Inovalis Real Estate Investment Trust Reports Financial Results for the First Quarter of 2016 and Change of Chief Financial Officer

/NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR DISSEMINATION IN THE UNITED STATES/

TORONTO, May 16, 2016 /CNW/ - Inovalis Real Estate Investment Trust (the "REIT") (TSX: INO.UN) today reported its financial results for the first quarter of 2016. Inovalis REIT's management team will be holding a conference call on May 16, 2016 at 2:00 pm EST to discuss the results. The dial-in numbers for the conference call are: in Toronto 1-416-764-8688; outside Toronto (toll free, within North America) 1-888-390-0546.

HIGHLIGHTS OF FIRST QUARTER 2016 RESULTS

• Inovalis REIT ("Inovalis REIT", or the "REIT" or "we") is a Canadian REIT managed by Inovalis S.A. ("Inovalis SA"), a local cross-border French and German real estate asset manager managing $10 billion of real estate and financial assets. As of March 31, 2016, Inovalis SA had a 15.9% interest in the REIT's equity (directly and indirectly).
• 18.1% year-over-year growth in IFRS book equity per unit of which 8.9% comes from the addition of high quality properties and the cap rate compression in France and in Germany. The further appreciation of the Euro against the Canadian dollar since Q1 2015 accounted for 9.2%.
• Funds from operations (FFO) for the quarter ended March 31, 2016 of $3,776 or $0.21 per unit (fully diluted), with a FFO payout ratio of 97.5%, compared to $0.21 per unit and payout ratio of 96.2% or the same period in 2015.
• Adjusted funds from operations (AFFO) for the quarter ended March 31, 2016 of $4,153 or $0.23 per unit (fully diluted) with an AFFO payout ratio of 88.2%, compared to $0.21 per unit and payout ratio of 96.2% for the same period in 2015.
• Occupancy rate on the REIT's portfolio was increased from 89.0% as at December 31, 2015 to 93.1% as at March 31, 2016 with a weighted average lease term of 6.2 years. The signature of new leases on 50,200 sq.ft on the Baldi, Courbevoie, Sablière and Bad Homburg properties in the course of the first quarter of 2016 reflects the good positioning of our properties in an improving letting market.
• On March 21, 2016, as designed in the Metropolitan Acquisition Loan agreement, and as approved by the REIT's Unitholders at a special meeting held on January 20, 2016, the REIT exercised its option to buy at a 12% discount the Metropolitan property at an entry cap rate of 4.8% for approximately $70 million. The Metropolitan property is a 79,000 square feet office property benefiting from an excellent location in a gentrifying area within downtown Paris. The property has a weighted average lease term of 7.7 years with tenants in diversified industries and of good credit quality. The property also offers potential for further capital appreciation and higher rental income that could be achieved through the re-letting of the current vacant area (9% of total space) and the reversion potential on passing rent.
• Debt to book value of the REIT was 57.6% as at March 31, 2016. Net of the cash available, debt to book value was 56.5%.
• During the quarter, the REIT terminated the finance lease on the Hanover property and refinanced it with an interest-only 7-year mortgage financing of €12.6 million ($18.6 million). The purpose of this operation was to make the REIT benefit from a fixed interest rate of 1.85% on this property for 7 years.

CHANGE OF CHIEF FINANCIAL OFFICER

Inovalis REIT also reports that Antoine Tronquoy has advised the REIT that he will be leaving effective June 30, 2016 to pursue other opportunities. Mr. Tronquoy joined the REIT in 2013 and has played a significant role in the growth and development of the REIT.

The REIT also announced today that Ms. Anne Smolen has been appointed the new Chief Financial Officer of the REIT effective July 1, 2016 and will be based in Paris.  Ms. Smolen has acted as CFO of Inovalis SA, the manager of the REIT, and has been actively involved with the REIT since inception, working closely with Mr. Tronquoy during that time. Before joining Inovalis S.A., Ms. Smolen acted as Deputy CFO for Urbania and CFO for Adyal. Prior to that, she was a Senior Manager at Ernst & Young in Paris for 13 years specializing in the real estate industry.

Stéphane Amine, the Chairman of the Board of the REIT commented, "We thank Antoine for his contributions and wish him all the best in his future endeavors. We are very pleased to have Anne become the new CFO of the REIT. Having Anne succeed Antoine as CFO ensures continuity and stability for the REIT and we look forward to her contributions as CFO. The rationale of the move of the CFO role from Canada to France is also to get the CFO closer to our European based operations."

ABOUT INOVALIS REAL ESTATE INVESTMENT TRUST

Inovalis Real Estate Investment Trust is an unincorporated, open-ended real estate investment trust established pursuant to a declaration of trust under the laws of the Province of Ontario. The REIT has been created for the purpose of acquiring and owning office properties primarily located in France and Germany but also opportunistically in other European countries where assets meet the REIT's investment criteria. The REIT currently owns an interest in eleven office properties in France and Germany, comprising approximately 1,083,000 square feet of gross leasable area (taking into account the interests in the properties owned in joint-ventures).

Management's discussion and analysis
(Dollar amounts in the MD&A are presented in thousands of Canadian dollars, except Unit or as otherwise stated)

OVERVIEW

The presentation of our operational information, financing information and operating results takes into account our proportionate share of income from investments in joint ventures. Please refer to "Non IFRS section" for a reconciliation to our condensed interim consolidated financial statements.

		March 31, 2016	December 31, 2015
Operational information ^(1)
Number of properties		11	10
Gross leasable area (sq.ft)		1,083,239	1,004,448
Occupancy rate (end of period) ^(2)		93.1%	89.0%
Weighted average lease term		6.2 years	6.3 years
Average capitalization rate ^(3)		6.1%	6.6%
Financing information ^(1)
Level of debt (debt-to-book value) ^(4)		57.6%	53.0%
Level of debt (debt-to-book value, net of cash) ^(4)		56.5%	51.9%
Weighted average term of principal repayments of debt		7.8 years	7.2 years
Weighted average interest rate ^(5)		2.07%	1.98%
Interest coverage ratio ^(6)		3.4 x	4.0 x
		Three months ending
(thousands of CAD$ except per Unit and other data)		March 31, 2016	March 31, 2015
Operating results
Rental income		7,431	5,866
Net rental earnings		4,135	3,731
Earnings for the period		2,628	3,065
Funds from Operations (FFO) ^(7) (8)		3,776	3,726
Adjusted Funds from Operations (AFFO) ^(7) (8)		4,153	3,715
FFO per Unit (diluted) ^(7) (8)		0.21	0.21
AFFO per Unit (diluted) ^(7) (8)		0.23	0.21
Distributions
Declared distributions on Units and Exchangeable sec.		3,681	3,583
Declared distribution per Unit (diluted) ^(8)		0.21	0.21
FFO payout ratio ^(7)		97.5%	96.2%
AFFO payout ratio ^(7)		88.2%	96.2%

