to land, building, and
intangible assets and liabilities, such as the value of above-market and
below-market leases, in-place leases and lease origination costs, if any.
Intangible assets and liabilities are recorded at cost and amortized over
their estimated useful lives ranging from 1 year to 18 years.
The values of above-market and below-market leases for acquired
properties are determined based on the present value of the difference
between the contractual base rentals under the lease and fair market
lease rates for similar in-place leases, measured from the date of
acquisition to the end of the remaining lease term.
The values of in-place leases are calculated as the present value of the
net operating income lost during a hypothetical expected lease-up period
required to replace the existing leases at the date of purchase.
Intangible assets and liabilities associated with the acquisition of real
property are amortized over the remaining term of the associated lease.
Above and below market leases are amortized to rental revenue. The
amortization of the remaining intangible assets is included in
amortization expense.
Financial Instruments
Management has determined that the majority of the NPR'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, accounts receivable, tenant security deposits, mortgages and
loans payable, operating facilities, distributions payable, accounts
payable and accrued liabilities and bank indebtedness. Except for
mortgages and loans payable, the fair value of financial instruments
approximated carrying values due to the short-term nature of the
financial instruments. The fair value of mortgages and loans payable is
disclosed in note 7.
Under NPR's Long Term Incentive Plan, the fair value of the units granted
to trustees, officers and employees is recognized as compensation expense
with an offsetting amount to contributed surplus based on the closing
price of NPR's trust units on December 31 of the fiscal year. Upon
issuance in accordance with the vesting policy, the units issued are
credited to capital with an offsetting amount to contributed surplus
based on the fair value of the units at the time of the grant.
Unit-based compensation
Under NPR's Unit Option Plan, options to acquire units are granted to
trustees, officers and employees from time to time at exercise prices not
less than the market value of the shares at the date of the grant.
Options granted by NPR are accounted for in accordance with the fair-
value method of accounting for stock-based compensation, and as such, the
calculated fair value of the option is recognized as compensation expense
with an offsetting amount recorded to contributed surplus, based on an
estimate of the fair value using a Black-Scholes option-pricing model.
Compensation expense is recognized over the vesting period of the related
options.
Upon exercise of the options, consideration paid, which approximates the
market value of the shares on grant date, is credited to capital. In
addition, contributed surplus, representing the calculated fair value of
the options exercised, is reclassified to capital. Forfeitures of options
are accounted for as they occur.
3. CHANGE IN ACCOUNTING POLICY AND RECENT ACCOUNTING PRONOUNCEMENTS
Change in accounting policy
On January 1, 2009, NPR adopted the June 2009 amendments to the Canadian
Institute of Chartered Accountants ("CICA"), Handbook Section 3862,
Financial Instruments - Disclosures. The amendments include enhanced
disclosures related to the fair value of financial instruments and the
liquidity risk associated with financial instruments. The amendment
requires a three level hierarchy that reflects the significance of the
inputs used in making the fair value measurements. The amendments will be
effective for annual financial statements for fiscal years ending after
September 30, 2009. The amendments are consistent with recent amendments
to financial instrument disclosure standards in International Financial
Reporting Standards ("IFRS").
On January 1, 2009 NPR adopted the August 2009 amendments to CICA
Handbook Section 3855, Financial Instruments - Recognition and
Measurement, relating to the impairment of financial assets. Amendments
to this Section have revised the guidance on the assessment of embedded
derivatives on reclassification of financial assets from the held-for-
trading and available-for-sale categories into the loans and receivables
category. The amendment also requires the use of the credit loss model
when assessing instruments held to maturity for impairment.
On January 1, 2009, NPR adopted EIC-173, Credit risk and the fair value
of financial assets and financial liabilities. This abstract requires
that an entity's own credit risk (for financial liabilities) and the
credit risk of the counterparty (for financial assets) should be taken
into account in determining the fair value of financial assets and
financial liabilities, including derivative instruments.
Effective January 1, 2009, NPR adopted CICA Handbook Section 3064,
Goodwill and Intangible Assets. These new pronouncements establish
standards for the recognition, measurement, presentation and disclosure
of goodwill subsequent to its initial recognition and of intangible
assets by profit-oriented enterprises.
The new standards had no impact on NPR's consolidated financial
statements.
