Alexis Nihon REIT Announces Fourth Quarter and 2005 Year-End Results.MONTREAL -- Acquisitions, expansion projects continue to grow FFO per unit to new high Alexis Nihon Real Estate Investment Trust (TSX:AN.UN) today announced results for the fourth quarter and 12 months ended December 31, 2005. 2005 Highlights - Increased funds from operations 15.3% to new high of $33.6 million - Increased funds from operations per unit 7.6% to record $1.311 per unit - Completed acquisitions totalling $75.9 million, increasing total leasable area 19.9% to 8.5 million square feet - Completed redevelopment project totalling $9.2 million, adding 68,800 square feet of leasable space - Paid monthly distributions at annual rate of $1.10 per unit - Improved distributable income payout ratio to 95.8% from 105.1% - Maintained an average interest rate of 6.18% on existing mortgages - Debt(i) to gross book value ratio of 59.7%, below REIT limit of 65.0% - Ended 2005 with $117 million capacity for acquisitions and investments (i) Including convertible debentures Acquisitions of office and industrial properties during 2005 increased leasable area by 19.9%. The new area, combined with redeveloped retail footage, generated new highs with most key metrics. Fourth quarter revenues advanced 12.7% over the same period in 2004, to a new high of $33.0 million. Distributable income increased 5.2% to $7.7 million, while funds from operations moved up 3.0% to $9.0 million. For the year, revenues gained 23.0% to a new high of $121.5 million. Distributable income lifted 17.0% to a record $29.5 million, while funds from operations rose 15.2% to a benchmark of $33.6 million, or $1.31 per unit. "During 2005, Alexis Nihon's acquisitions and redevelopment activities substantially increased the REIT's scale of operations and broadened our geographic presence," said Paul J. Massicotte, President and Chief Executive Officer. "The REIT's expanded property portfolio has increased our revenue base, raised our market profile, added to geographic diversification and enhanced unitholder value." The five properties acquired during 2005 were acquired at capitalization rates that enable the added operations to be immediately accretive to distributable income, noted Guy Charron, Executive Vice President and Chief Operating Officer. "However, the ongoing decline in cap rates, particularly in the retail sector, is making redevelopment of existing properties and new construction increasingly attractive as alternatives." Rene Fortin, Senior Vice President and Chief Financial Officer, pointed out the REIT's financings completed in 2004, combined with mortgages, term debt and bank credit facilities, enabled the REIT to complete all expansion activities in 2005. "The REIT's capital structure permitted several expansion initiatives to be completed while increasing funds from operations per unit and distributable income per unit," said Mr. Fortin. "As a result, the REIT finished the year with a strong balance sheet and ample acquisition capacity, while continuing to meet debt obligations and make monthly distributions to unitholders."
Financial Highlights
(thousands of dollars except per-unit amounts)
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Period ended December 31 3 months 12 months
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2005 2004 2005 2004
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Revenues from rental
operations $32,981 $29,254 $121,496 $98,750
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Net operating income $16,771 $15,416 $62,830 $51,590
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Distributable income(1) $7,746 $7,363 $29,487 $25,197
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Distributable income
per unit (diluted)(1) $0.289 $0.280 $1.108 $1.039
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Funds from operations(1) $8,995 $8,730 $33,631 $29,170
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FFO per unit(1) $0.350 $0.342 $1.311 $1.218
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(1) Distributable income and FFO are non-GAAP measures
Additional Financial Information Attached to this news release are financial statements with accompanying notes and management's discussion and analysis. These documents plus a supplemental information package will be filed on SEDAR and made available at www.alexisnihon.com. Conference Call and Webcast Management will also hold a conference call and live audio webcast on Friday, March 3, 2006 at 2 p.m. (ET) to discuss the REIT's fourth quarter performance. The call will be webcast at www.alexisnihon.com and also may be accessed by dialing 1-866-250-4665 or 416-644-3428. A recording of the webcast will be archived until midnight on Friday, March 17, 2006. It will be accessible at www.alexisnihon.com and also by dialing 877-289-8525 or 416-640-1917 and entering passcode 21177132#. About Alexis Nihon REIT The REIT currently owns interests in 55 office, retail and industrial properties, including a 426-unit, multi-family residential property, located in the greater Montreal area and the National Capital region. The REIT's portfolio has an aggregate of 8.5 million square feet of leasable area, of which 0.4 million square feet is co-owned. Readers are cautioned distributable income and distributable income per unit are non Generally Accepted Accounting Policy ("GAAP") measures and should not be construed as an alternative to net earnings and earnings per share determined in accordance with GAAP as an indicator of the REIT's performance. The REIT's methods of calculating these measures may differ from other issuers' methods and accordingly, they may not be comparable to measures used by other issuers. This document may contain forward-looking statements, relating to Alexis Nihon REIT's operations or to the environment in which it operates, which are based on Alexis Nihon REIT's operations, estimates, forecasts and projections. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict, and/or are beyond Alexis Nihon REIT's control. A number of important factors could cause actual outcomes and results to differ materially from those expressed in these forward-looking statements. These factors include those set forth in other public filings. In addition, these forward-looking statements relate to the date on which they are made. Alexis Nihon REIT disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Consolidated Balance Sheets
As at December 31
(in thousands of dollars)
2005 2004
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Assets
Income-producing properties (note 6) $ 668,746 $ 603,689
Intangible assets (note 7) 39,416 31,904
Land held for development 964 964
Cash and cash equivalents - 10,000
Other assets (note 8) 20,960 16,319
Due from companies under common control
of certain trustees of the REIT (note 9) 535 250
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$ 730,621 $ 663,126
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Liabilities
Debts on income-producing properties
(note 10) $ 370,321 $ 334,674
Convertible debentures - liability
component (note 11) 53,468 53,338
Intangible liabilities (note 12) 3,203 3,214
Bank indebtedness (note 13) 41,969 808
Accounts payable and accrued liabilities 20,303 10,555
Distributions payable 2,251 2,281
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491,515 404,870
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Commitments and Contingencies (note 14)
Equity
Unitholders' equity 239,106 258,256
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$ 730,621 $ 663,126
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See accompanying notes
Consolidated Statements of Unitholders' Equity
For the Years Ended December 31
(in thousands of dollars)
Other
Units Net Equity
in $ Income Components Distributions Total
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Unitholders'
Equity -
December 31,
2004 $ 267,234 $ 34,170 $ 2,852 $ (46,000) $ 258,256
Net income - 6,128 - - 6,128
Units issued
(note 15) 2,971 - - - 2,971
Distributions - - - (28,249) (28,249)
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Unitholders'
Equity -
December 31,
2005 $ 270,205 $ 40,298 $ 2,852 $ (74,249) $ 239,106
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Unitholders'
Equity -
December 31,
2003 $ 198,107 $ 22,822 $ 1,148 $ (19,527) $ 202,550
Net income - 11,348 - - 11,348
Units issued
(note 15) 69,127 - - - 69,127
Convertible
debentures -
equity
component - - 1,704 - 1,704
Distributions - - - (26,473) (26,473)
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Unitholders'
Equity -
December 31,
2004 $ 267,234 $ 34,170 $ 2,852 $ (46,000) $ 258,256
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See accompanying notes
Consolidated Statements of Income
For the Years Ended December 31
(in thousands of dollars, except per unit amounts)
2005 2004
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Revenues from Rental Operations (note 16) $ 121,496 $ 98,750
Rental Property Operating Costs 58,666 47,160
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Net Operating Income 62,830 51,590
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Expenses
Interest (note 17) 26,413 20,184
Amortization of buildings 15,220 12,849
Other amortization (note 18) 10,856 4,980
Internalization of construction management
company (note 4) 1,613 -
General and administrative 2,150 1,687
Trust expenses 450 542
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56,702 40,242
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Net Income $ 6,128 $ 11,348
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Basic Net Income Per Unit (note 20) $ 0.239 $ 0.474
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Diluted Net Income Per Unit (note 20) $ 0.239 $ 0.474
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See accompanying notes
Consolidated Statements of Cash Flows
For the Years Ended December 31
(in thousands of dollars)
2005 2004
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Cash Flows generated from (used for) -
Operating Activities
Net income $ 6,128 $ 11,348
Items not affecting cash:
Amortization of buildings 15,220 12,849
Other amortization 10,856 4,980
Amortization of above and below market
in-place leases (232) (252)
Amortization of deferred financing costs 655 248
Amortization of deferred recoverable costs 280 -
Interest on convertible debentures paid
by units - 197
Accrued rental revenue (1,704) (1,899)
Internalization of construction
management company 1,613 -
Changes in:
Other assets (note 24) (3,470) 5,964
Accounts payable and accrued liabilities 7,857 (1,347)
Additions to tenant improvements and
leasing costs (9,080) (7,356)
Additions to deferred recoverable costs (1,189) -
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Cash Flows generated from Operating Activities 26,934 24,732
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Financing Activities
Increase in debts on income-producing properties 32,938 102,000
Repayment of debts on income-producing
properties (12,683) (29,521)
Convertible debentures issued (net of
issue costs) - 52,644
Amortization of fair value debt adjustment (126) (55)
Accretion on liability component of
convertible debentures 130 42
Additions to deferred financing costs (613) (642)
Bank indebtedness 41,161 (4,129)
Proceeds of public offering of units (net
of issue costs) - 56,159
Distributions (26,946) (25,374)
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Cash Flows generated from Financing Activities 33,861 151,124
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Investing Activities
Acquisition of rental properties (note 5) (62,971) (154,594)
Additions to buildings (7,541) (10,184)
Additions to furniture, fixtures and computers (172) (210)
Deposits on potential acquisitions 174 (755)
Due from companies under common control of
certain trustees of the REIT (285) (113)
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Cash Flows used for Investing Activities (70,795) (165,856)
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(Decrease) Increase in Cash and Cash Equivalents (10,000) 10,000
Cash and Cash Equivalents - Beginning of Year 10,000 -
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Cash and Cash Equivalents - End of Year $ - $ 10,000
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See accompanying notes
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
(dollar amounts are in thousands, except per unit amounts)