(1)	Taking into account the interest the REIT has in the properties held in partnerships.
(2)	Occupancy rate reaches 93.5% as of March 31, 2016 taking into account the Vendor Lease expiring in April 2016.
(3)	Calculated on annualized net rental earnings (based on net rental earnings for the quarter).
(4)	The definition of debt-to-book value and of debt-to-book value, net of cash can be found under the section Non-IFRS Financial Measures.
(5)	Calculated as the weighted average interest rate paid on the finance leases and the mortgage loans.
(6)	Calculated as net rental earnings plus interest, less general and administrative expenses, divided by interest expense on the financial leases and mortgage financings.
(7)	The reconciliation of FFO and AFFO to earnings can be found under the section Non-IFRS Financial Measures.
(8)	Based on the fully diluted weighted average number of Units during the period.

BASIS OF PRESENTATION

The following management's discussion and analysis ("MD&A") of the financial condition and results of operations of Inovalis REIT should be read in conjunction with the REIT's condensed interim consolidated financial statements for the period from January 1, 2016 to March 31, 2016, and the notes thereto. This MD&A has been prepared taking into account material transactions and events up to and including May 12, 2016. Financial data provided in the condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards. All amounts in this MD&A are in thousands of Canadian dollars, except per unit amounts and where otherwise stated. Historical results, including trends which might appear, should not be taken as indicative of future operations or results. Additional information about Inovalis REIT has been filed with applicable Canadian securities regulatory authorities and is available at www.sedar.com. The exchange rate used throughout this MD&A for statement of earnings items is the average rate during the said period, i.e. 1.5141 Canadian dollars per Euro for the three-month period ended March 31, 2016. For balance sheet items, projections or market data, the exchange rate used is 1.4775 (exchange rate as at March 31, 2016).

FORWARD-LOOKING INFORMATION

Although we believe that the expectations reflected in the forward-looking information are reasonable, we can give no assurance that these expectations will prove to have been correct, and since forward-looking information inherently involves risks and uncertainties, undue reliance should not be placed on such information. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such forward-looking statements. The estimates and assumptions, which may prove to be incorrect, include, but are not limited to, the various assumptions set forth in this document as well as the following: (i) we will continue to receive financing on acceptable terms; (ii) our future level of indebtedness and our future growth potential will remain consistent with our current expectations; (iii) there will be no changes to tax laws adversely affecting our financing capability, operations, activities, structure or distributions; (iv) we will retain and continue to attract qualified and knowledgeable personnel as we expand our portfolio and business; (v) the impact of the current economic climate and the current global financial conditions on our operations, including our financing capability and asset value, will remain consistent with our current expectations; (vi) there will be no material changes to government and environmental regulations adversely affecting our operations; (vii) conditions in the international and, in particular, the French and German real estate markets, including competition for acquisitions, will be consistent with the current climate; and (viii) capital markets will provide us with readily available access to equity and/or debt financing.

The forward-looking statements are subject to inherent uncertainties and risks, including, but not limited to, the factors listed under the Risk and Uncertainties section of this MD&A. Consequently, actual results and events may vary significantly from those included in, contemplated or implied by such statements.

MARKET AND INDUSTRY DATA

This MD&A includes market and industry data and forecasts that were obtained from third-party sources, industry publications and publicly available information as well as industry data prepared by Inovalis SA on the basis of its knowledge of the commercial real estate industry in which we operate (including Inovalis SA estimates and assumptions relating to the industry based on that knowledge). Inovalis SA's knowledge of the real estate industry has been developed through its 18 years of experience and participation in the industry. Inovalis SA believes that its industry data is accurate and that its estimates and assumptions are reasonable, but there can be no assurance as to the accuracy or completeness of this data. Third-party sources generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. Although Inovalis SA believes it to be reliable, Inovalis SA has not verified any of the data from third-party sources referred to in this MD&A, or analyzed or verified the underlying studies or surveys relied upon or referred to by such sources, or ascertained the underlying assumptions relied upon by such sources.

NON-IFRS FINANCIAL MEASURES

Funds from Operations and Adjusted Funds from Operations
Funds from operations ("FFO") and adjusted funds from operations ("AFFO") are not measures recognized under IFRS and do not have standardized meanings prescribed by IFRS. FFO and AFFO are supplemental measures of performance for real estate businesses. We believe that AFFO is an important measure of economic performance and is indicative of our ability to pay distributions, while FFO is an important measure of operating performance and the performance of real estate properties. The IFRS measurement most directly comparable to FFO and AFFO is net earnings. See the Non-IFRS Reconciliation (FFO and AFFO) section for reconciliation of FFO and AFFO to net earnings.

FFO is defined as net earnings in accordance with IFRS, excluding: (i) acquisition costs, (ii) gain on bargain purchase, (iii) net change in fair value of investment properties, (iv) net change in fair value of financial instruments at fair value through profit and loss, (v) changes in fair value of Exchangeable securities, (vi) adjustment for property taxes accounted for under IFRIC 21, (vii) loss on exercise of lease option, (viii) adjustment for foreign exchange gains or losses on monetary items not forming part of an investment in a foreign operation, (ix) gain on disposal of an interest in a subsidiary and the non-cash portion of earnings from investments accounted for using the equity method, * finance income earned from loans to joint-ventures, (xi) non-recurring finance costs, (xii) deferred taxes and (xiii) gains or losses from non-recurring items. It has also been adjusted to exclude the distributions declared on Exchangeable securities. These distributions are recognized in profit and loss consistent with the classification of the Exchangeable securities as a liability. However, they are not to be considered when determining distributions for the Unitholders as indeed they are subordinated to the distributions to the Unitholders.

AFFO is defined as FFO subject to certain adjustments, including adjustments for: (i) the non-cash effect of straight line rents, (ii) the cash effect of the lease equalization loans (equalizing the rent payments, providing the REIT with stable and predictable monthly cash flows over the term of the France Telecom leases in the Vanves property, the Smart & Co. lease in the Courbevoie property and the Rue du Commerce leases in the Baldi property), (iii) amortization of fair value adjustment on assumed debt, (iv) the non-cash portion of the asset management fees paid in Exchangeable securities, (v) capital expenditures, (vi) capital expenditures paid by the vendors of the leasehold interest in the properties and/or tenants and (vii) amortization of transaction costs on mortgage loans.