Recent Accounting Pronouncements
On January 5, 2009, the AcSB released Handbook Section 1582 Business
Combinations, Section 1601, Consolidated Financial Statements and Section
1602 Non-Controlling Interest which supersedes Section 1581, Business
Combinations and Section 1600, Consolidated Financial Statements. The
released sections apply to interim and annual consolidated financial
statements relating to fiscal years beginning on or after January 1,
2011, and prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual
reporting period beginning on or after January 1, 2011. The Sections are
consistent with IFRS standards. Early application and adoption are
permitted.
On February 13, 2008 the Accounting Standards Board ("AcSB") confirmed
that the transition date to IFRS from Canadian GAAP would be January 1,
2011 for all publicly accountable enterprises. In April 2008, the AcSB
issued an exposure draft proposing to incorporate IFRS into the CICA
Handbook as a replacement for current Canadian GAAP for most publicly
accountable enterprises including the REIT. NPR will adopt IFRS as the
basis for preparing its consolidated financial statements and will
provide comparative financial information for the previous fiscal year
using IFRS beginning with the quarter ending March 31, 2011.
The impact of the adoption of IFRS on the consolidated financial
statements of NPR is expected to be significant. NPR continues to
evaluate the potential impact of IFRS to its consolidated financial
statements. This is an ongoing process as the International Accounting
Standards Board and the AcSB issue new standards and recommendations.
4. RENTAL PROPERTIES AND OTHER CAPITAL ASSETS
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2009 2008
Accumulated Net Accumulated Net
Amortiz- Book Amortiz- Book
Cost ation Value Cost ation Value
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Land 90,906 - 90,906 90,676 - 90,676
Buildings 815,985 98,983 717,002 800,612 76,187 724,425
Furniture, fixtures
and equipment 10,326 4,956 5,370 9,006 3,757 5,249
Vehicles 1,307 674 633 1,193 732 461
Capital and leasehold
improvements 36,491 14,151 22,340 23,026 9,870 13,156
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955,015 118,764 836,251 924,513 90,546 833,967
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NPR acquired properties and completed development projects in the year
ended December 31, 2009 for a total purchase price of $11.7 million (2008
- $80.4 million). During the year, NPR completed the sale of three non-
core assets for gross proceeds of $992,000 (2008 - $395,000) and a gain
on sale of $246,000 (2008 - $136,000). Acquisitions and development
projects were financed as follows:
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2009 2008
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Cash paid 9,800 80,391
Mortgages payable 1,788 -
Class B LP Units issued 65 -
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Total 11,653 80,391
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Residential rental units 40 724
Seniors' units 111 94
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Units acquired 151 818
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Commercial square feet - 40,233
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5. PREPAID EXPENSES AND OTHER ASSETS
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2009 2008
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Prepaid expenses 2,543 2,812
Prepaid equity leases 1,997 2,167
Other 548 500
Refundable deposits and mortgage proceeds held in
trust - 185
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5,088 5,664
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6. INTANGIBLE ASSETS AND LIABILITIES
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2009 2008
Accumulated Net Accumulated Net
Amortiz- Book Amortiz- Book
Cost ation Value Cost ation Value
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Above-market leases 173 (139) 34 173 (114) 59
In-place leases 6,474 (2,466) 4,008 6,565 (1,588) 4,977
Lease origination
costs 1,643 (834) 809 1,669 (564) 1,105
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8,290 (3,439) 4,851 8,407 (2,266) 6,141
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Below-market leases 1,220 (1,126) 94 1,220 (941) 279
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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.
7. MORTGAGES AND LOANS PAYABLE
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2009 2008
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Mortgages and loans payable 518,912 502,277
Fair value adjustment (8,217) (8,574)
Deferred financing costs (11,699) (10,903)
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498,996 482,800
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Mortgages and loans payable bear interest at rates ranging from 2.31% to
12.13% and have a weighted average rate of 4.87% as at December 31, 2009
(December 31, 2008 - 5.13%). Mortgages and loans are payable in monthly
installments of blended principal and interest of approximately $3.5
million. The mortgages mature between 2010 and 2025 and are secured by
charges against specific properties. Land and buildings with a carrying
value of $679 million have been pledged to secure mortgages and loans
payable of NPR. The fair value of mortgages and loans payable at December
31, 2009 is approximately $535.0 million (December 31, 2008 - $517.7
million).