1. Description of the REIT Alexis Nihon Real Estate Investment Trust (the "REIT") is an unincorporated closed-ended investment trust created by a contract of trust (the "Contract of Trust"). The REIT was established under, and is governed by, the laws of the Province of Quebec. 2. Changes in Accounting Policy (a) Diluted Earnings per share Effective October 1, 2005 the REIT adopted the Canadian Institute of Chartered Accountants ("CICA") Emerging Issues Committee Abstract ("EIC") No. 155 "The Effect of Contingently Convertible Instruments on the Computation of Diluted Earnings Per Share", retroactively with restatement. The adoption of the pronouncement had no material impact on the Diluted Net Income Per Unit of the REIT for the years ended December 31, 2004 and 2005. (b) Convertible Debt Instruments Effective October 17, 2005 the REIT prospectively adopted EIC No. 158 "Accounting for Convertible Debt Instruments". The adoption of the pronouncement has had no material impact on the financial statements. 3. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the REIT, its subsidiairies and its proportionate share of assets, liabilities, revenues and expenses of co-owned properties. On consolidation, all material inter-entity transactions and balances have been eliminated. Use of Estimates The preparation of the consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting year. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Significant estimates and assumptions made by management include, but are not limited to, the useful lives of long-lived assets, the cash flows expected from the on-going use and disposal of long-lived assets, the discount rates used in determining certain fair value estimates and the fair values of tangible and intangible assets acquired upon the purchase of income-producing properties. Revenue recognition The REIT uses the straight-line method of recognizing rental revenue whereby the total amount of rental revenue to be received from leases is accounted for on a straight-line basis over the term of the related agreements. Percentage rents are recognized when the required level of sales has been achieved. Recoveries from tenants for taxes, insurance and other operating expenses are recognized as revenues in the period in which the applicable costs are incurred. Recoveries for repair and maintenance costs (deferred recoverable costs) are recognized on a straight-line basis over the expected life of the items. Parking and other incidental are recognized when the services are provided. Income-Producing Properties Income-producing properties include land, buildings, tenant improvements (developed by the REIT), leasing costs, deferred recoverable costs and tenant improvements recorded on acquisitions which are carried at cost less accumulated amortization. Cost includes the purchase price of the asset plus acquisition-related costs. Income-producing properties are reviewed periodically for impairment as described under "Impairment of Long-Lived Assets". Maintenance and repairs that are not recoverable from tenants are either expensed as incurred, or, in the case of a major item, capitalized to buildings and amortized on a straight-line basis over the expected useful life of the item. Amortization of buildings is provided using the straight-line method over 35 years. Major repair and maintenance items that are recoverable from tenants are capitalized to deferred recoverable costs and amortized on a straight-line basis over the expected useful life of the items. The amortization of these items are included in rental property operating costs. Amortization of leasing costs and tenant improvements including tenant inducements and allowances are provided using the straight-line method over the terms of the related leases. Intangible Assets and Liabilities A portion of the purchase price of an income-producing property must be allocated to intangible components including in-place leasing costs, above and below market leases and tenant relationships, if any. This allocation is based on management's estimate of their fair values. These intangibles are amortized on a straight-line basis over the terms of the related leases. The amortization of the above and below market in-place leases is recorded in revenues from rental operations. Intangibles are reviewed periodically for impairment as described under "Impairment of Long-Lived Assets". Land held for development Land held for development is carried at cost. The cost includes the purchase price of the land plus other acquisition-related costs. Impairment of Long-Lived Assets Long-lived assets, which include income-producing properties, intangibles, land held for development and furniture, fixtures and computers, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is assessed by comparing the carrying amount of an asset with the expected future net undiscounted cash flows from its use together with its residual value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Cash and Cash Equivalents Cash and cash equivalents consist primarily of unrestricted cash and highly liquid investments having an initial maturity of three months or less. Deferred Financing Costs Deferred financing costs are amortized over the terms of the related debt. Income Taxes Income taxes for the subsidiary companies 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 the differences are expected to reverse. Unit-Based Compensation Plans The REIT has in effect the following unit-based compensation plans: a) A unit option plan as described in note 15. The REIT will recognize the fair value of unit options on their grant date as compensation expense over the period that the unit options vest. b) An employee unit purchase plan (EUPP) as described in note 15. A compensation expense is recognized for the REIT's contributions to the plan over the vesting period. c) A unit bonus plan as described in note 15. A compensation expense is recognized for the REIT's contributions to the plan over the vesting period. 4. Business Acquisition On January 1, 2005, the REIT acquired the assets of a construction management company owned by certain trustees of the REIT for a consideration of approximately $1,638 paid by the issuance of 132,743 units of the REIT. Substantially all of the purchase price has been expensed as an internalization of construction management services by the REIT in accordance with EIC-138 "Internalization of the management function in a royalty or income trust". The acquisition has been recorded at the exchange amount, which is the amount of the consideration established and agreed to by the related parties. The purchase price has been allocated as follows: --------------------------------------------------------------------- Furniture and fixtures 25 Internalization of construction management expense 1,613 --------------------------------------------------------------------- Consideration paid $ 1,638 --------------------------------------------------------------------- --------------------------------------------------------------------- The net income of the acquired company has been included in the consolidated statement of net income from the date of acquisition. 5. Acquisition of Rental Properties During the year the REIT acquired five income-producing properties and related assets and liabilities (2004 - land held for development, 17 income-producing properties and related assets and liabilities). The following table summarizes the net assets acquired:
Office Industrial Total Total
Property Properties 2005 2004
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Land held for development $ - $ - $ - $ 964
Land 2,955 12,022 14,977 32,763
Building 17,310 30,907 48,217 107,227
Tenant improvements - - - 1,139
Intangible assets and
liabilities:
Lease origination costs
for in-place leases 4,865 11,052 15,917 33,430
Above market in-place
leases 439 - 439 1,780
Below market in-place
leases (570) (164) (734) (3,650)
Other assets - - - 2,765
Accounts payable and
accrued liabilities - - - (1,471)
Debts on income-producing
properties (7,749) (7,769) (15,518) (20,353)
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Cash consideration paid
for the net assets
acquired $ 17,250 $ 46,048 $ 63,298 $ 154,594
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The results of operations of income-producing properties are included in the consolidated financial statements from their date of acquisition.
6. Income-Producing Properties
2005 2004
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Net Net
Accumulated Carrying Carrying
Cost Amortization Amount Amount
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Land $ 127,935 $ - $ 127,935 $ 112,952
Building and tenant
improvements 573,025 37,934 535,091 487,295
Leasing costs 4,798 957 3,841 2,345
Tenant improvement
recorded on
acquisitions 1,139 169 970 1,097
Deferred recoverable
costs $ 1,189 $ 280 $ 909 $ -
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$ 708,086 $ 39,340 $ 668,746 $ 603,689
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7. Intangible Assets
2005 2004
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Net Net
Accumulated Carrying Carrying
Cost Amortization Amount Amount
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Lease origination costs
for in-place leases $ 49,347 $ 11,453 $ 37,894 $ 30,308
Above market in-place
leases 2,219 697 1,522 1,596
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$ 51,566 $ 12,150 $ 39,416 $ 31,904
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8. Other Assets
2005 2004
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Accounts receivable $ 5,345 $ 2,824
Deferred rent receivable 3,602 1,899
Prepaids 1,386 1,412
Deposits on potential acquisitions 581 755
Restricted funds 6,088 5,593
Furniture, fixtures and computers 725 714
Deferred financing costs 3,080 3,122
Other 153 -
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$ 20,960 $ 16,319
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Restricted funds held at Canadian financial institutions are pursuant to agreements with various mortgage lenders. Furniture, fixture and computers are net of accumulated amortization of $527 (December 31, 2004 - $340). Deferred financing costs are net of accumulated amortization of $901 (December 31, 2004 - $413) 9. Due from Companies Under Common Control of Certain Trustees of the REIT The amounts due from companies under common control of certain trustees of the REIT are non-interest bearing and have no specific terms of repayment.
10. Debts on Income-Producing Properties
2005 2004
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Loans secured by mortgages on income-producing
properties, bearing interest at a weighted
average annual rate of 6.18%, repayable in
blended monthly instalments of $2,789 maturing
at various dates no later than July 1, 2019 $368,225 $ 332,675
Accrued interest 1,874 1,739
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370,099 334,414
Fair value debt adjustment (note 17) 222 260
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$ 370,321 $ 334,674
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Principal repayments of debt on income-producing properties are due
as follows:
Instalments Due on
payments maturity Total
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2006 $ 10,251 $ 20,895 $ 31,146
2007 9,676 79,326 89,002
2008 7,447 50,034 57,481
2009 5,617 47,064 52,681
2010 5,656 22,745 28,401
Subsequent to 2010 35,824 73,690 109,514
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74,471 293,754 368,225
Accrued interest 1,874
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$ 370,099
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11. Convertible Debentures On August 31, 2004, the REIT issued $55 million principal amount of Series A subordinated unsecured convertible debentures (the "2004 Convertible Debentures") at a price of $1,000 per convertible debenture. The 2004 Convertible Debentures bear interest at 6.2% per annum payable semi-annually and will mature June 30, 2014. The 2004 Convertible Debentures will be convertible, subject to certain restrictions, in whole or in part, at the holders' option, at any time prior to June 27, 2014 into 73.2601 units per $1 000 of face value (in aggregate, 4.029 million units), subject to an anti-dilution adjustment, representing a conversion price of $13.65 per unit. Provided that the REIT is not in default at date of payments, the REIT may elect, at its option, to satisfy any obligation to pay the principal amount on maturity or the redemption date, by delivering units of the REIT. The number of units to be issued will be determined by dividing the principal amount of the 2004 Convertible Debentures that are to be redeemed or that are to mature, by 95% of the volume-weighted average trading price of the units of the REIT on the Toronto Stock Exchange (the "TSX") for the 20 consecutive trading days ending on the fifth trading day preceding the date of payment. In addition, units of the REIT may be issued to pay interest on the 2004 Convertible Debentures. The 2004 Convertible Debentures are not redeemable prior to June 30, 2008, except in the event of a change of control. On or after June 30, 2008 and prior to June 30, 2010, the 2004 Convertible Debentures may be redeemed by the REIT, in whole or in part, at a redemption price equal to the principal amount thereof plus accrued and unpaid interest, provided that the volume-weighted average trading price of the Units on the TSX for the 20 consecutive trading days ending on the fifth trading day preceding the date on which notice of redemption is given exceeds 125% of the conversion price. On or after June 30, 2010 and prior to June 30, 2014, the 2004 Convertible Debentures may be redeemed by the REIT at any time at a redemption price equal to the principal amount thereof plus accrued and unpaid interest. In accordance with Section 3860 of the CICA Handbook, the 2004 Convertible Debentures were divided into their liability and equity components, measured at their respective fair values at time of issue. Interest expense on the 2004 Convertible Debentures is determined by applying an effective interest rate of 6.6% to the outstanding liability component. The difference between actual cash interest payments and interest expense is accreted to the liability component of the 2004 Convertible Debentures up to the face value of the 2004 Convertible Debentures. Issue costs related to the 2004 Convertible Debentures are deferred and amortized over the term of the debt.