FFO and AFFO should not be construed as alternatives to net earnings or cash flow from operating activities, determined in accordance with IFRS, as indicators of our performance. Our method of calculating FFO and AFFO may differ from other issuers' methods and accordingly may not be comparable to measures used by them.

Debt-to-book value
Our debt-to-book value ratio is calculated on a look-through basis and takes into account the REIT's apportioned amount of indebtedness at the partnerships' level. Indebtedness at the REIT's level, as well as at the different partnerships' levels is calculated as the sum of (i) finance lease liabilities, (ii) mortgage loans, (iii) lease equalization loans, (iv) other long-term liabilities and (v) deferred tax liabilities. Indebtedness does not take into account the contribution from shareholders that are recorded as a liability, as is the case at the REIT's level for the Exchangeable securities and at the partnerships' level for the contribution from the REIT and its partners.

BUSINESS OVERVIEW AND STRATEGY

Inovalis REIT is an unincorporated open-ended real estate investment trust governed by the laws of the Province of Ontario. Inovalis REIT was founded and sponsored by Inovalis SA, our asset manager. Our Units have been listed on the Toronto Stock Exchange under the trading symbol INO.UN since April 10, 2013. Our head and registered office is located at 151 Yonge Street, 11^th floor, Toronto, Ontario, M5C 2W7.

Our long-term objectives are to:

• generate predictable and growing cash distributions on a tax-efficient basis from investments in income-producing office properties
• maximize the long-term value of both our properties and Units through active and efficient management
• grow our asset base, primarily in France and Germany, but also opportunistically in other European countries where assets meet our investment criteria
• increase the cash available for distribution to holders of Units ("Unitholders"), through an accretive acquisition program that successfully leverages Inovalis SA's extensive relationships and depth of commercial property and financing.

The REIT's Investment criteria encompasses office properties outside of Canada with an occupancy level above 80% (unless AFFO accretive), secured rental cash flows, a property value between €20 million ($30 million) to €60 million ($89 million) (unless AFFO accretive) and a potential future upside with respect to matters including rent and area development. According to management, this target investment size falls within a very liquid segment of the real estate market in Europe, and debt financing for such acquisitions is readily available from local lenders.

BUSINESS ENVIRONMENT

French commercial real estate investment market
Investment in commercial real estate in France reached €29.0 BN ($42.8 BN) in 2015, 45.0% higher than the last ten year average of €20.0 BN ($29.6 BN). Despite its slow economic growth, France is still much sought after, enjoying its second best year ever for investment after 2007. The Greater Paris region accounted for the largest share of acquisitions (76%). Offices are still investors' favorite, attracting 61% of investment.

According to BNP Paribas Real Estate, the prime yield in the Central Business District compressed down to 3.25% as at Q4 2015 (from 4.00% as at Q4 2014) and the prime yield in the Inner Rim further down to 4.50% (from 5.30% as at Q4 2014). Investors have increasingly bought properties beyond Paris business districts, which are structurally incapable of supplying demand and which offer low yields. Non-prime office yields have also declined in the majority of markets in the Greater Paris Region and are increasingly sought after.

As at December 31, 2015, the vacancy rate in the Greater Paris Region was 6.9% and inside Paris was below 4.7%. This figure is mainly comprised of lower quality properties as, according to CBRE, new and redeveloped properties only accounted for 18% of the immediate supply.

German commercial real estate investment market
Investment in commercial real estate in Germany reached €56.3 BN ($83.2 BN) in the 2015, 40% higher than in 2014 and the second-beat year ever, exceeded only in 2007. Offices have become investors' favorite, attracting 42% of investment.

For investors, Germany continues to offer an extremely attractive and stable environment with interest rates still low, active consumers, upward-trending early indicators and a labor market that remains robust.

Office yields have declined throughout Germany over the last few years and, according to BNP Paribas Real Estate, prime office properties in the largest cities (Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, Munich) trade at a cap rate ranging between 3.65% and 4.45%, the average for the largest big 6 cities being 4.12%, i.e. 40 bps lower than one year before.

Banks are competing for the financing of first class office properties with long-term leases in good locations. As competition increases, banks are increasingly financing slightly risker properties.

REAL ESTATE MANAGEMENT AND ADVISORY SERVICES

Pursuant to a management agreement, Inovalis SA is the manager of the REIT and provides the strategic, advisory, asset management, project management, construction management, property management and administrative services necessary to manage the operations of the REIT.

Upon the earlier of (i) the REIT achieving a market capitalization of $750 million (including any Exchangeable securities held by Inovalis SA) based on the volume weighted average price (VWAP) over a 20-day trading period and (ii) April 10, 2018, the Management Agreement will terminate and the management of the REIT will be internalized at no additional cost.

OUR OPERATIONS

Performance indicators⁽¹⁾

As at	March 31, 2016	December 31, 2015
Gross leasable area (sq.ft)	1,083,239	1,004,448
Number of properties	11	10
Number of tenants	41	31
Occupancy rate (excluding Vendor Leases)	93.1%	89.0%
Occupancy rate (including Vendor Leases)	93.5%	89.5%
Weighted average lease term ^(2)	6.2 years	6.3 years

(1)	Taking into account the interest the REIT has in the properties held in partnerships.
(2)	Excluding early termination rights. Taking into account early termination rights, the weighted average lease term is 4.5 years.

Portfolio
The REIT has an interest in 11 properties, of which 7 are wholly owned by the REIT (Baldi, Courbevoie, Jeuneurs, Metropolitan, Sablière and Vanves in France, Hanover in Germany) and 4 are held through partnerships with various global institutional funds (Arcueil in France, Bad Homburg, Cologne and Duisburg in Germany).

Occupancy
The overall weighted average occupancy rate across our portfolio was 93.1% at December 31, 2015. The signature of new leases on 50,200 sq.ft on the Baldi, Courbevoie, Sablière and Bad Homburg properties in the course of the first quarter of 2016 reflects the good positioning of our properties in an improving letting market. These new leases will generate annual net additional rental revenues of $616, of which $180 pertain to the Courbevoie and Sablière properties and $436 to studios areas on the Baldi property. The lease on these studios areas in the Baldi property provides the tenant with an option to buy its premises for a consideration of $4,088 (€2,700) by November 23, 2016 upon expiry of the rent-free period. The Vendor Lease on the Vanves property on 4,521 sq.ft (or 0.5% of total GLA) generating an annual income to the REIT of $260 will expire in April 2016. External brokers are working with the Inovalis SA team to lease remaining vacant premises on the REIT's portfolio.

The REIT's portfolio occupancy rate of 93.1% is in line with the market vacancy rate of 6.9% in the Greater Paris Region.