Minimum required future principal repayments, including maturities, are
as follows:
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2010 46,541
2011 44,882
2012 50,281
2013 91,003
2014 78,218
Subsequent 207,987
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518,912
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8. OPERATING FACILITIES
NPR has two revolving credit facilities totaling $57.5 million (December
31, 2008 - $50.0 million) for acquisition and operating purposes. The
$50.0 million facility bears interest at prime plus 1.50% or bankers'
acceptance plus 3.00% with a maturity date of May 21, 2010. The $7.5
million facility bears interest at prime plus 1.50% or bankers'
acceptance plus 3.00% with a maturity date of July 31, 2010. Specific
properties with a carrying value of $92.9 million have been pledged as
collateral security for the operating facilities. At December 31, 2009
NPR had utilized $33.7 million (December 31, 2008 - $26.6 million) of the
operating facilities.
9. LONG-TERM INCENTIVE PLAN AND UNIT OPTION PLAN
NPR has a Long-Term Incentive Plan ("LTIP") for the executives of NPR,
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
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Balance - December 31, 2008 56,440
Units vested and issued - January, 2009 (8,408)
Units vested and issued - February, 2009 (28,509)
Units granted - December 31, 2009 28,950
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Balance - December 31, 2009 48,473
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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 NPR 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 generally vest in 1/3 tranches:
immediately upon award, then 12 and 24 months following. As at December
31, 2009, a total of 192,136 LTIP units had vested and been issued
(December 31, 2008 - 155,219).
NPR 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, NPR 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 NPR.
The exercise price is determined using the weighted average trading price
of the units on the five days prior to the options being granted. The
following table summarized the outstanding unit options as at December
31, 2009:
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Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Price December 31 Life In Years Price December 31 Price
-------------------------------------------------------------------------
$23.12 735,000 3.4 $23.12 489,999 $23.12
$15.05 124,997 4.2 $15.05 20,004 $15.05
-------------------------------------------------------------------------
859,997 3.7 $21.95 510,003 $22.80
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On May 20, 2008, 735,000 options with an exercise price of $23.12 and
expiring on May 20, 2013 were granted to trustees and officers. 245,002
options vested immediately, 245,001 options vested on May 20, 2009 and
244,997 will vest on May 20, 2010.
On March 12, 2009, 157,500 options with an exercise price of $15.05 and
expiring on March 12, 2014 were granted to trustees and officers. 52,507
options vested immediately, 52,497 options will vest on March 12, 2010
and 52,496 will vest on March 12, 2011. During the year ended December
31, 2009, 32,503 options were exercised at an exercise price of $15.05
per unit.
The REIT accounts for its Option Plan using the fair value method, under
which compensation expense is measured at the date the options are
granted using the Black-Scholes model and recognized over the vesting
period. The following assumptions were used in calculating the fair value
of the options granted on May 20, 2008; expected annual dividend rate of
6.40%, expected volatility of 18%, risk-free rate of return of 3.10% and
expected life of 5 years. The following assumptions were used in
calculating the fair value of the options granted on March 12, 2009;
expected annual dividend rate of 9.83%, expected volatility of 28.8%,
risk-free rate of return of 1.75% and expected life of 5 years.
Compensation expense for the year ended December 31, 2009 relating to
options granted was $504,000 (2008 - $631,000).
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 NPR trust units
and NPR contributes one unit for every three units acquired by an
employee. The units are purchased on the TSX at market prices. During the
year ended December 31, 2009, employees invested a total of $117,434
(2008 - $115,562) and NPR contributed $39,166 (2008 - $38,555). During
the year ended December 31, 2009, 8,955 units (2008 - 7,974 units) were
purchased at an average cost of $18.71 per unit (2008 - $20.65 per unit).
11. INCOME TAXES
NPR has certain corporate subsidiaries which are subject to income tax on
their respective taxable income at the applicable legislated tax rates.
On October 31, 2006, a "Distribution Tax" on publicly traded investment
trusts and publicly listed partnerships was announced by the federal
Minister of Finance. The announcement created a new tax regime for
Specified Investment Flow Throughs ("SIFTs"), which include certain
publicly listed income trusts and publicly listed partnerships. These
entities will be taxed in effect as corporations (at a rate comparable to
the general combined federal/provincial corporate income tax rate).
Certain real estate investment trusts are excluded from the SIFT
definition and therefore are not subject to the new regime.
The legislation provides for a transition period for publicly traded
entities that existed prior to November 1, 2006 and is not expected to
apply to NPR until 2011, The new tax regime, does not apply to entities
that qualify for 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. At December 31, 2009, NPR does not appear to qualify for the REIT
exemption.
GAAP requires NPR to recognize future income tax assets and liabilities
based on estimated temporary differences expected as at January 1, 2011.
Under the current legislation, NPR 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 NPR's
assets and liabilities at January 1, 2011 and has been calculated using
the expected tax rates of 19.13% to 28.4% (December 31, 2008 - 19.63% to
29.5%).