12. Intangible Liabilities
2005 2004
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Net Net
Accumulated Carrying Carrying
Cost Amortization Amount Amount
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Below market in-place leases $ 4,384 $ 1,181 $ 3,203 $ 3,214
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13. Bank Indebtedness The REIT has a $50,000 credit facility which consists of a general operating loan, banker's acceptance and letters of credit. Borrowings under the general operating loan bear interest at prime plus 0.5% per annum. Borrowings under the bankers' acceptance bear interest at the bankers' acceptance rate plus 2.25% per annum. The letter of credit facility is limited to $5,000. The credit facility is secured by a first ranking hypothec on three income-producing properties having a total net carrying amount of $46,149 and a second ranking hypothec on two income-producing properties having a total net carrying amount of $243,201. The terms of the banking agreement require the REIT to meet certain financial covenants. 14. Commitments and Contingencies (a) The annual future payments required under emphyteutic leases, expiring from 2046 to 2065, on land for two income-producing properties and a portion of a third income-producing property having a total net carrying value of $43,664 (2004 - $42,994), are as follows: --------------------------------------------------------------------- 2006 $ 411 2007 415 2008 416 2009 416 2010 416 Subsequent to 2010 16,717 (b) The REIT is committed to payments under various service agreements for the maintenance of an income-producing property, expiring from 2006 to 2012. The estimated minimum payments required under these agreements are approximately as follows: --------------------------------------------------------------------- 2006 $ 2,017 2007 529 2008 498 2009 447 2010 447 Subsequent to 2010 728 (c) Letters of guarantee outstanding as at December 31, 2005 amount to $5,000 (2004 - $2,000). This amount has been given as a performance guarantee to execute required repairs under a mortgage agreement. 15. Units Issued and Outstanding The interests in the REIT are represented by a single class of units which are unlimited in number. Each unit entitles the holder to a single vote and carries the right to participate in all distributions. Changes to the balance of units issued and outstanding were as follows:
2005 2004
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Number Number
of units Amounts of units Amounts
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Balance - beginning of
year 25,515,935 $ 267,234 20,091,900 $ 198,107
Issuance of units:
Offerings - - 4,300,000 56,159
Internalization of
construction
management (note 4) 132,743 1,638 - -
Distribution reinvestment
plan 105,417 1,333 51,531 621
Interest on convertible
debenture - - 16,061 197
Conversion of convertible
debenture - - 1,056,443 12,150
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Balance - end of year 25,754,095 $ 270,205 25,515,935 $ 267,234
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Distribution Reinvestment Plan The REIT maintains a distribution reinvestment plan pursuant to which unitholders may elect to have all cash distributions of the REIT automatically reinvested in additional units. The plan gives to the reinvestment plan participants a number of units amounting to 103% of their cash distribution. During the year, 105,417 units (2004 - 51,531) have been issued at a weighted average price of $12.64 (2004 - $12.05) pursuant to the distribution reinvestment plan. Unit-Based Compensation Plans a) Unit Option Plan The REIT has a unit option plan (the "Plan") under which unit options may be issued to employees, directors, officers or Trustees of the REIT, its wholly-owned subsidiaries as well as certain trusts of which the REIT is directly or indirectly a beneficiary. The total number of units in respect of which options may be granted under the Plan may not exceed 2,535,180 units. The unit option plan provides that at no time shall the number of units reserved for issuance under the Plan exceed 15% of the then outstanding units. The exercise price of the options will be equal to the market price of the units on the day before the day on which the option is granted. The option shall be exercisable for a period not exceeding 10 years. No grants have been awarded under the Plan. b) Employee Unit Purchase Plan (EUPP) The REIT has in effect an EUPP which gives eligible employees the opportunity to acquire units of the REIT for between 2% to 5% of their gross salaries and to have the REIT contribute, a further amount equal to 50% of the amount invested by the employees, over the following five years. The contributions are used to purchase units of the REIT in the open market. c) Unit Bonus Plan In 2005, the REIT adopted a Unit Bonus Plan (the "Plan") which provides for the grant of Trust Units to key executives and any other employees designated by the board of directors of the REIT, up to a maximum of 40% of their overall bonus. Annually, the REIT contributes the amount of the bonus to be rendered under the Unit Bonus Plan to the trust administering the plan, which in turn purchases units of the REIT on the open market. The employees become entitled to the units and the income from the distributions over a three-year period of continuous employment. The REIT's contributions and accumulated distributions are recorded as deferred compensation expense (included in other assets) and expensed over the vesting period. In 2005, the REIT recorded a total compensation expense of $73 (December 31, 2004 - $1) for the various plans.
16. Revenues From Rental Operations
2005 2004
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Rental revenue contractually due under
the leases $ 119,560 $ 96,599
Accrued rental revenue 1,704 1,899
Amortization of above market in-place leases (513) (184)
Amortization of below market in-place leases 745 436
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$ 121,496 $ 98,750
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17. Interest
2005 2004
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Interest on debts on income-producing
properties, at stated rate $ 21,353 $ 18,104
Interest on convertible debentures, at
stated rate 3,410 1,421
Accretion on liability component of
convertible debentures 130 42
Amortization of deferred financing costs 655 248
Amortization of fair value debt adjustment (126) (55)
Other interest 991 424
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$ 26,413 $ 20,184
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Certain debts on income-producing properties assumed on acquisitions have been adjusted to fair value using the market interest rate at the time of acquisition. This fair value debt adjustment is amortized to interest expense over the remaining life of the debts. Interest paid during the year was $25,619 (2004 - $19,206).
18. Other Amortization
2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Amortization of tenant improvements and leasing
costs incurred through leasing activities $ 2,212 $ 1,612
Amortization of furniture, fixtures and
computers 186 204
Amortization of lease origination costs for
in-place leases incurred through acquisitions 8,331 3,122
Amortization of tenant improvements incurred
through acquisitions 127 42
---------------------------------------------------------------------
$ 10,856 $ 4,980
---------------------------------------------------------------------
---------------------------------------------------------------------
19. Income Taxes The REIT is an unincorporated, closed-ended investment trust created by the Contract of Trust governed by the laws of the Province of Quebec. The REIT is taxed as a "mutual fund trust" for income tax purposes. Pursuant to the Contract of Trust, the REIT will make distributions or designate all taxable income earned by the REIT to unitholders and will deduct such distributions and designations for income tax purposes. Therefore, no provision for income taxes has been made. Income tax obligations relating to distribution from the REIT are the obligations of the unitholders. The REIT's subsidiaries are Canadian-based enterprises which are subject to tax on their taxable income under the Income Tax Act (Canada) at an average rate of approximately 31%. There is no provision required for the years ended December 31, 2005 and 2004.
20. Net Income Per Unit Calculations
Basic and diluted per unit amounts are based on the following:
2005 2004
---------------------------------------------------------------------
Basic Diluted Basic Diluted
---------------------------------------------------------------------
Net income $ 6,128 $ 6,128 $ 11,348 $ 11,348
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average number
of units outstanding 25,661,055 25,661,055 23,942,455 23,942,455
---------------------------------------------------------------------
---------------------------------------------------------------------
Convertible debentures have been excluded from the calculations of the diluted net income per unit for the year ended December 31, 2005 and 2004 since they are anti-dilutive. 21. Distributable Income Distributable income is presented because the REIT believes this measure is a relevant measure of its ability to earn and distribute cash returns to unitholders. Distributable income, which is not defined within Canadian generally accepted accounting principles, has been calculated in accordance with the terms of the Contract of Trust as follows:
2005 2004
---------------------------------------------------------------------
Net income $ 6,128 $ 11,348
Add (deduct)
Internalization of construction management
company 1,613 -
Amortization of buildings 15,220 12,849
Amortization of amounts recorded on
acquisitions:
Tenant improvements 127 42
Lease origination costs for in-place leases 8,331 3,122
Above and below market in-place leases (232) (252)
Accretion on liability component of
convertible debentures 130 42
Amortization of fair value debt adjustments (126) (55)
Accrued rental revenue (1,704) (1,899)
---------------------------------------------------------------------
Distributable income $ 29,487 $ 25,197
---------------------------------------------------------------------
---------------------------------------------------------------------
22. Investments in Co-Owned Properties The REIT'S pro-rata share of the assets and liabilities of the Co-Owned Properties as at December 31, 2005 and 2004, as well as its proportionate share in the revenues, expenses and cash flows for the years then ended are as follows: 2005 2004 --------------------------------------------------------------------- Income-producing properties $ 8,715 $ 8,834 Debts on income-producing properties 4,177 4,443 Accounts payable and accrued liabilities 168 125 Revenues 1,361 1,427 Expenses 1,266 1,239 Net income 95 188 Cash flows from: Operating activities 382 344 Financing activities (266) (244) Investing activities (116) (100) --------------------------------------------------------------------- --------------------------------------------------------------------- 23. Segmented Information The segmented information is aligned to conform to the REIT's strategic business unit organization and is disaggregated among four segments: office, retail, industrial and multi-family residential properties. The REIT, its subsidiaries and the Co-Owned Properties operate in the province of Quebec and Ontario in the above-mentioned segments. The operating segments are managed separately because of the different types of properties, tenants and marketing strategies involved. The REIT evaluates segment performance based on net operating income which is entirely allocated amongst the segments. The REIT utilizes the same accounting policies for its segments as those described in note 3.