Tenants
The tenant base in the portfolio is well diversified from an industry segment standpoint, with many tenants having large national or multinational footprints. 72% of 2016 estimated gross rental income come from French public agencies, are guaranteed by large German or international banks, or are signed with investment grade corporates or are affiliates of investment grade corporates.

The following table shows our five largest tenants, sorted out by contribution to gross leasable area (GLA). Tenants marked with ⁽*⁾ are from properties owned on a partnership basis. The GLA shown for these tenants reflects the percentage of ownership the REIT has in the underlying property.

Tenant		Tenant Sector		GLA (sq.ft.)	% of Total GLA
Orange (formerly France Telecom) (*)		Telecommunications		268,740	24.8%
Facility Services Hannover GmbH		Banking / Real estate		124,076	11.5%
Mitsubishi Hitachi Power Systems Europe GmbH ^(*^)		Manufacturer		108,959	10.1%
Rue du Commerce		E-commerce		51,926	4.8%
National Conservatory of Arts and Crafts		Education and training		50,407	4.7%
Top 5 tenants				604,108	55.8%
Other tenants		Diversified		404,566	37.3%
Vendor Lease		-		4,521	0.4%
Vacant				70,045	6.5%
Total				1,083,239	100.0%

Our largest tenant Orange is rated BBB+/Baa1/BBB+ by S&P/Moody's/Fitch and has leases in two of our properties, the Vanves property and the Arcueil property (held in partnership).

Leasing profile
Rental indexation
All leases have rental indexation based on either the French ICC (construction cost index) or ILAT (index averaging construction costs and CPI indexes) or the German Consumer Price Index, as applicable.

Lease rollover profile
The REIT has an average remaining lease term of 6.2 years (not including tenant early termination rights). Assuming all tenants leave at the earliest possible early termination rights, which is a highly improbable scenario, the average remaining lease term in our portfolio is 4.5 years.

The following table sets out the amount of GLA and percentage of total GLA of the properties subject to leases expiring during the periods shown (excluding early lease terminations).

Lease Maturity Profile as at March 31, 2016
(% of total GLA)

Implicit Renewal	0%		2023	10%
2016	1%		2024	17%
2017	0%		2025	7%
2018	5%		2026	3%
2019	6%		Total	93%
2020	17%		Vacant areas	6%
2021	26%
2022	1%		Total	100%

CONSOLIDATED FINANCIAL INFORMATION

Our discussion of results of operations includes our proportionate share of income from investments in joint ventures. Please refer to "Non IFRS section" for a reconciliation to our condensed interim consolidated financial statements.

		Three months ended March 31
(in thousands of CAD$)		2016		2015
Rental income		7,431		5,866
Service charge income		1,821		1,866
Service charge expenses		(4,891)		(3,980)
Other property operating expenses		(226)		(21)
Net rental earnings		4,135		3,731
Administration expenses		(1,464)		(1,093)
Foreign exchange gain		94		9
Net change in fair value of investment properties		(3,257)		1,750
Gain on bargain purchase		9,877		-
Acquisition costs		(665)		28
Operating earnings		8,720		4,425
Gain (loss) on financial instruments at fair value through P&L		(245)		633
Loss on exercise of early payment option on finance leases		(1,920)		-
Loss on refinancing of a debt		(605)		-
Finance income		1,166		380
Finance costs		(2,300)		(1,343)
Additionnal loss from Arcueil's joint venture		(1,205)		-
Distributions on Exchangeable securities		(452)		(429)
Net change in fair value of Exchangeable securities		(616)		(552)
Earnings before income taxes		2,543		3,114
Current income tax expense		(111)		(11)
Deferred income tax expense		154		(38)
Earnings for the period		2,587		3,065
Non-controlling interest		41		-
Earnings for the period (attributable to the Trust)		2,628		3,065

Net rental earnings
Rental income increased by $1,565 year on year, of which $390 was coming from the properties wholly owned by the REIT ($449 increase due to FX change and $59 decrease of rental income on a same store basis) and $1,175 from the properties held in joint ventures ($50 increase due to FX change and $1,125 increase of rental income due to the addition of the Arcueil, Bad Homburg and Cologne properties). The $59 decrease on a same store basis is the combination of (i) the loss of tenants on the Baldi property and the expiry of the Vendor leases on the Baldi and Sablière properties in Q4 2015 and (ii) new leases signed in the course of Q1 2016.

Service charge income decreased by $45 year on year, which is the combination of a $139 decrease for the properties wholly owned ($147 increase due to FX change offset by a $286 decrease from operations on a same store basis) and $94 for the properties held in joint ventures ($12 increase due to FX change and $82 increase from operations due to the addition of the Arcueil, Bad Homburg and Cologne properties). The $286 decrease is mainly accounted for by charges not recovered on premises previously vacated by tenants.

Service charge expenses increased by $911 year on year, of which $338 is accounted for by FX change and $573 from various items including mainly higher property taxes. The difference between service charge income and service charge expenses amounts are accounted for by the application of the IFRIC 21 rule that recognizes property taxes for their full amount as of January 1, 2016.

Net rental earnings increased by $404 year on year, of which a decrease of $452 was coming from the properties wholly owned by the REIT ($271 positive impact from FX change and $723 decrease from operations) and a $856 increase from the properties held in joint ventures ($46 increase due to FX change and $810 increase of rental income due to the addition of the Arcueil, Bad Homburg and Cologne properties).

Administration expenses
Administration expenses are primarily comprised of asset management fees paid to Inovalis SA and of other general administrative expenses such as trustee fees, directors' and officers' liability insurance, professional fees (including accounting fees), legal fees, filing fees, shareholders related expenses and other expenses. Administration expenses for the quarter ended March 31, 2016 amounted to $1,464 vs. $1,093 for the quarter ended March 31, 2015. $718 is related to the asset management fees paid to Inovalis SA (vs. $513 for the same period in 2014) and $746 to other expenses (vs. $580 for the same period in 2015. The $166 increase in other general administrative expenses (from $580 to $746) is the combination of FX change ($49) and a 20.2% year on year increase ($117), while at the same time the assets under management increased by 44.3%.

Net change in fair value of investment properties
Out of the $3,257 negative net change in fair value of investment properties, $2,279 is accounted for by the Metropolitan property and more precisely by the capitalization of costs associated with the termination of the finance lease in place and the implementation of a new one. The remaining net change of $978 is accounted for by the other properties.

Gain on bargain purchase
The gain on bargain purchase of $9,877 was realized from the acquisition of the Metropolitan property. As per the Acquisition loan that the REIT granted to Inovalis SA in 2014, the REIT was entitled to receive a portion of the profit generated on the stabilization of the property that would translate into a discount to the purchase price in the event the REIT elected to exercise its right of first offer for the purchase of the property once the latter met the investment criteria of the REIT.