The future tax liabilities arise from the temporary differences
summarized below:
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Future tax liabilities arising from temporary
differences between accounting and tax basis of:
Rental property assets in corporate subsidiaries 9,304 9,614
Rental properties 28,868 24,963
Deferred financing costs 1,574 981
Other assets 4,005 3,931
-------------------------------------------------------------------------
43,751 39,489
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 provision for income taxes is comprised
of the following:
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Current income tax expense 373 409
Future income tax expense 4,240 3,306
-------------------------------------------------------------------------
Total income tax expense 4,613 3,715
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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:
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Earnings from before income taxes 25,929 26,417
Less income attributable to NPR not subject to
future income tax (23,999) (24,529)
-------------------------------------------------------------------------
Income in corporate subsidiaries 1,930 1,888
Income tax rate based on basic and weighted
average rates 19.13% 19.63%
-------------------------------------------------------------------------
Expected income tax expense from statutory income
tax rate 369 371
Increase (decrease) in current taxes resulting from:
Non-deductible expenses 57 (88)
Sale of rental properties 48 9
Other (101) 117
-------------------------------------------------------------------------
Current income tax expense 373 409
-------------------------------------------------------------------------
Increase (decrease) in future taxes resulting from:
Future income taxes - corporate subsidiaries (310) (394)
Decrease in future income tax rates (1,250) -
Future income taxes relating to Bill-C52 5,800 3,700
-------------------------------------------------------------------------
Future income tax expense 4,240 3,306
-------------------------------------------------------------------------
Total income tax expense 4,613 3,715
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. UNITHOLDERS' CAPITAL
Trust units
The total authorized number of trust units is unlimited. The total number
of trust units of the REIT outstanding as at December 31, 2009 is
23,020,538 (December 31, 2008 - 22,755,010) representing a net book value
of $343.3 million (December 31, 2008 - $338.3 million), net of issue
costs.
Class B Exchangeable Limited Partnership Units and Special Voting Units
The Class B Units can be exchanged for trust units at any time at the
option of the holder of the Class B units. Each Class B unit has a
"Special Voting Unit" attached to it, which entitles the holder to one
vote, either in person or by proxy at the meeting of unitholders of the
trust as if he or she was a unitholder of the trust. Total number of
Class B LP Units and special voting units of Northern Property Limited
Partnership, a controlled limited partnership, outstanding as at December
31, 2009, is 2,085,090 (December 31, 2008 - 2,278,635) representing a net
book value of $25.4 million (December 31, 2008 - $29.1 million).
Distributions to Unitholders
Pursuant to the Trust Declaration, holders of Trust units and Class B
units are entitled to receive distributions made on each distribution
date as approved by the Trustees. Distributions for the year are required
to be at least equal to the net income as determined in accordance with
the Income Tax Act.
The total number of NPR 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 December 31, 2009 is 25,105,628 (December
31, 2008 - 25,033,645), representing net proceeds of $368.7 million, net
of issue costs of $19.6 million (December 31, 2008 - $367.5 million, net
of issue costs of $19.6 million). The number of units issued and
outstanding is as follows:
-------------------------------------------------------------------------
Trust Class
Units Issue B LP
-------------------------------------------------------------------------
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 -
May 26, 2008 LTIP units
issued 11,931 $22.35 -
Issue costs - - -
Class B LP units
exchanged 188,466 - (188,466)
-------------------------------------------------------------------------
December 31,
2008 22,755,010 - 2,278,635
-------------------------------------------------------------------------
January 2, LTIP units
2009 issued 8,408 $24.20 -
January 6, Property
2009 acquisition - - 3,833
February 5, LTIP units
2009 issued 28,509 $16.21 -
Options exercised 32,503 $15.05 -
July 24, 2009 Units cancelled (1,270) $10.00 -
Issue costs - - -
Class B LP units
exchanged 197,378 - (197,378)
-------------------------------------------------------------------------
December 31,
2009 23,020,538 2,085,090
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Issue Total
-------------------------------------------------------------------------
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
May 26, 2008 LTIP units
issued - 11,931 267
Issue costs - - (8)
Class B LP units
exchanged - - -
-------------------------------------------------------------------------
December 31,
2008 - 25,033,645 367,446
-------------------------------------------------------------------------
January 2, LTIP units
2009 issued - 8,408 204
January 6, Property
2009 acquisition $16.91 3,833 65
February 5, LTIP units
2009 issued - 28,509 462
Options exercised - 32,503 528
July 24, 2009 Units cancelled - (1,270) (13)
Issue costs - - (2)
Class B LP units
exchanged - - -
-------------------------------------------------------------------------
December 31,
2009 25,105,628 368,690
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. NET EARNINGS PER UNIT
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Net earnings 21,316 22,702
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average units for basic net
earnings per unit 25,088,584 25,027,697
Dilutive effect of units to be issued
under the LTIP 22,280 19,978
Dilutive effect of Option Plan 44,264 13,270
-------------------------------------------------------------------------
Weighted average units for diluted net
earnings per unit 25,155,128 25,060,945
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per unit:
Basic $0.850 $0.907
Diluted $0.847 $0.906
-------------------------------------------------------------------------
-------------------------------------------------------------------------
14. GUARANTEES, COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, NPR 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 NPR 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, NPR 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, NPR becomes subject to various legal and
other claims. Management and its legal counsel evaluate these claims and,
where required, accrue the best estimate of costs relating to these
claims. Management believes the outcome of claims of this nature at
December 31, 2009 will not have a material impact on NPR.