Multi-family
2005 Office Retail Industrial residential Total
---------------------------------------------------------------------
Revenues from
rental
operations $ 59,821 $ 34,274 $ 22,053 $ 5,348 $ 121,496
Rental property
operating costs 31,283 15,731 8,348 3,304 58,666
---------------------------------------------------------------------
Net operating
income $ 28,538 $ 18,543 $ 13,705 $ 2,044 $ 62,830
---------------------------------------------------------------------
Income-producing
properties $ 312,701 $ 178,037 $ 145,332 $ 32,676 $ 668,746
---------------------------------------------------------------------
Intangible
assets $ 16,063 $ 10,729 $ 12,624 $ - $ 39,416
---------------------------------------------------------------------
Additions to
income-producing
properties $ 30,800 $ 7,440 $ 44,506 $ 150 $ 82,896
---------------------------------------------------------------------
Additions to
intangible
assets $ 5,304 $ - $ 11,052 $ - $ 16,356
---------------------------------------------------------------------
---------------------------------------------------------------------
Multi-family
2004 Office Retail Industrial residential Total
---------------------------------------------------------------------
Revenues from
rental
operations $ 52,181 $ 28,374 $ 12,884 $ 5,311 $ 98,750
Rental property
operating costs 26,143 12,838 4,994 3,185 47,160
---------------------------------------------------------------------
Net operating
income $ 26,038 $ 15,536 $ 7,890 $ 2,126 $ 51,590
---------------------------------------------------------------------
Income-producing
properties $ 291,564 $ 174,997 $ 103,991 $ 33,137 $ 603,689
---------------------------------------------------------------------
Intangible
assets $ 12,979 $ 12,382 $ 6,543 $ - $ 31,904
---------------------------------------------------------------------
Additions to
income-producing
properties $ 63,858 $ 43,370 $ 51,278 $ 163 $ 158,669
---------------------------------------------------------------------
Additions to
intangible
assets $ 13,830 $ 13,257 $ 8,123 $ - $ 35,210
---------------------------------------------------------------------
---------------------------------------------------------------------
24. Supplemental Cash Flow Information
Change in Other Assets
2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Accounts receivable $ (2,848) $ 868
Prepaids 26 (467)
Restricted funds (495) 5,563
Other (153) -
---------------------------------------------------------------------
$ (3,470) $ 5,964
---------------------------------------------------------------------
---------------------------------------------------------------------
25. Related Party Transactions The following related party transactions were measured at the exchange amount which is the amount established and agreed to by the related parties. Head Lease In order to provide unitholders of the REIT with stable, predictable revenues in respect of certain vacant spaces that are expected to be leased in the near term, the head lessee, a company under common control of certain trustees of the REIT, entered into the head lease with the REIT. The head lease is for a term of ten years and applies to approximately 68,165 (2004 - 166,661) square feet of leasable area of the income-producing properties at specified market rental rates. For 2005, the head lease revenue amounted to $1,332 (2004 - $2,248). As security for the obligation of the head lease, a company under common control of certain trustees of the REIT has pledged units of the REIT. Other Accounts payable and accrued liabilities include $Nil (2004 - $896) due to companies under common control of certain trustees of the REIT. 26. Financial Instruments Credit Risk Management reviews a new tenant's credit history before signing new leases and conducts regular reviews of its existing tenants' credit performance. Interest Rate Risk The REIT is exposed to interest rate risk on debts on income-producing properties and bank indebtedness which bear interest based on prime rates. The fair value of the debts and bank indebtedness will fluctuate as a result of changes in interest rates. Fair Value of Financial Instruments The fair value of the REIT's, cash and cash equivalents, accounts receivable, deposits, restricted funds, bank indebtedness and accounts payable and accrued liabilities approximate their carrying amounts due to the relatively short periods to maturity of the instruments. The fair value of the debts on income-producing properties at December 31, 2005 and 2004 has been established by discounting the future cash flows using interest rates corresponding to that which the REIT would currently be able to obtain for loans with similar maturity dates and terms. Based on these assumptions, the fair value of debts on income-producing properties at December 31, 2005 has been estimated at $378,750 (2004 - $344,645) compared with the carrying value of $368,447 (2004 - $332,935). The fair value of the 2004 convertible debentures as at December 31, 2005 is $56,100 (2004 - $55,000) compared with the carrying value of $55,172 (2004 - $55,042) . The fair values are based on the 2004 convertible debentures' market rates at December 31, 2005 and 2004. A reasonable estimate of fair value could not be made for amounts due to and from companies under common control of certain trustees of the REIT as there is no comparable market data. 27. Comparative Figures Certain reclassifications of 2004 amounts have been made to facilitate comparison with the current year. 28. Subsequent Event Subsequent to year end, the REIT put in place conventional first mortgage loans on twelve income-producing properties totaling $38,934. In addition, the REIT repaid a mortgage loan on an additional property in the amount of $7,131.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
The following discussion describes the business, the business environment, and management's expectations as at February 28, 2006. It should be read in conjunction with the consolidated financial statements of the Alexis Nihon Real Estate Investment Trust ("the REIT") for the years ended December 31, 2005, and 2004, as well as the notes thereto. This discussion contains forward-looking statements relating to the REIT's operations and/or to the environment in which it operates, which are based on the REIT's expectations, estimates, forecasts and projections. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict, and/or are beyond the REIT's control. A number of important factors may cause actual outcomes and results to differ materially from those expressed in these forward-looking statements. These factors include those set forth in other public filings of the REIT. Therefore, readers should not place undue reliance on any such forward-looking statements. In addition, these forward-looking statements speak only as of the date on which they are made and the REIT disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or circumstances or otherwise. All amounts reflected in this discussion are in thousands of dollars except for per unit and square foot amounts. OVERVIEW AND OBJECTIVES The REIT is an unincorporated closed-end real estate investment trust created pursuant to the Declaration of Trust. The REIT is governed by the laws of the Province of Quebec and began operations on December 20, 2002. The REIT units and convertible debentures are publicly traded and listed on the Toronto Stock Exchange (TSX) under the symbols AN.UN and AN.DB respectively. Additional information relating to the REIT is also available on the REIT's website at www.alexisnihon.com and on SEDAR at www.sedar.com. The objectives of the REIT are: i. To provide unitholders with stable and growing cash distributions, payable monthly and, to the maximum extent practicable, income tax deferred; and ii. To improve and maximize unit value through future acquisitions of additional income-producing properties and the ongoing active management or redevelopment of the REIT's properties. DISTRIBUTION REINVESTMENT PLAN The REIT has a Unitholder Distribution Reinvestment Plan ("DRIP") providing unitholders with the option of reinvesting their total monthly cash distributions in additional units of the REIT, thereby allowing them to steadily increase their ownership without incurring any commission or other transaction cost. To encourage participation, unitholders registered in the DRIP will also receive additional units equal in value to 3% of the monthly distribution otherwise payable. The Plan is administered by National Bank Trust Inc., the REIT's transfer agent (1-800-341-1419). Please visit our website to download our DRIP brochure. 2005 OVERVIEW On January 1st, 2005, the REIT acquired the operations of ANC Construction Inc., the REIT's construction management business for renovations and leasehold improvements, principally in respect to properties owned by the REIT. ANC Construction Inc. was a company indirectly controlled by Paul J. Massicotte, the REIT's president and CEO, and Robert A. Nihon, chairman of the REIT's Board of Trustees. The purchase price of $1.6 million was paid through the issuance of 132,743 units of the REIT on March 31, 2005. On February 2nd, 2005, the REIT announced the acquisition of a 225,600 square foot, 98% leased, industrial property in Boucherville, Quebec for $8.4 million representing an initial capitalization rate of approximately 11.1%. On April 26, 2005, the REIT announced an expansion of $9.2 million at its Centre Laval shopping centre located in Laval. Plans called for a 68,830 square foot expansion of which 38,705 square feet is occupied by Best Buy and 14,900 square feet is occupied by Ares both of whose stores opened in mid-October 2005. When fully leased, the expansion space is expected to generate approximately $1.0 million annually in net operating income. On June 17, 2005, the REIT announced the acquisition of a 953,604 square foot, 100% leased, portfolio of three industrial properties in Montreal, Quebec for $43.1 million representing a capitalization rate of approximately 8.8%. On September 1, 2005, the REIT announced the acquisition of a 173,936 square foot, 96% leased, office property in Ottawa, Ontario for $24.5 million representing a capitalization rate of approximately 9.7%. As of December 31, 2005, the REIT's portfolio consisted of 55 office, retail and industrial properties (including a 426-unit multi-family residential property) aggregating 8.5 million square feet of leasable area of which 0.4 million square feet is co-owned. There are 52 properties located in the Greater Montreal Area and 3 in the National Capital Region. The chart below outlines the REIT's portfolio of properties and square footage: # of properties Leasable area (square feet) Property ------------------------------------------------------- Type Wholly owned Co-owned Wholly owned Co-owned --------------------------------------------------------------------- Office 20 - 2,987,677 - Retail 4 - 1,488,005 - Industrial 24 7(2) 3,300,722 410,417 Residential -(1) - 300,321 - --------------------------------------------------------------------- Total 48 7 8,076,725 410,417 --------------------------------------------------------------------- --------------------------------------------------------------------- (1) With respect to the "# of properties", Place Alexis Nihon has been included as one property in the office category. It includes two office towers, a retail concourse and a multi-family residential component. (2) The REIT owns 25% of 102,032 square feet (3 properties), and 50% of 308,385 square feet (4 properties). The portfolio has a mix of over 900 non-residential tenancies, including many high quality, national tenants with strong covenants. FINANCIAL PERFORMANCE The financial results of the REIT for the years 2005 and 2004, in total and by quarter, are summarized in the following table:
2005
----------------------------------------------------
Total Dec. Sept. June March
Revenues from
rental
operations $ 121,496 $ 32,981 $ 30,671 $ 28,856 $ 28,988
Rental property
operating costs 58,666 16,210 14,602 13,451 14,403
---------------------------------------------------------------------
Net operating
income 62,830 16,771 16,069 15,405 14,585
---------------------------------------------------------------------
Interest 26,413 7,017 6,919 6,340 6,137
Amortization
of buildings 15,220 4,041 3,903 3,653 3,623
Other
amortization 10,856 3,119 2,839 2,515 2,383
Internalization
of construction
management 1,613 - - - 1,613
General and
administrative 2,150 589 493 792 276
Trust 450 116 99 97 138
---------------------------------------------------------------------
56,702 14,882 14,253 13,397 14,170
---------------------------------------------------------------------
Net Income 6,128 1,889 1,816 2,008 415
Add/(Deduct):
Amortization of
buildings 15,220 4,041 3,903 3,653 3,623
Internalization
of
construction
management 1,613 - - - 1,613
Amortization
of amounts
recorded on
acquisitions:
Tenant
improvements 127 32 32 31 32
Lease
origination
costs for
in-place
leases 8,331 2,293 2,209 1,949 1,880
Above and
below
market
in-place
leases (232) (53) (56) (65) (58)
Accretion on
liability
component of
convertible
debentures 130 33 33 33 31
Amortization
of fair value
debt
adjustments (126) (23) (37) (33) (33)
Accrued rental
revenue
recognized
on a
straight-line
basis (1,704) (466) (360) (416) (462)
---------------------------------------------------------------------
Distributable
Income (1) $ 29,487 $ 7,746 $ 7,540 $ 7,160 $ 7,041
---------------------------------------------------------------------
---------------------------------------------------------------------
Distributions $ 28,249 $ 7,080 $ 7,072 $ 7,064 $ 7,033
Distributions
per unit $ 1.100 $ 0.275 $ 0.275 $ 0.275 $ 0.275
---------------------------------------------------------------------
---------------------------------------------------------------------
Funds from
operations(1) $ 33,631 $ 8,995 $ 8,514 $ 8,131 $ 7,991
Funds from
operations
per unit $ 1.311 $ 0.350 $ 0.331 $ 0.317 $ 0.313
---------------------------------------------------------------------
---------------------------------------------------------------------
Net income per
unit:
Basic $ 0.239 $ 0.073 $ 0.071 $ 0.078 $ 0.016
Diluted(2) $ 0.239 $ 0.073 $ 0.071 $ 0.078 $ 0.016
---------------------------------------------------------------------
---------------------------------------------------------------------
Distributable
income per
unit:
Basic $ 1.149 $ 0.301 $ 0.293 $ 0.279 $ 0.276
Diluted $ 1.108 $ 0.289 $ 0.282 $ 0.270 $ 0.267
---------------------------------------------------------------------
---------------------------------------------------------------------
Total Assets $ 730,621 $ 730,621 $ 734,089 $ 710,104 $ 661,068
Total Debt(3) $ 465,758 $ 465,758 $ 465,354 $ 439,422 $ 390,247
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted
average
number of
units:
Basic 25,661,055 25,736,198 25,706,883 25,677,642 25,520,625
Diluted
(for net
income) 25,661,055 25,736,198 25,706,883 25,677,642 25,520,625
Diluted
(for
distributable
income) 29,690,361 29,765,504 29,736,189 29,706,948 29,549,931
---------------------------------------------------------------------
---------------------------------------------------------------------
2004
----------------------------------------------------
Total Dec. Sept. June March
Revenues from
rental
operations $ 98,750 $ 29,254 $ 25,425 $ 23,281 $ 20,790
Rental property
operating costs 47,160 13,838 11,266 11,073 10,983
---------------------------------------------------------------------
Net operating
income 51,590 15,416 14,159 12,208 9,807
---------------------------------------------------------------------
Interest 20,184 6,257 5,458 4,347 4,122
Amortization
of buildings 12,849 3,632 3,373 3,134 2,710
Other
amortization 4,980 2,532 1,509 741 198
Internalization
of construction
management - - - - -
General and
administrative 1,687 312 606 463 306
Trust 542 49 138 248 107
---------------------------------------------------------------------
40,242 12,782 11,084 8,933 7,443
---------------------------------------------------------------------
Net Income 11,348 2,634 3,075 3,275 2,364
Add/(Deduct):
Amortization of
buildings 12,849 3,632 3,373 3,134 2,710
Internalization
of construction
management - - - - -
Amortization of
amounts recorded
on acquisitions:
Tenant
improvements 42 7 35 - -
Lease origination
costs for
in-place
leases 3,122 1,742 866 514 -
Above and below
market
in-place
leases (252) (153) (59) (40) -
Accretion on
liability
component of
convertible
debentures 42 42 - - -
Amortization of
fair value
debt
adjustments (55) (33) (22) - -
Accrued rental
revenue
recognized
on a
straight-line
basis (1,899) (508) (507) (616) (268)
---------------------------------------------------------------------
Distributable
Income (1) $ 25,197 $ 7,363 $ 6,761 $ 6,267 $ 4,806
---------------------------------------------------------------------
---------------------------------------------------------------------
Distributions $ 26,473 $ 7,017 $ 7,013 $ 6,913 $ 5,530
Distributions
per unit $ 1.100 $ 0.275 $ 0.275 $ 0.275 $ 0.275
---------------------------------------------------------------------
---------------------------------------------------------------------
Funds from
operations(1) $ 29,170 $ 8,730 $ 7,910 $ 7,105 $ 5,425
Funds from
Operations
per unit $ 1.218 $ 0.342 $ 0.310 $ 0.288 $ 0.270
---------------------------------------------------------------------
---------------------------------------------------------------------
Net income
per unit:
Basic $ 0.474 $ 0.103 $ 0.121 $ 0.133 $ 0.118
Diluted(2) $ 0.474 $ 0.103 $ 0.121 $ 0.133 $ 0.118
---------------------------------------------------------------------
---------------------------------------------------------------------
Distributable
income
per unit:
Basic $ 1.052 $ 0.289 $ 0.265 $ 0.254 $ 0.239
Diluted $ 1.039 $ 0.280 $ 0.263 $ 0.253 $ 0.237
---------------------------------------------------------------------
---------------------------------------------------------------------
Total Assets $ 663,126 $ 663,126 $ 670,814 $ 564,405 $ 479,803
Total Debt(3) $ 388,820 $ 388,820 $ 392,627 $ 288,014 $ 268,540
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted
average
number of
units:
Basic 23,942,455 25,506,516 25,494,379 24,637,663 20,096,970
Diluted
(for
net income) 23,942,455 25,506,516 25,494,379 24,637,663 20,096,970
Diluted
(for
distributable
income) 25,663,683 29,535,822 26,808,283 25,102,034 21,153,413
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Distributable income and Funds from operations are non-GAAP measures, see definition on pages 8 and 11 (2) Convertible debentures have been excluded from the calculations of the diluted net income per unit in 2004 and in 2005 since they are anti-dilutive. (3) Total debt comprises debts secured by mortgages, bank indebtedness, and the liability component of convertible debentures. Factors that have caused period to period variances mainly result from acquisitions completed by the REIT in 2004 and 2005. The 2005 increase in the weighted average number of units (basic and diluted) used in calculating net income per unit results from units issued via: i) the REIT's DRIP and ii) the issuance of units on the acquisition of ANC Construction Inc. in March 2005 and in 2004 to: i) the REIT's DRIP, ii) the payment of interest in the form of units of the REIT on the 2002 Convertible Debenture, iii) a new issue of units in April 2004 and iv) the conversion of the 2002 Convertible Debenture in May 2004 into units of the REIT. NET OPERATING INCOME The quarter over quarter ("QOQ QOQ - Quarter on Quarter") and year to date ("YTD") analysis by sector of the REIT's net operating income ("NOI") is explained in greater detail in the following section entitled "Segmented Analysis". In summary, for the year ended December 31, 2005, NOI totaled $62,830 which was an increase of $11,240 or 21.8% over the same period last year. Of the increase, $11,075 is attributable to the NOI generated from the acquisition of 22 properties acquired at various times in 2004 (17 properties) and 2005 (5 properties). In total, 5 office, 2 retail, and 15 industrial properties were acquired during this time representing 3,530,760 square feet. Had these properties been excluded from the 2005 NOI, the same property NOI for the year 2005 would have totaled $51,755 reflecting a positive variance of $165 or 0.3% over 2004. Three months ended Year ended Same property YOY ----------------------------------------- NOI variance March June Sept. Dec. Dec. 31, 2005 --------------------------------------------------------------------- - Increase (decrease) in straight-lining of rents $194 ($199) ($147) ($43) ($195) - Increase (decrease) in amortization of above and below market in-place leases 58 25 (4) (98) (19) - Net positive (negative) variance associated with occupancies and redevelopment 685 (48) (328) (1) 308 - (Increase) decrease in non-recoverable and bad debt expense (365) 443 (89) (212) (223) - Increase in cancellation penalties received - 8 240 - 248 - Positive (negative) variance in other income 193 95 (111) (48) 129 - Net increase (decrease) in the residential sector NOI 111 32 (150) (76) (83) --------------------------------------------------------------------- Net variance $876 $356 ($589) ($478) $165 --------------------------------------------------------------------- --------------------------------------------------------------------- Excluding the YOY impact of straight-lining of rents and other accounting changes, the same property portfolio reflected an increase of $379 or 0.7%.