Acquisition costs
Business acquisition costs amounted to $665 in the quarter ended March 31, 2016, of which $439 is accounted for by the Metropolitan acquisition (notary fees and transfer taxes), $141 by the Hanover refinancing and $85 by other costs.

Gain (loss) on financial instruments at fair value through profit and loss
The REIT recognized a loss on financial instruments at fair value through profit and loss for the quarter ended  March 31, 2016 of $245. For the same period in 2015, the REIT recognized a gain of $633. These gains and losses are mostly the result of the variation in value realized on the foreign exchange ("FX") contracts.

Loss on exercise of early payment option on finance leases
Immediately following the Metropolitan acquisition, the REIT exercised its option to purchase the investment property that was leased and concomitantly closed a new finance lease contract to replace the finance lease assumed as part of the transaction. A loss on the exercise of early payment option of the finance lease of $1,920 was recognized in the quarter ended March 31, 2016.

Loss on refinancing of a debt
During the quarter ended March 31, 2016, the REIT refinanced its debt on the Hanover property. The finance lease in place was terminated and replaced with a mortgage financing. The impact of de-recognition of the finance lease amounted to $605.

Finance income
The finance income consists mainly of the interests perceived by the REIT on the Acquisition loan (Metropolitan transaction). Further to the purchase of the Metropolitan property at a discount and the concomitant reimbursement of the Acquisition loan, a portion of the profit was treated as interests perceived on the Acquisition loan (as the cash translation of the right of first offer and access to profit sharing mechanism) and the remaining portion of the profit was treated as a gain on bargain purchase (see above). In line with the prevailing debt market environment, we took the view that the Acquisition loan market rate would be 12% (implying a 3.25% non cash component on top of the 8.75% cash interests). The finance income for the quarter ended March 31, 2016 is the sum of the 8.75% interests for the period and the 3.25% interests from the draw date in November 2014 until reimbursement of the loan in March 2016 ($797).

Finance costs
For the three-month period ended March 31, 2016, the finance costs amounted to $2,300 including approximately $1,800 for interests costs related to finance leases, mortgage loans, the lease equalization loans and the loan granted by the partner on the Cologne transaction, approximately $225 of other finance costs (mainly amortization of fair value adjustment on finance leases assumed at a discount at the time of a business acquisition and amortization of transaction costs on mortgage loans) and finally $275 as potential FX indemnity to the joint venture partner in the Arcueil transaction.

Additional loss from Arcueil's joint venture
For the Arcueil joint venture, an interest of 25% in the partnership was taken into account in the proportionate consolidation presentation, in line with the apportioned investment in the transaction by the REIT of 25% while, as per the joint venture agreement and as reflected in the condensed interim consolidated financial statements, the REIT is entitled to receive a 75% share of the net profit. This additional loss from Arcueil's joint venture of $1,205 for the three-month period ended March 31, 2016 is the bridge between both presentations. It includes, inter alia, $825 for 75% of the variation of the potential indemnity to the joint venture partner during the quarter (the remaining 25% being already taken into account in the Finance costs above).

Distributions on Exchangeable securities
Distributions to the holders of Exchangeable securities are calculated in a manner to provide a return that is economically equivalent to the distributions received by the Unitholders. They are, however, subordinated to the distributions to the other Unitholders until April 10, 2016. During the three-month period ended March 31, 2016 the distribution recognized on Exchangeable securities was $452 while it was $429 for the same period in 2015. The increase is the result of the additional Exchangeable securities received by Inovalis SA in lieu of asset management fees.

Net change in fair value of Exchangeable securities
The net change in value of the Exchangeable securities, as well as the cost of distributions recognized on Exchangeable securities, are recognized in profit and loss because, for financial reporting purposes, the Exchangeable securities have been classified as a liability at fair value through profit or loss.

For the three-month period ended March 31, 2016, the REIT reported a loss of $616 which is the result of the change in the closing price of Units on the TSX which was $9.70 on March 31, 2016 compared to $9.37 as at December 31, 2015.

Current income tax expense
The current income tax expense incurred of $111 amounts to a withholding tax paid by the REIT's Luxemburg holding company on the dividends it received from affiliates.

Last 24 Months Key Financial Information
The information provided in this section includes our proportionate share of income from investments in joint ventures. Please refer to "Non IFRS section" for a reconciliation to our condensed interim consolidated financial statements.

		3-month period ended
(in thousands of CAD$)			March 31, 2016	Dec. 31, 2015	Sept. 30, 2015	June 30, 2015	March 31, 2015	Dec 31, 2014	Sept. 30, 2014	June 30, 2014
Rental income			7,431	8,423	7,710	6,006	5,866	5,459	4,802	4,658
Net rental earnings			4,135	8,690	7,321	8,047	3,731	5,742	5,096	5,039
Earnings for the period			2,628	6,641	4,479	16,615	3,065	21,374	2,158	(6,897)
Earnings per Unit (CAD$)			0.15	0.43	0.29	1.08	0.20	1.56	0.19	(0.61)

NON-IFRS RECONCILIATION

Investments in joint ventures
The REIT's proportionate share of the financial position and results of operation of its investment in joint ventures, which are accounted for using the equity method under IFRS in the condensed interim consolidated financial statements, are presented below using the proportionate consolidation method (with the exception of Arcueil), which is a non-GAAP measure. For the purpose of the proportionate consolidation, the initial investment of both partners in the joint ventures were considered as being equity investments as opposed to a combination of equity and loans and accordingly, the related proportionate consolidation balance sheet items were eliminated as well as the associated finance income and finance costs. For the Arcueil joint venture, an interest of 25% in the partnership was taken into account in the proportionate consolidation presentation, in line with the apportioned investment in the transaction by the REIT of 25% while, as per the joint venture agreement and as reflected in the condensed interim consolidated financial statements, the REIT is entitled to receive a 75% share of the net profit. A line entitled "additional gain or loss from Arcueil's joint venture" in the Consolidated statement of earnings reconciliation to consolidated financial statements bridges both presentations. A reconciliation of the financial position and results of operations to the condensed interim balance sheets and consolidated statements of earnings is included in the tables showed in the Non-IFRS Reconciliation section. 

For the quarter ended March 31, 2016, the proportional financial results include the following proportion of the revenues and expenses of each one of the joint ventures: 50% for Duisburg and Walpur, 49% for Cologne and 25% for Arcueil.

In 2015, the proportional financial results included 50% of the revenues and expenses of Duisburg.