During the normal course of operations, NPR provided guarantees for
mortgages and loans payable relating to investments in corporations and
joint ventures where NPR 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, NPR may be liable for 100% of the
outstanding balances of these mortgages and loans payable. At December
31, 2009, NPR has provided guarantees totaling $6.1 million (December 31,
2008 - $10.4 million). The mortgages bear interest at rates ranging from
3.06% to 6.10% and mature July 2010 to December 2013 (December 2008 -
4.54% to 7.90% and mature June 2009 to December 2013). As at December 31,
2009, land and buildings with a carrying value of $6.3 million have been
pledged to secure these mortgage and loans payable (December 2008 - $6.5
million).
NPR has included its proportionate share of its joint ventures' mortgages
and loans payable totaling $4.9 million at December 31, 2009 (December
31, 2008 - $5.2 million) in these consolidated financial statements.
In connection with the acquisition of certain seniors' properties in
Newfoundland, the tenants have agreed to expand certain properties
purchased by NPR. NPR has entered into agreements to purchase these
expansions once completed. In total, NPR has commitments totalling $2.0
million.
15. SEGMENTED INFORMATION
The primary business segments used by management are geographic segments
(i.e. provinces and territories). NPR operates in 5 geographic segments,
British Columbia, Alberta, the Northwest Territories, Nunavut and
Newfoundland. Within its geographic business segments, NPR has two
business operating segments: residential and commercial income producing
properties. The REIT's residential properties are comprised of three
components: apartments, townhomes and single family rental units;
execusuite apartment rental units, where the rental periods range from a
few days to several months; and seniors' properties where the properties
are leased on a long term basis to qualified operators who provide
services to individual residents. The commercial business segment is
comprised of office, industrial and retail properties in areas where NPR
has residential operations. All items, except gain on sale of rental
properties and gain on settlement of debt which are related only to the
REIT and are included in the Consolidated Statement of Earnings, are not
allocated to the defined segments. As such, NPR has not provided a
reconciliation of Earnings before Other Items to Net Earnings. In 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 business segments in all geographic segments. Segmented
information for NPR is provided below:
Total Assets
-------------------------------------------------------------------------
December 31, 2009 BC Alberta NWT Nunavut Nfld Total
-------------------------------------------------------------------------
Residential
Multi-family 92,488 176,982 85,046 113,105 58,392 526,013
Execusuites - - 10,470 9,537 9,428 29,435
Seniors' 16,230 121,691 - - 49,610 187,531
-------------------------------------------------------------------------
108,718 298,673 95,516 122,642 117,430 742,979
Commercial 21,289 9,083 90,388 19,660 1,192 141,612
Trust - 3,776 - - - 3,776
-------------------------------------------------------------------------
TOTAL ASSETS 130,007 311,532 185,904 142,302 118,622 888,367
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Assets
-------------------------------------------------------------------------
December 31, 2008 BC Alberta NWT Nunavut Nfld Total
-------------------------------------------------------------------------
Residential
Multi-family 90,384 161,176 86,323 115,131 56,109 509,123
Execusuites - - 8,019 9,853 9,495 27,367
Seniors' 15,710 123,794 - - 40,965 180,469
-------------------------------------------------------------------------
106,094 284,970 94,342 124,984 106,569 716,959
Commercial 21,409 8,912 97,868 20,992 1,222 150,403
Trust - 5,560 - - - 5,560
-------------------------------------------------------------------------
TOTAL ASSETS 127,503 299,442 192,210 145,976 107,791 872,922
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Geographic Segments
-------------------------------------------------------------------------
Year ended
December 31, 2009 BC Alberta NWT Nunavut Nfld Total