SEGMENTED ANALYSIS
Office Three months ended
-------------------------------------------------
Mar. 31 June 30 Sept. 30
-------------------------------------------------
2005 2004 2005 2004 2005 2004
-------------------------------------------------
Revenues from
rental operations $14,458 $11,660 $14,243 $12,926 $14,848 $12,895
Rental property
operating costs 7,792 6,184 6,897 6,203 7,809 6,270
-------------------------------------------------
Net operating
income $6,666 $5,476 $7,346 $6,723 $7,039 $6,625
-------------------------------------------------
-------------------------------------------------
Office Three months ended Year ended
------------------------------------------------
Dec. 31 Dec. 31
------------------------------------------------
2005 2004 2005 2004
------------------------------------------------
Revenues from rental
operations $16,272 $14,700 $59,821 $52,181
Rental property
operating costs 8,785 7,486 31,283 26,143
------------------------------------------------
Net operating income $7,487 $7,214 $28,538 $26,038
------------------------------------------------
------------------------------------------------
Net operating income from office rental operations totaled $28,538 for the year compared with $26,038 in 2004 representing an increase of $2,500 or 9.6%. The positive variance for the year is summarized as follows:
Three months ended Year ended
Same property YOY -----------------------------------------
NOI variance March June Sept. Dec. Dec. 31, 2005
---------------------------------------------------------------------
- NOI contribution from
properties acquired $1,546 $684 $635 $628 $3,493
- Decrease in
straight-lining or
rents (44) (83) (121) (18) (266)
- Increase in
amortization of above
and below market
in-place leases 20 20 22 2 64
- (Negative) positive
variance associated
with occupancies (97) (484) (190) 144 (627)
- (Negative) positive
variances in
non-recoverable
and bad debt expense (288) 487 (51) (256) (108)
- (Decrease) increase in
cancellation penalties
received (10) 8 69 - 67
- Positive (negative)
variance in other
income 63 (9) 50 (227) (123)
---------------------------------------------------------------------
Net positive variance $1,190 $623 $414 $273 $2,500
---------------------------------------------------------------------
---------------------------------------------------------------------
Retail Three months ended
-------------------------------------------------
Mar. 31 June 30 Sept. 30
-------------------------------------------------
2005 2004 2005 2004 2005 2004
-------------------------------------------------
Revenues from
rental operations $8,478 $5,689 $8,290 $6,666 $8,325 $7,437
Rental property
operating costs 3,850 3,008 3,819 3,118 3,795 3,018
-------------------------------------------------
Net operating
income $4,628 $2,681 $4,471 $3,548 $4,530 $4,419
-------------------------------------------------
-------------------------------------------------
Retail Three months ended Year ended
------------------------------------------------
Dec. 31 Dec. 31
------------------------------------------------
2005 2004 2005 2004
------------------------------------------------
Revenues from rental
operations $9,181 $8,582 $34,274 $28,374
Rental property
operating costs 4,267 3,694 15,731 12,838
------------------------------------------------
Net operating income $4,914 $4,888 $18,543 $15,536
------------------------------------------------
------------------------------------------------
For the year 2005, the retail sector net operating income totaled $18,543 compared with $15,536 in 2004. The YOY positive variance of $3,007 or 19.4% is detailed as follows:
Three months ended Year ended
Same property YOY -----------------------------------------
NOI variance March June Sept. Dec. Dec. 31, 2005
---------------------------------------------------------------------
- NOI contribution from
properties acquired $957 $625 $353 $ - $1,935
- Increase (decrease) in
straight-lining of rents 190 (147) (76) (96) (129)
- Increase (decrease) in
amortization of above
and below market
in-place leases 69 29 10 (103) 5
- Net positive (negative)
variance associated with
occupancies and
redevelopment 704 419 (91) 85 1,117
- Increase in cancellation
penalties received - - 33 - 33
- Positive (negative)
variance in other
income 27 (3) (118) 140 46
---------------------------------------------------------------------
Net positive variance $1,947 $923 $111 $26 $3,007
---------------------------------------------------------------------
---------------------------------------------------------------------
Industrial Three months ended
-------------------------------------------------
Mar. 31 June 30 Sept. 30
-------------------------------------------------
2005 2004 2005 2004 2005 2004
-------------------------------------------------
Revenues from rental
operations $4,752 $2,160 $4,959 $2,364 $6,108 $3,721
Rental property
operating costs 1,949 887 1,895 919 2,126 1,275
-------------------------------------------------
Net operating income $2,803 $1,273 $3,064 $1,445 $3,982 $2,446
-------------------------------------------------
-------------------------------------------------
Industrial Three months ended Year ended
------------------------------------------------
Dec. 31 Dec. 31
------------------------------------------------
2005 2004 2005 2004
------------------------------------------------
Revenues from rental
operations $6,234 $4,639 $22,053 12,884
Rental property
operating costs 2,378 1,913 8,348 4,994
------------------------------------------------
Net operating income $3,856 $2,726 $13,705 $7,890
------------------------------------------------
------------------------------------------------
The industrial sector reflects a YOY positive variance of $5,815 or 73.7%. Net operating income for the year totaled $13,705 compared with the $7,890 in 2004. The contributing factors include:
Three months ended Year ended
Same property YOY -----------------------------------------
NOI variance March June Sept. Dec. Dec. 31, 2005
---------------------------------------------------------------------
- NOI contribution from
properties acquired $1,399 $1,532 $1,511 $1,205 $5,647
- Impact of
straight-lining or
rents 48 31 50 71 200
- (Decrease) increase
in amortization of
above and below market
in-place leases (31) (24) (36) 3 (88)
- Net positive (negative)
variance associated
with occupancies 78 17 (47) (230) (182)
- Increase in cancellation
penalties received 10 - 138 - 148
- (Increase) decrease in
non-recoverable and bad
debt expense (77) (44) (37) 44 (114)
- Positive (negative)
variance in other
income 103 107 (43) 37 204
---------------------------------------------------------------------
Net positive variance $1,530 $1,619 $1,536 $1,130 $5,815
---------------------------------------------------------------------
---------------------------------------------------------------------
Residential Three months ended
-------------------------------------------------
Mar. 31 June 30 Sept. 30
-------------------------------------------------
2005 2004 2005 2004 2005 2004
-------------------------------------------------
Revenues from rental
operations $1,300 $1,281 $1,364 $1,325 $1,390 $1,372
Rental property
operating costs 812 904 840 833 872 703
-------------------------------------------------
Net operating income $488 $377 $524 $492 $518 $669
-------------------------------------------------
-------------------------------------------------
Residential Three months ended Year ended
------------------------------------------------
Dec. 31 Dec. 31
------------------------------------------------
2005 2004 2005 2004
------------------------------------------------
Revenues from rental
operations $1,294 $1,333 $5,348 $5,311
Rental property
operating costs 780 745 3,304 3,185
------------------------------------------------
Net operating income $514 $588 $2,044 $2,126
------------------------------------------------
------------------------------------------------
Net operating income for the residential sector totaled $2,044 representing a YOY decrease of $82 or 3.9%. In summary, variances resulted from: Three months ended Year ended Same property YOY ----------------------------------------- NOI variance March June Sept. Dec. Dec. 31, 2005 --------------------------------------------------------------------- - Increase in revenues generated from rental increases on regular apartments $27 $28 $40 $34 $129 - (Decrease) increase in revenues generated from the executive suites (9) 11 (21) (75) (94) - Positive (negative) variances in operating expenses 93 (7) (170) (33) (117) --------------------------------------------------------------------- Net negative variance $111 $32 ($151) ($74) ($82) --------------------------------------------------------------------- --------------------------------------------------------------------- INTEREST EXPENSE Interest expense consists of interest paid on secured mortgages on the income-producing properties as well as interest on the REIT's general bank indebtedness, interest on convertible debentures, accretion of the liability component of the convertible debentures, amortization of the fair value debt adjustments on mortgages assumed on acquisitions, and amortization of deferred financing costs. As at December 31, 2005, interest expense totaled $26,413 compared with $20,184 in 2004. The YOY variance of $6,229 results from: - Interest on secured mortgages on income producing properties acquired $3,373 - Increase in interest on convertible debentures 1,989 - Interest on new mortgages put in place 1,517 - Increase on interest accretion on convertible debentures 89 - Increase in interest on general bank indebtedness 744 - Interest savings on secured mortgages repaid upon maturity (965) - Amortization of the fair value debt adjustments relating to mortgages assumed on the acquisition of certain properties (71) - Other, net (447) --------------------------------------------------------------------- Net increase $6,229 --------------------------------------------------------------------- --------------------------------------------------------------------- The table below reflects the weighted average interest rate on existing mortgages by quarter and YOY as well as the weighted-average term to maturity.
2005 2004
-------------------------------------------------
Dec. Sept. June Mar. Dec. Sept. June Mar.