FFO and AFFO

		Three months ended March 31
(in thousands of CAD$)		2016		2015
Earnings for the period		2,628		3,065
Add/(Deduct):
Business acquisition costs		665		(28)
Gain on bargain purchase		(9,877)		-
Loss on exercise of lease option		1,920		-
Loss on debt refinancing		605		-
Net change in fair value of investment properties		3,257		(1,750)
Gain (loss) on financial instruments at fair value through P&L		245		(633)
Adjustment for property taxes accounted for under IFRIC 21		2,682		2,030
Net finance costs from joint ventures		1,257		-
Distributions on Exchangeable securities		452		429
Change in fair value of Exchangeable securities		616		552
Foreign exchange (loss) gain		(94)		(9)
Non-recurring finance income relating to Acquisition Loan		(797)		-
Other non-recurring finance costs		414		32
Deferred income tax expense		(154)		38
Minority interest		(41)		-
FFO		3,776		3,726
Add/(Deduct):
Non-cash effect of straight line rents		323		(663)
Cash effect of the lease equalization loans		(315)		240
Amortization of fair value adjustment on assumed debt		51		109
Amortization of transaction costs on mortgage loans		94		115
Non-cash part of asset management fees paid                                           in Exchangeable securities ^(1)		288		257
Capex net of cash subsidy		(100)		(100)
Adjustement from investment		36		32
AFFO		4,153		3,715
FFO / Units (diluted) (in CAD$) ^(2)		0.21		0.21
AFFO / Units (diluted) (in CAD$) ^(2)		0.23		0.21

(1)	For purposes of this presentation, 50% of non-cash part of the asset management fee is included in the AFFO reconciliation. Notwithstanding, 100% of the asset management fee is paid in Exchangeable securities.
(2)	Based on weighted average number of fully diluted Units, 17,754,631 and 17,332,699 for 3-month periods ended March 31, 2016 and 2015.

Management believes FFO is an important measure of our operating performance and is indicative of our ability to pay distributions. However, it does not represent cash flow from operating activities as defined by IFRS and is not necessarily indicative of cash available to fund Inovalis REIT's needs. This non-IFRS measurement is commonly used for assessing real estate performance. Our FFO and AFFO calculations are based on the average foreign exchange rate for the period (1.5141 Canadian dollars per Euro for the year ended December 31, 2015) and does not take into account our foreign currency hedging arrangements (100% of our monthly cash distributions are covered until February 2019 at an average rate of 1.5085).

Balance sheet reconciliation to consolidated financial statements

		As at March 31, 2016						As at December 31, 2015
Assets		As per REIT's  financial  statements		Share from investments in joint-ventures		Proportionate Consolidation		As per REIT's  financial  statements		Share from investments in joint-ventures		Proportionate Consolidation
Non-current assets
Investment properties		426,443		100,180		526,623		355,704		100,359		456,063
Investment accounted for using the equity method		37,320		(37,320)		-		40,337		(40,337)		-
Acquisition loan		-		-		-		18,786		-		18,786
Derivative financial instruments		333		-		333		92		-		92
Other long-term assets		1,478		-		1,478		-		-		-
Restricted cash and other financial assets		698		-		698		1,375		-		1,375
Deferred tax assets		-		310		310
Total non-current assets		466,272		63,170		529,442		416,294		60,022		476,316
Current assets
Trade and other receivables		4,725		832		5,557		4,803		816		5,619
Derivative financial instruments		41		156		197		197		159		356
Other current assets		1,597		57		1,654		1,333		39		1,372
Restricted cash		305		-		305		305		-		305
Cash and cash equivalents		11,851		3,187		15,038		6,895		3,958		10,853
Total current assets		18,519		4,232		22,751		13,533		4,972		18,505
Total assets		484,791		67,402		552,193		429,827		64,994		494,821
Liabilities and equity
Liabilities
Non-current liabilities
Loans from a joint-venture partner		-		6,371		6,371		-		6,480		6,480
Loans to partner in Arcueil		-		1,919		1,919		-		-		-
Mortgage loans		87,731		35,992		123,723		70,779		36,133		106,912
Finance lease liabilities		152,745		17,594		170,339		120,285		17,192		137,477
Other long-term liabilities		-		1,683		1,683		-		1,171		1,171
Lease equalization loans		4,478		-		4,478		5,090		-		5,090
Tenant deposits		2,436		-		2,436		1,746		-		1,746
Exchangeable securities		21,879		-		21,879		18,034		-		18,034
Provision relating to an investment		1,070		(1,070)		-		925		(925)		-
Derivative financial instruments		2,888		261		3,149		2,698		158		2,856
Deferred tax liabilities		1,231		1,692		2,923		1,651		1,332		2,983
Total non-current liabilities		274,458		64,442		338,900		221,208		61,541		282,749
Current liabilities
Mortgage loans		462		-		462		415		-		415
Finance lease liabilities		6,167		616		6,783		6,217		582		6,799
Lease equalization loans		1,534		-		1,534		1,335		-		1,335
Tenant deposits		114		-		114		116		-		116
Exchangeable securities		1,798		-		1,798		1,366		-		1,366
Derivative financial instruments		837		-		837		878		-		878
Trade and other payables		10,577		1,905		12,482		6,174		2,129		8,303
Other current liabilities		1,077		439		1,516		469		742		1,211
Total current liabilities		22,566		2,960		25,526		16,970		3,453		20,423
Total liabilities		297,024		67,402		364,426		238,178		64,994		303,172
Equity
Trust units		136,622		-		136,622		136,365		-		136,365
Retained earnings		34,790		-		34,790		35,359		-		35,359
Accumulated other comprehensive income		16,396		-		16,396		19,925		-		19,925
Total Unitholders' equity		187,808		-		187,808		191,649		-		191,649
Non-controlling interest		(41)		-		(41)		-		-		-
Total liabilities and equity		484,791		67,402		552,193		429,827		64,994		494,821

Consolidated statement of earnings reconciliation to consolidated financial statements