-------------------------------------------------------------------------
Rental revenue 16,169 33,963 36,364 25,812 18,459 130,767
Other income 462 943 1,106 553 401 3,465
Operating expenses (6,292) (9,816) (16,495) (8,596) (6,240) (47,439)
-------------------------------------------------------------------------
10,339 25,090 20,975 17,769 12,620 86,793
Interest on
mortgages (3,002) (10,978) (5,908) (3,867) (2,680) (26,435)
Amortization (4,085) (7,500) (7,899) (5,715) (3,590) (28,789)
-------------------------------------------------------------------------
EARNINGS BEFORE
OTHER ITEMS 3,252 6,612 7,168 8,187 6,350 31,569
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Geographic Segments
-------------------------------------------------------------------------
Year ended
December 31, 2008 BC Alberta NWT Nunavut Nfld Total
-------------------------------------------------------------------------
Rental revenue 14,082 32,875 36,556 24,861 16,252 124,626
Other income 427 830 1,097 347 432 3,133
Operating expenses (6,145) (6,960) (16,851) (7,597) (5,901) (43,454)
-------------------------------------------------------------------------
8,364 26,745 20,802 17,611 10,783 84,305
Interest on
mortgages (2,452) (9,814) (5,464) (4,397) (2,372) (24,499)
Amortization (3,254) (6,940) (7,246) (5,797) (3,210) (26,447)
-------------------------------------------------------------------------
EARNINGS BEFORE
OTHER ITEMS 2,658 9,991 8,092 7,417 5,201 33,359
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Business Segments
-------------------------------------------------------------------------
Total
Year ended Multi- Execu- Residen- Commer-
December 31, 2009 family suites Seniors' tial cial Total
-------------------------------------------------------------------------
Rental revenue 82,352 8,190 17,486 108,028 22,739 130,767
Other income 2,942 208 - 3,150 315 3,465
Operating expenses (33,935) (4,334) (24) (38,293) (9,146) (47,439)
-------------------------------------------------------------------------
51,359 4,064 17,462 72,885 13,908 86,793
Interest on
mortgages (16,670) (969) (6,130) (23,769) (2,666) (26,435)
Amortization (18,062) (1,305) (4,460) (23,827) (4,962) (28,789)
-------------------------------------------------------------------------
EARNINGS BEFORE
OTHER ITEMS 16,627 1,790 6,872 25,289 6,280 31,569
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Business Segments
-------------------------------------------------------------------------
Total
Year ended Multi- Execu- Residen- Commer-
December 31, 2008 family suites Seniors' tial cial Total
-------------------------------------------------------------------------
Rental revenue 77,162 8,369 16,494 102,025 22,601 124,626
Other income 2,677 128 - 2,805 328 3,133
Operating expenses (30,389) (4,270) (23) (34,682) (8,772) (43,454)
-------------------------------------------------------------------------
49,450 4,227 16,471 70,148 14,157 84,305
Interest on
mortgages (14,631) (872) (6,286) (21,789) (2,710) (24,499)
Amortization (16,374) (1,035) (4,217) (21,626) (4,821) (26,447)
-------------------------------------------------------------------------
EARNINGS BEFORE
OTHER ITEMS 18,445 2,320 5,968 26,733 6,626 33,359
-------------------------------------------------------------------------
-------------------------------------------------------------------------
16. RELATED PARTY TRANSACTIONS
Related party transactions are conducted in the normal course of
operations and are measured at the exchange amount, which is the amount
of consideration established and agreed upon by the related parties. A
Trustee of NPR is the Chairman of AgeCare Investment Ltd. ("AgeCare"),
which leases six seniors' properties from NPR. For the year ended
December 31, 2009, NPR earned rental income, including rental revenue
earned on a straight-line basis over the term of the lease, totaling
$12.6 million (2008 - $12.6 million) from AgeCare. Amounts outstanding in
accounts receivable pertaining to this lease were $nil at December 31,
2009 (December 31, 2008 - $nil). In addition, AgeCare is paid an annual
fee for advisory services provided to NPR respecting prospective
acquisitions of seniors' properties. For the year ended December 31,
2009, NPR paid $120,000 for these services (2008 - $120,000).