Weighted-average
interest rate 6.2% 6.2% 6.3% 6.3% 6.3% 6.3% 6.3% 6.4%
-------------------------------------------------
-------------------------------------------------
Weighted-average
term to maturity
(years) 5.08 5.33 5.46 5.61 5.83 6.07 5.30 3.54
-------------------------------------------------
-------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses, which consist of the REIT's overhead costs net of amounts recovered under operating expenses, totaled $2,150 for the year 2005 compared to $1,687 in 2004. The YOY variance of $463 is attributable to the following: - Increase in capital taxes paid by the REIT's subsidiaries $107 - Increase in legal, audit and professional fees 150 - Increase in costs associated with non-concluded acquisitions 67 - Other 139 --------------------------------------------------------------------- Net increase $463 --------------------------------------------------------------------- --------------------------------------------------------------------- AMORTIZATION EXPENSE For the year ended December 31, 2005, total amortization (buildings and other) was $26,076 compared to $17,829 in 2004. The YOY increase of $8,247 results from approximately $5,294 of amortization of lease origination costs for in-place leases and tenant improvements incurred through acquisitions, as well as approximately $1,839 of amortization of buildings principally for properties acquired, and $1,114 of amortization on tenant improvements, commissions and property additions. TRUST EXPENSES Trust expenses in 2005 totaled $450 versus $542. The YOY decrease of $92 primarily results from the reduction of annual filling fees relating to the prospectuses in 2004 of $89. INTERNALIZATION OF CONSTRUCTION MANAGEMENT The CICA's abstract (EIC-138) concerning the accounting for the internalization of the management function in royalty and income trusts, requires that the consideration paid for the early termination of a management contract should be charged to expense in the same period as the management internalization transaction is consummated. As a result of the acquisition and internalization of the REIT's construction management company on January 1, 2005 (see "2005 Overview" in previous pages), substantially all of the purchase price ($1,613 of the $1,638) was expensed by the REIT in accordance with EIC-138 with the exception of $25 for acquiring the fair value of the furniture, fixtures and computers. DISTRIBUTABLE INCOME Distributable income and distributable income per unit are non-GAAP measures and should not be construed as an alternative to net earnings and earnings per unit determined in accordance with GAAP as an indicator of the REIT's performance. The REIT's methods of calculating these measures may differ from other issuers' methods and accordingly, they may not be comparable to measures used by other issuers. Distributable income represents net income determined in accordance with Canadian GAAP, subject to certain adjustments as set out in the Declaration of Trust. These adjustments include adding back amortization (but not amortization of tenant inducements and other leasing costs), income tax expense, amounts received under the AN Income Subsidy, and excluding any gains or losses on the disposition of assets. Also excluded are any amounts that the Trustees in their discretion determine to be appropriate, including the impact of the change in accounting policy for the straight-lining of contractual rent increases, the full impact of EIC-140, as well as the internalization of the REIT's construction management function which was fully expensed in accordance with EIC-138.
Distributable income by quarter and YOY are as follows:
Twelve
months ended
Three months ended - 2005 Dec. 31
------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 2005 2004
------------------------------------------------
Distributable
Income $7,041 $7,160 $7,540 $7,746 $29,487 $25,197
Per unit:
Basic $0.276 $0.279 $0.293 $0.301 $1.149 $1.052
Diluted $0.267 $0.270 $0.282 $0.289 $1.108 $1.039
Distributions
paid $7,033 $7,064 $7,072 $7,080 $28,249 $26,473
Distributable income
payout ratio 99.9% 98.7% 93.8% 91.4% 95.8% 105.1%
Increases in distributions paid reflects distributions made on units issued throughout the year on the REIT's DRIP (105,417 units in 2005); as well as 132,743 units issued as payment on the acquisition of the REIT's construction management division on March 31, 2005. LEASING DATA In 2005, leases for 987,404 square feet of space expired at a weighted average net rental rate of $8.55 per square foot. Of this amount, 685,840 square feet having a weighted average net rental rate of $7.89 was renewed at a weighted average net rental rate of $8.01. During the same period, 587,104 square feet of vacant space was leased at a weighted average net rental rate of $10.98 per square foot. The following tables reflect the REIT's average occupancies and net rental rates:
2005
-----------------------------------------------------------
Occupancies March 31, June 30, September 30,
---------------------------------------------------------------------
Area Area Area
Segment (sq.ft.) Occupancy (sq.ft.) Occupancy (sq.ft.) Occupancy
---------------------------------------------------------------------
Office 2,813,741 88.0% 2,813,741 86.9% 2,987,677 87.5%
Retail 1,434,400 94.7% 1,434,400 95.5% 1,434,400 95.9%
Indus-
trial 2,757,535 87.1% 3,711,139 92.4% 3,711,139 90.4%
Residen-
tial 300,321 96.0% 300,321 98.8% 300,321 95.5%
---------------------------------------------------------------------
Overall 7,305,997 89.3% 8,259,601 91.3% 8,433,537 90.5%
---------------------------------------------------------------------
---------------------------------------------------------------------
2005 2004
--------------------------------------------------------
Occupancies December 31, December 31,
---------------------------------------------------------------------
Area Area
Segment (sq.ft.) Occupancy (sq.ft.) Occupancy
---------------------------------------------------------------------
Office 2,987,677 88.4% 2,813,741 87.1%
Retail 1,488,005 96.1% 1,432,100 96.6%
Industrial 3,711,139 91.2% 2,531,925 89.9%
Residential 300,321 92.8% 300,321 95.8%
---------------------------------------------------------------------
Overall 8,487,142 91.1% 7,078,087 90.4%
---------------------------------------------------------------------
---------------------------------------------------------------------
Net rental rate 2005 2004
---------------------------------------------------------------------
Segment March 31, June 30, September 30, December 31, December 31,
---------------------------------------------------------------------
Office $11.19 $11.03 $11.36 $11.35 $11.03
Retail 12.62 13.04 13.29 13.56 13.07
Industrial 5.28 4.97 4.99 5.00 5.38
Residen-
tial(1) 1,006.23 1,032.10 1,046.17 1,037.28 1,030.14
---------------------------------------------------------------------
Overall $9.54 $8.89 $9.11 $9.18 $9.70
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) The residential sector sets forth the average monthly gross rent per unit. Since September 30, 2005, the overall portfolio occupancy level increased by 0.6% to 91.1%. The office, retail and industrial sectors reflected increases of 0.9%, 0.2% and 0.8% respectively. The increases in the office and industrial sectors resulted from increased leasing activity. As for the retail sector, the increase resulted from the opening in October 2005 of Best Buy (38,705 square feet) and Ares (14,900 square feet) in the new expansion space at Centre Laval. As for the residential sector, the decrease of 2.7% is attributable to vacancies as at December 31, in the 72 furnished apartments, which are leased on a short-term basis, and are historically mostly vacant at year end due to seasonal holidays. The REIT'S YOY and QOQ occupancy levels and net rental rates may have been affected by acquisitions of properties having slightly lower occupancy levels and lower net rental rates than the existing portfolio averages. Excluding acquired properties the YOY same portfolio occupancy levels and net rental rates reflect the following:
December 31, 2004 December 31, 2005
-----------------------------------------
Area Net rental Net rental
Segment (sq.ft.) Occupancy rate Occupancy rate
---------------------------------------------------------------------
Office 2,813,741 87.1% $11.03 88.0% $11.11
Retail 1,432,100 96.6% 13.07 96.1% 13.40
Industrial 2,531,925 89.9% 5.38 87.3% 5.45
Residential(1) 300,321 95.8% 1,030.14 92.8% 1,037.28
---------------------------------------------------------------------
Overall 7,078,087 90.4% $9.70 89.6% $9.83
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) The residential sector sets forth the average monthly gross rent per unit. The same portfolio occupancy level in the office sector shows a YOY favorable variance of $0.9% resulting from leasing activities. The YOY retail and industrial sectors' unfavorable variances of 0.5%, and 2.6% respectively, which represents approximately 7,160 square feet of retail space and 65,830 square feet of industrial space, is attributable principally to expected move outs of tenants at lease expiry, as well as YOY vacancies resulting from tenant insolvencies. The YOY negative variance of 3.0% in the residential sector results from lower occupancy of the executive suites which are leased on short-term leases. DEBT FINANCING AND CONTRACTUAL OBLIGATIONS In addition to the issuance of 132,743 units on March 31, 2005, discussed previously (see "2005 Overview"), the REIT also completed the following financing activities: During the year the REIT repaid upon maturity the mortgages on: Property Amount Rate Maturity --------------------------------------------------------------------- - 80 - 140 Lindsay Street, Dorval $835 8.4% January - 8411 - 8453 Dalton Road, Mount-Royal $497 8.4% January - 8459 - 8497 Dalton Road, Mount-Royal $692 8.4% January - 9960 - 9970 Cote de Liesse Road, Lachine $844 8.2% May On June 17, 2005 the REIT acquired a portfolio of three industrial properties and assumed a mortgage of $7,704 on the property located at 2105, 23rd Avenue, Lachine. The mortgage bears interest at 5.82%, has a 20 year amortization, and matures in February 2009. On June 30, 2005 the REIT put in place a 10 year mortgage of $3,938 on another of the properties acquired on June 17, 2005 located at 1111, 46th Avenue, Lachine. The mortgage bears interest at 4.98%, has a 25 year amortization, and matures in July 2015. On July 18, 2005 the REIT put in place a hypothecary loan of $18,000 on an industrial property located at 2000 Halpern, St. Laurent, which had been acquired on June 17, 2005. The loan bears interest at a rate of 4.68%, maturing on August 1, 2010, and has a 25 year amortization. On September 1, 2005 the REIT acquired an office property located at 400 Cooper Street in Ottawa and assumed a mortgage of $7,749 bearing interest at 6.0%, having a 25 year amortization, and maturing on April 1, 2010. In addition, the REIT put in place a hypothecary loan of $11,000 bearing interest at 5.19%, on a 25 year amortization, maturing on September 1, 2015. During the year, the REIT also extended on a month-to-month basis the following mortgages with the consent of the lenders, under the same terms and conditions, while negotiations on a new financing agreement were being finalized (see "Subsequent Events"): Principal Property Amount(1) Rate Maturity --------------------------------------------------------------------- - 3339 - 3403 Griffith Street, St. Laurent $3,863 5.875% July - 777 St. Catherine Street West, Montreal $7,131 7.870% October - 1925 - 1975 Hymus Blvd., Dorval $1,717 8.250% October - 8100 Cavendish Blvd., St-Laurent $2,384 5.875% December - 8545 - 8579 Dalton Road, Mount-Royal $979 5.600% December - 8605 - 8639 Dalton Road, Mount-Royal $951 5.600% December (1) As at December 31, 2005 In addition, the REIT renewed its $50,000 credit facility for a six month period from November 1, 2005 to April 30, 2006. The credit facility is subject to annual reviews and consists of a general operating loan and letters of credit. Advances under the credit facility bear interest at prime plus 0.5% or at the rate for bankers' acceptances plus 2.25%. The terms of the credit facility provide for conditions precedent to draw-downs, events of default and negative covenants customary for operating facilities of such nature and certain negative covenants with respect to the incurrence of debt by the REIT. In addition to second ranking hypothecs on Place Alexis Nihon and Centre Laval, the facility is secured by a first ranking hypothec on the properties located at 1080 Beaver Hall Hill, Montreal, Quebec; 2102-2150, 32nd Avenue, Montreal (Lachine), Quebec; and 1615-1805, 55th Avenue, Montreal (Dorval), Quebec. The credit facility was renewed on the same terms and conditions except that if the occupancy rate of 1080 Beaver Hall Hill falls below 65% for a full quarter, the REIT will have 60 days from the end of such quarter to bring the occupancy rate up to 75%, failing which, the REIT will have to provide additional security in an amount of $10,000. As at December 31, 2005, the REIT's debt secured by income-producing properties was $412,290 representing 52.8% of gross book value (book value of the REIT's assets plus accumulated amortization less intangible liabilities was $780,336), well below its 60% threshold limit. Including the convertible debentures, the percentage is 59.7% (limit 65%). Floating rate debt, which cannot exceed 15% of gross book value, totaled $41,969 or 5.4%. The REIT's contractual obligations at December 31, 2005 were as follows:
Payments due by period
----------------------------------------------
Less than 1 - 3 4 - 5 After 5
Total 1 year years Years years
----------------------------------------------
Long-term debt $370,099 $33,020 $146,483 $81,082 $109,514
Emphyteutic leases 18,791 411 831 832 16,717
Maintenance agreements 4,666 2,017 1,027 894 728
Convertible debentures 55,000 - - - 55,000
----------------------------------------------
Total $448,556 $35,448 $148,341 $82,808 $181,959
----------------------------------------------
----------------------------------------------
LIQUIDITY AND CAPITAL EXPENDITURES Funds from operations ("FFO") is a measure of the funds generated from the business before reinvestment in the business or provision for other capital needs. The REIT considers FFO and particularly FFO per unit, to be an indicative measure of operating performance. FFO is not a measure defined by GAAP. FFO as presented is in accordance with the recommendations of the Real Property Association of Canada ("REALPac"). It may not, however, be comparable to similar measures presented by other real estate investment trusts. The following is the calculation of FFO based on the industry's standard definition:
Twelve
Three months ended - 2005 months ended
FFO/Net Income Mar. June Sept. Dec. December 31,
Reconciliation: 31 30 30 31 2005 2004
---------------------------------------------------------------------
Net Income (per
financial statements) $415 $2,008 $1,816 $1,889 $6,128 $11,348
Adjustments to
reconcile net income
to FFO:
Internalization of
construction
management company 1,613 - - - 1,613 -
Amortization of
buildings 3,623 3,653 3,903 4,041 15,220 12,849
Other amortization,
excluding
amortization of
furniture, fixtures
& computers 2,340 2,470 2,795 3,065 10,670 4,776
Interest on the AN
Convertible Debentures
paid by units - - - - - 197
---------------------------------------------------------------------
Funds from operations $7,991 $8,131 $8,514 $8,995 $33,631 $29,170
---------------------------------------------------------------------
---------------------------------------------------------------------
Distributions $7,033 $7,064 $7,072 $7,080 $28,249 $26,473
---------------------------------------------------------------------
---------------------------------------------------------------------
FFO payout ratio 88.0% 86.9% 83.1% 78.7% 84.0% 90.8%
---------------------------------------------------------------------
---------------------------------------------------------------------
FFO per unit $0.313 $0.317 $0.331 $0.350 $1.311 $1.218
---------------------------------------------------------------------
---------------------------------------------------------------------
Distributions per unit $0.275 $0.275 $0.275 $0.275 $1.100 $1.100
---------------------------------------------------------------------
---------------------------------------------------------------------
The cash generated from operating activities, conventional mortgage financing, as well as funds from operating and acquisition facilities, have been used to meet all of the REIT's liquidity requirements in 2005 and were principally utilized for funding property acquisitions, principal repayments of debts on income-producing properties, and distributions to unitholders. Management expects to be able to continue to meet all of the REIT's ongoing obligations and to finance future growth through the issuance of new equity as well as by using conventional real estate debt, short-term financing from the REIT's credit facilities, and the REIT's stable cash flow. The REIT currently has a theoretical acquisition capacity of approximately $117 million for growth investments, while still meeting its debt covenants. CAPITAL EXPENDITURES, LEASING COMMISSIONS AND TENANT IMPROVEMENTS Capital expenditures, leasing commissions and tenant improvements totaled $18,978 in 2005 compared to $17,540 in 2004. Details of the amounts incurred are as follows:
Twelve months ended
2004 2005
----------------------
Additions to buildings:
Redevelopment - Centre Laval(1) $ 3,836 $ 5,886
Parking repairs 2,125 1,833
Non-recoverable maintenance 461 1,078
Recoverable maintenance 3,762 1,101
----------------------
Total additions to buildings 10,184 9,898
----------------------
Tenant improvements & leasing costs:
Renewals & vacant space lease-ups 2,464 5,902
Value enhancing(2) - 644
Redevelopment 2,860 895
Leasing commissions 2,032 1,639
----------------------
Total tenant improvements & leasing costs 7,356 9,080
----------------------
Total $ 17,540 $ 18,978
----------------------
----------------------
(1) Includes an accrual of $2,357 for additions incurred but not yet paid for. (2) Reflects tenant improvements and leasing commissions spent leasing-up then vacant space on properties that have been acquired by the REIT, to the sustainable level of occupancy. OUTSTANDING UNITS DATA As of December 31, 2005, the Nihon/Massicotte Group hold approximately 30.1% of the 25,754,095 outstanding units of the Alexis Nihon REIT. At February 28, 2006, there were 25,764,926 units of the REIT issued and outstanding. EMPLOYEE UNIT PURCHASE PLAN The REIT has in effect an Employee Unit Purchase Plan ("EUPP") which gives eligible employees the opportunity to acquire units of the REIT for between 2% and 5% of their gross salaries. The REIT contributes a further amount equal to 50% of the amount invested by the employees over the next five years. The contributions are used to purchase units of the REIT in the open market. UNIT BONUS PLAN In 2005, the REIT adopted a Unit Bonus Plan (the "Plan") which provides for the grant of Trust Units to key executives and any other employee designated by the board of directors of the REIT, up to a maximum of 40% of their overall bonus. Annually, the REIT contributes the amount of the bonus to be rendered under the Unit Bonus Plan to the trust administering the plan, which in turn purchases units of the REIT on the open market. The employees become entitled to the units and the income from the distributions over a three year period of continuous employment. The REIT's contributions and accumulated distributions are recorded as deferred compensation expense (included in other assets) and expensed over the vesting period. In 2005, the REIT recorded a compensation expense of $73. RELATED PARTY TRANSACTIONS The following related party transactions were measured at the exchange amount, which is the amount established and agreed to by the related parties. Head Lease At the time of the IPO in December 2002, and in order to provide unitholders of the REIT with stable, predictable revenues in respect to 218,097 square feet of certain vacant spaces, the AN Head Lessee, a company under common control of certain trustees of the REIT, entered into a head lease with the REIT. The head lease is for a term of 10 years and, of the original head lease space, applied in 2005 to approximately 68,165 (2004 - 166,661) square feet of leasable area of the income-producing properties at specified market rental rates. For 2005, the head lease revenue amounted to $1,332 (2004 - $2,248). An acceptable tenant must be approved by the members of the Head Lease Committee in order for the Head Lease space to be permanently retired. As at December 31, 2005, 39.2% of the remaining Head Lease area of 68,165 sq.ft., has been leased. CRITICAL ACCOUNTING ESTIMATES The financial statements are based on the selection and application of critical accounting policies set forth in the notes to the consolidated financial statements, which require management to make significant estimates and assumptions. Management believes that there are three critical areas of judgment in the application of accounting policies that affect the financial condition and results of operations of the REIT. Impairment of long lived assets Management reviews the long-lived assets used in operations for impairment when there is an event or change in circumstances that indicates an impairment in value. An asset is considered impaired when the undiscounted future cash flows are not sufficient to recover the asset's carrying value. If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The evaluation of anticipated cash flows is based in part on assumptions regarding future occupancy, rental rates, capital requirements and residual values that could differ materially from actual results in future periods. Property Acquisitions For acquisitions of properties initiated on or after September 12, 2003, the CICA has issued guidance for accounting for operating leases in connection with these acquisitions. Through management's judgment and estimates, the purchase price must be allocated to land site improvements, building, the above or below market value of in place operating leases, the fair value of tenant improvements, in-place leasing costs and the value of the relationship with the existing tenants. These estimates will impact rentals from income properties, expense and amortization expense recorded on both a quarterly and annual basis. Fair Value of Financial Instruments Management reports the fair value of financial instruments. Fair value of financial instruments approximate amounts at which these instruments could be exchanged between knowledgeable and willing parties. The estimated fair values may differ in amount from that which could be realized in an immediate settlement of the instruments. Management estimates the fair value of mortgages payable based on current market rates for mortgages of similar terms. Fair values of convertible debentures are reported in the financial statements based on current market prices. CHANGES IN ACCOUNTING POLICIES a) Diluted Earnings per share Effective October 1, 2005 the REIT adopted the Canadian Institute of Chartered Accountants ("CICA") Emerging Issues Committee Abstract ("EIC") No. 155 "The Effect of Contingently Convertible Instruments on the Computation of Diluted Earnings Per Share", retroactively with restatement. The adoption of the pronouncement had no material impact on the Diluted Net Income Per Unit of the REIT for the years ended December 31, 2004 and 2005. b) Convertible Debt Instruments Effective October 17, 2005 the REIT prospectively adopted EIC No. 158 "Accounting for Convertible Debt Instruments". The adoption of the pronouncement has had no material impact on the financial statements. DISCLOSURE CONTROLS AND PROCEDURES The REIT maintains appropriate information systems, procedures and controls to ensure that new information disclosed externally is complete, reliable and timely. The Chief Executive Officer and the Chief Financial Officer of the REIT evaluated the effectiveness of the REIT's disclosure controls and procedures (as defined in Multilateral Instruments 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings) as at December 31, 2005 and have concluded that such |