		Three months ended
		March 31, 2016						March 31, 2015
(in thousands of CAD$)		Amounts per REIT's financial statements^(1)		Share of income from investments in joint ventures		Total		Amounts per REIT's financial statements		Share of income from investments in joint ventures	Total
Rental income		5,673		1,758		7,431		5,283		583	5,866
Service charge income		1,590		231		1,821		1,729		137	1,866
Service charge expenses		(4,485)		(406)		(4,891)		(3,802)		(178)	(3,980)
Other property operating expenses		(41)		(185)		(226)		(21)		-	(21)
Net rental earnings		2,737		1,398		4,135		3,189		542	3,731
Administration expenses		(1,218)		(246)		(1,464)		(1,000)		(93)	(1,093)
Foreign exchange gain		94		-		94		9		-	9
Net change in fair value of investment properties		(2,907)		(350)		(3,257)		1,750		-	1,750
Gain on bargain purchase		9,877		-		9,877		-		-	-
Acquisition costs		(659)		(6)		(665)		-		28	28
Share of net earnings of investments (equity method)		(205)		205		-		170		(170)	-
Operating earnings		7,720		1,001		8,720		4,118		307	4,425
Loss on financial instruments at fair value through P&L		(144)		(101)		(245)		633		-	633
Loss on exercise of early payment option on finance leases		(1,920)		-		(1,920)		-		-	-
Loss on debt refinancing		(605)		-		(605)		-		-	-
Finance income		1,166		-		1,166		560		(180)	380
Finance costs		(2,630)		330		(2,300)		(1,229)		(114)	(1,343)
Additional loss from Arcueil's joint venture ^(2)		-		(1,205)		(1,205)		-		-	-
Distributions on Exchangeable securities		(452)		-		(452)		(429)		-	(429)
Net change in fair value of Exchangeable securities		(616)		-		(616)		(552)		-	(552)
Earnings before income taxes		2,519		25		2,543		3,101		13	3,114
Current income tax expense		(85)		(26)		(111)		(8)		(3)	(11)
Deferred income tax expense		153		1		154		(28)		(10)	(38)
Earnings for the period		2,587		-		2,587		3,065		-	3,065
Non-controlling interest		41		-		41		-		-	-
Earnings for the period (attributable to the Trust)		2,628		-		2,628		3,065		-	3,065

(1)	Income statement amounts presented for the REIT were taken from the internal consolidated financial statements as at March 31, 2016.
(2)	Reflects the additional loss assumed by the REIT in reference with its actual 75% rights to the net profit of the Arcueil joint venture.

PROPERTY CAPITAL INVESTMENTS       

Fair value
The fair value of our investment property portfolio as at March 31, 2016 was $526.6 million including the REIT's interests in the properties held in partnerships (vs. $456.1 million as at December 31, 2015). The fair value of the French properties was $424.2 million (80.6% of total value) and the fair value of the German properties was $102.4 million (19.4% of total value).

Management principally uses discounted cash flows to determine the fair value of the investment properties. These values are supported by third party appraisals in conformity with the requirements of the Royal Institution of Chartered Surveyors Standards, and for the French properties also in conformity with the Charte de l'expertise immobilière, European Valuation Standards of TEGoVA (the European Group of Valuers' Association) and IFRS 13.

Building improvements
The REIT is committed to improving its operating performance by incurring appropriate capital expenditures in order to replace and maintain the productive capacity of its property portfolio so as to sustain its rental income generating potential over the portfolio's useful life.

Since the IPO in April 2013, a total of $1.7 million has been spent on the properties, funded by a reserve that was set aside by the vendors of the four initial properties.

Guarantees, commitments and contingencies
The REIT and its subsidiaries have provided guarantees in connection with the finance lease liabilities and the mortgage loans, including pledge of affiliates of the REIT, first mortgages and assignment of receivables and future receivables. As at March 31, 2016, guarantees provided by the REIT with respect to its long-term debts include a preferential claim held by mortgage lenders on the Jeuneurs, Veronese and Sablière properties in the amount of $69,780.

The REIT agreed to pledge up to May 6, 2016 its 49% equity investment in Cologne as a guarantee of the commitment to repurchase a $6,371 loan from the other partner in Cologne.

OTHER SIGNIFICANT ASSETS

Restricted cash
Restricted cash amounted to $1,003 as at March 31, 2016 and is comprised of a collateral for the foreign exchange currency contracts.

Investments accounted for using the equity method
This section encompasses the 50% interest the REIT (through its subsidiaries) has in the Duisburg property, the 50% interest in the Walpur property, the 25% interest in the Arcueil property and the 49% interest in the Cologne property. The fair value of the investments accounted for using the equity method was $37,320 as at March 31, 2016 compared to $40,466 as at December 31, 2015.

Acquisition loan
The Acquisition loan on the Metropolitan property ($18,786 as at December 31, 2015) was repaid by Inovalis SA to Inovalis REIT when the latter purchased the property on March 21, 2016. There was no cash payment, as compensation was made with other amounts due by the REIT to Inovalis SA for the purchase of the Metropolitan property.

Trade and other receivables
Trade and other receivables as at March 31, 2016 amounted to $7,035 taking into account the REIT's interests in the properties held in partnerships compared to $5,619 as at December 31, 2015.

Other current Assets
Other current assets as at December 31, 2015 amounted to $1,597 compared to $1,333 as at December 31, 2015. This amount is mainly composed of sales tax receivables.     

PRESENTATION OF OUR CAPITAL

Liquidity and capital resources
Inovalis REIT's primary sources of capital are cash generated from operating activities, credit facilities, sharing the ownership of actual assets owned entirely and equity issues. Our primary uses of capital include property acquisitions, payment of distributions, costs of attracting and retaining tenants, recurring property maintenance, major property improvements and debt interest payments. We expect to meet all of our ongoing obligations through current cash, cash flows from operations, debt refinancing and, as growth requires and when appropriate, new equity or debt issues. We can also sell some portion of assets owned in order to get access to capital but also in the perspective of diversification of our portfolio.

The REIT's cash available increased from $6.9 million as at December 31, 2015 to $11.9 million as at March 31, 2016. The increase in cash is mainly attributable to the Metropolitan acquisition, which, further to the implementation of the finance lease and the repayment of the Acquisition loan resulted in net proceeds available to the REIT. The investment in the Cologne property was funded by a $6.4 million loan from the partner that was reimbursed subsequent to quarter end.

Financing activities
Our debt strategy is to have secured mortgage financing with a term to maturity that is appropriate in relation to the lease maturity profile of our portfolio and then to put in place, when appropriate, interest-only financings. We intend to search for fixed rate financings or floating rate financings with a cap. Our preference is to have staggered debt maturities to mitigate interest rate risk and limit refinancing exposure in any particular period. Our debt to book value stands at 57.6% and net of the $11.9 million of cash available as at March 31, 2016, this debt to book value stands at 56.5%.

During the quarter, the REIT terminated the finance lease on the Hanover property and refinanced it with an interest-only 7-year mortgage financing of €12.6 million ($18.6 million). The purpose of this refinancing was to make the REIT benefit from an interest-only loan with a fixed interest rate of 1.85% for 7 years.

Key performance indicators in the management of our debt are summarized in the following table (taking into account the interest the REIT has in the properties held in partnerships).