During the first quarter of 2009, NPR completed renovations totaling
$2.15 million to a seniors' facility in BC which is leased to AgeCare. At
December 31, 2009, In accordance with the lease agreement, AgeCare is
repaying this amount over 15 years. Interest revenue of $112,800 was
earned for the year ended December 31, 2009 (2008 - $nil) relating to
this receivable. Amounts outstanding at December 31, 2009 was $2.1
million (December 31, 2008 - $nil).
A company owned by a Trustee of NPR leases commercial space from NPR
under normal commercial terms. NPR earned rental revenue from that
arrangement of $481,000 for the year ended December 31, 2009 (2008 -
$454,000). Amounts outstanding in accounts receivable pertaining to this
lease were $nil at December 31, 2009 (December 31, 2008 - $nil).
17. FINANCIAL INSTRUMENTS
NPR's accounts and loans receivable and other financial liabilities are
substantially carried at amortized cost, which approximates fair value.
Such fair value estimates are not necessarily indicative of the amounts
the Trust might pay or receive in actual market transactions.
The fair value hierarchy of financial instruments measured at fair value
on the balance sheet is as follows:
-------------------------------------------------------------------------
December 31, 2009 December 31, 2008
Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
-------------------------------------------------------------------------
Financial assets
and liabilities:
Cash - - - 731 - -
Bank
indebtedness 1,820 - - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The three levels of the fair value hierarchy are described as follows:
Level 1: Values based on unadjusted quoted prices in active markets
that are accessible at the measurement date for identical assets or
liabilities.
Level 2: Values based on quoted prices in markets that are not active
or model inputs that are observable either directly or indirectly for
substantially the full term of the asset or liability.
Level 3: Values based on prices or valuation techniques that require
inputs that are both unobservable and significant to the overall fair
value measurement.
NPR had no embedded derivatives requiring separate recognition for the
years ended December 31, 2009 and 2008.
Utility cost risk
NPR 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 REITs 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 portfolio
generally provide for recovery of operating costs, including utilities.
Because of the northern location of a portion of NPR's portfolio, the
exposure to utility price fluctuations is more pronounced in the first
and last fiscal quarter of the year.NPR 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 for certain
residential rental units in Alberta, NPR does not utilize hedges or
forward contracts to manage exposure to utility cost risk.
Heating oil is the primary source of fuel for heating properties located
in Nunavut and the Northwest Territories. Over the last two years, NPR
converted heating systems for certain properties in Yellowknife from fuel
oil based boilers to wood pellet boilers. The investment in these
environmentally friendly boilers continues to reduce NPR's exposure to
volatile heating oil prices. 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.
Natural gas is the significant source of fuel for heating properties
located in Alberta, BC and Inuvik, NWT. NPR has fixed price contracts for
certain of its properties which accounts for approximately 31% of the
REIT's usage in Alberta. During 2009, NPR received approximately $40,000
in rebates under the Natural Gas Rebate Program which provided for
rebates to consumers when natural gas prices exceeded $5.50 per gigajoule
from October to March. The government of Alberta did not renew the
Natural Gas Rebate Program for the 2009-2010 heating season. 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.
Management prepared a sensitivity analysis on the impact of price changes
in the cost of heating oil and natural gas. A 10% change over the average
price of heating oil and natural gas would impact NPR's net earnings by
$283,000 for the year ended December 31, 2009.
Electricity is the primary source of fuel for heating properties located
in Newfoundland as well as parts of north eastern 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
multi-family rental units. As there is not a significant direct risk to
NPR regarding the price of electricity, a sensitivity analysis has not
been prepared.
Liquidity risk
Ultimate responsibility for monitoring liquidity risk management lies
with management and the Board of Trustees of the REIT. The REIT moderates
liquidity risk by managing mortgage and loan maturities to ensure a
relatively even amount of mortgage maturities in each year. At December
31, 2009 the REIT has operating facilities totaling $57.5 million
(December 31, 2008 - $50.0 million). At December 31, 2009, $33.7 million
of the operating facilities were utilized (December 31, 2008 - $26.6
million). Cash flow projections are completed on a regular basis to
ensure there will be adequate liquidity to maintain operating and
investment activities in addition to making monthly distributions to
unitholders. The Board of Trustees reviews current financial results and
the annual business plan in determining appropriate distribution levels.
Credit risk
NPR's credit risk primarily arises from the possibility that tenants may
not be able to fulfill their lease commitments. 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 AgeCare Investments Ltd. (See note 16),
which leases seniors' properties in Alberta and BC from the REIT, and the
Governments of Canada, the Northwest Territories and Nunavut, which
leases a large number of residential units and commercial property in the
Northwest Territories and Nunavut.
NPR 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. 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 current tenant and other receivables:
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
0-30 days 1,405 987
31-60 days 221 267
61-90 days 58 130
Over 90 days 730 722
-------------------------------------------------------------------------
Tenant receivables 2,414 2,106
Other receivables 2,094 3,329
Allowance for doubtful accounts (350) (350)
-------------------------------------------------------------------------
4,158 5,085
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NPR classifies tenants as past tenants on the date of their move out from
a residential unit. NPR records a specific allowance for doubtful
accounts on all balances owed by past tenants. Any subsequent recovery of
balances owed from past tenants is recorded as a reduction in the bad
debt provision for the period. In addition, NPR records an allowance for
doubtful accounts from current tenants and other receivables 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 from current and past tenants and
other receivables, estimated by Management based on prior experience and
current economic conditions.
The reconciliation of changes in allowance for doubtful accounts is as
follows:
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Balance, beginning of period 350 250
Accounts receivable written off (532) (690)
Accounts recovered 590 355
Increase (decrease) in allowance (58) 435
-------------------------------------------------------------------------
Balance, December 31 350 350
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following is an aging of accounts payable and accrued liabilities:
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
0-6 months 10,629 9,916
6 months to 1 year 1,193 1,251
Over 1 year 212 51
-------------------------------------------------------------------------
12,034 11,218
Tenant security deposits 3,521 3,893
-------------------------------------------------------------------------
15,555 15,111
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Management believes that future cash flows from operations and
availability under the current operating facilities provide sufficient
available funds through the foreseeable future to support these financial
liabilities.
Interest rate risk
NPR is exposed to interest rate risk on mortgages and loans payable and
does not hold any financial instruments to mitigate that risk. NPR
utilizes both fixed and floating rate debt. Interest rate risk related to
floating interest rates is limited primarily to the utilization of
operating facilities. 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,
NPR 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 for floating rate debt has been completed based
on the exposure to interest rates at the balance sheet date. Floating
rate debt includes all mortgage and loans payable which are not subject
to fixed interest rates and the revolving line of credit. If interest
rates changed by 0.50% and all other variables remained constant, NPR's
net earnings for the year ended December 31, 2009 would have changed by
$228,000.
18. CAPITAL MANAGEMENT
NPR'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. NPR'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. NPR 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. NPR has
operating facilities which is used to fund acquisitions and capital
expenditures until specific mortgage debt is placed or additional equity
is raised.
Consistent with others in the industry, NPR 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%. NPR's
debt to gross book value is as follows:
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December 31, December 31,
2009 2008
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Bank indebtedness (cash) 1,820 (731)
Operating facilities 33,698 26,600
Mortgages and loans payable 518,912 502,277
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Debt 554,430 528,146
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Rental properties and other capital assets 836,251 833,967
Capital assets improvements in progress 7,046 3,773
Capital assets under development 20,423 8,996
Refundable deposits and mortgage proceeds
held in trust - 185
Accumulated amortization 118,764 90,546
Future income taxes on acquisitions (21,647) (21,625)
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Gross Book Value 960,837 915,842
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Debt to Gross Book Value 57.7% 57.7%
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NPR is subject to three principal financial covenants in its mortgage and
loans payable and operating 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 (total
interest expense and principal repayments);
- Interest Coverage - calculated as Net earnings before interest, taxes
and amortization divided by total interest expense;
- Debt to Gross Book Value as calculated above.
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2009 2008
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Earnings from continuing operations before taxes 25,929 26,417
Amortization 28,789 26,447
Interest on mortgages 26,435 24,499
Interest on operating facilities 755 1,286
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Net earnings before interest, taxes and
amortization 81,908 78,649
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Interest on mortgages 26,435 24,499
Interest on operating facilities 755 1,286
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Total Interest Expense 27,190 25,785
Principal repayments 16,198 14,983
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Debt Service Payments 43,388 40,768
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Interest Coverage 3.01 3.05
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Debt Service Coverage 1.89 1.93
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As at and during the year ended December 31, 2009, NPR complied with all
externally imposed capital requirements and all covenants relating to its
debt facilities.
19. SUBSEQUENT EVENTS
Between January 1, 2010 and March 17, 2010 NPR completed mortgage
financings and renewals totalling $22.4 million with interest rates from
2.97% to 6.05% and terms to maturity from 6 months to 10 years. Proceeds
from the mortgage financings were used to repay existing mortgage debt
and a portion of the operating facility.
For further information: contact Todd Cook, Chief Financial Officer, at (403) 531-0720
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