		As at March 31, 2016		As at December 31, 2015
Weighted average interest rate ^(1)		2.07%		1.98%
Debt-to-book value ^(2)		57.6%		52.8%
Debt-to-book value, net of cash^(2)		56.5%		51.8%
Interest coverage ratio ^(3)		3.4 x		4.0 x
Debt due in next 12 months in thousand of CAD$ (including interests)		12,618		12,232
Weighted average term to maturity of debt ^(4)		7.8 years		7.2 years

(1)	Calculated as the weighted average interest rate paid on the finance leases and the mortgage financing.
(2)	The definition of debt-to-book value and of debt-to-book value, net of cash can be found under the section Non-IFRS Financial Measures.
(3)	Calculated as net rental earnings plus interest, less general and administrative expenses, divided by interest expense on the financial leases and mortgage financings.
(4)	Calculated as the weighted average term on all the financial leases and mortgage financings.

Leasehold and Mortgage Financing Maturity Profile
(% of amount outstanding as at March 31, 2016)

2016	0%		2023	0%
2017	8%		2024	3%
2018	0%		2025	7%
2019	25%		2026	27%
2020	0%		2027	6%
2021	0%		2028	18%
2022	6%		Total	100%

Equity
Our discussion about equity is inclusive of Exchangeable securities, which are economically equivalent to the REIT's Units. In our consolidated financial statements, the Exchangeable securities are classified as a combination of current and non-current liabilities under IFRS because of the conversion feature that can be exercised by the holder of those securities.

		3-month period ended March 31, 2016
Units
Number at beginning of period		15,637,019
Increase/(Decrease) in number during the period		-
Units issued pursuant to the DRIP		28,468
Number at end of period		15,665,487
Weighted average number during the period		15,651,355
Exchangeable securities
Number at beginning of period		2,070,398
Increase/(Decrease) in number during the period		370,543
Number at end of period		2,440,941
Weighted average number during the period		2,103,276
Units and Exchangeable securities
Number at beginning of period		17,707,417
Increase/(Decrease) in number during the period		399,011
Number at end of period		18,106,428
Weighted average number during the period		17,754,631

Our Declaration of Trust authorizes the issuance of an unlimited number of Units and an unlimited number of Special Voting Units. Issued and outstanding Units and Special Voting Units may be subdivided or consolidated from time to time by the Trustees without notice to or approval of the Unitholders of the REIT.

A total of 370,543 Exchangeable securities were issued during the period from January 1, 2016 to March 31, 2016 in favor of Inovalis SA, of which 74,507 as payment of the asset management fees for the first quarter of 2016 and 296,036 as a further into the REIT by Inovalis SA.

Further to the Distribution Reinvestment Plan ("DRIP") in place, a total of 28,468 Units were issued to Unitholders during the quarter ended March 31, 2016. As of March 31, 2016, 8.2% of the Units were enrolled in the DRIP.

Distribution and management of foreign exchange risk
Our Declaration of Trust provides our trustees with the discretion to determine the percentage payout of income that would be in the best interests of the REIT. Given that the level of working capital tends to fluctuate over time and should not affect our distribution policy, we do not consider it when determining our distributions.

In order to ensure the predictability of distributions to our Unitholders, we have established an active foreign exchange hedging program. As at March 31, 2016, the REIT is committed to sell €663 (on the average) at an average rate of 1.5085 and to receive $1,000 on a monthly basis until February 2019 (included). Approximately 60% of the contracts are forward contracts and 40% of the contracts are a combination of puts and calls. The puts and calls contracts were taken at the beginning of 2015 when the market conditions were such that this strategy enabled us to lock in a better rate than the one what we would have had with forward contracts.

Subsequent to the quarter, all of the above mentioned foreign exchange contracts, which were provided by a Canadian bank, were terminated and replaced with a new series of 36 monthly forward contracts provided by a French bank. Under those contracts, the REIT is committed to sell €670 (on the average) at an average rate of 1.4930 and to receive $1,000 on a monthly basis until April 2019 (included). Under these new contracts there is no cash collateral requirement from the bank as was the case with the previous contracts. Besides, the average rate is slightly lower because we chose not to take put and calls any longer as this previous strategy proved to be more volatile in terms of mark to market of our position and prevented us, for such contracts, to apply hedge accounting.

		Three months ended March 31
(in thousands of CAD$ except for per Unit amounts)		2016		2015
Declared distributions on Units		3,229		3,154
Declared distributions on Exchangeable securities		452		429
Total declared distributions		3,681		3,583
Distribution per Unit (diluted)		$ 0.20625		$ 0.20625

We currently pay monthly distributions to Unitholders of $0.06875 per Unit, or $0.825 per Unit on an annual basis.

Trade and other payables
Trade and other payables as at March 31, 2016 amounted to $12,482 taking into account the REIT's interests in the properties held in partnerships compared to $8,303 as at December 31, 2015. The increase is principally due to the accrual of all property taxes and levies in the first quarter, which will resorb itself over the course of the year. Also, the addition of Metropolitan in the course of the quarter increases the level of operating expenses and the resulting increases in payables.

ANALYSIS OF DISTRIBUTED CASH

		3 months ended March 31, 2016		3 months ended March 31, 2015
Cash flows from operating activities (A)		3,785		1,920
Earnings before income taxes (B)		2,519		3,101
Declared distribution on Units (C)		3,229		3,154
Excess (shortfall) of cash flows from operating activities over cash distributions paid (A - C)		556		(1,234)
Excess (shortfall) of profit or loss over cash distributions paid (B - C)		(710)		(53)

As shown in the table above, the cash flows related to operating activities as reported in the REIT's consolidated statement of cash flows exceeded the cash distributions declared for the quarter ended March 31, 2016.

Also, as shown in the table above, the amount of distributions declared for the quarter was greater than the amount of earnings reported during the period. Notwithstanding this situation, the REIT does not believe that any portion of these distributions should be regarded as an economic return of capital. The REIT's profit or loss reflects a number of gains or losses that do not affect cash as well as a number of expenses that are related to investing or financing activities rather than to operating activities.

Every quarter, the REIT ensures that sufficient funds were being generated from rental operations to continue making distributions at the planned rate. To perform this assessment, management uses the FFO and AFFO measures presented in the section entitled Non-IFRS reconciliation (FFO and AFFO). These measures are used to determine the amount of funds generated by ongoing rental operations that are available for distribution. These measures remove from consideration those gains and losses that are recognized for accounting purposes but that do not impact cash flow. They also remove from consideration various revenues and expenses that are recognized in profit or loss for accounting purposes but which do not arise from ongoing rental operations, for example because they were incurred to acquire revenue generating assets.

As quantified in the FFO and AFFO calculations, the funds used to make the distributions during the current quarter were generated through the REIT's ongoing rental operations.

The REIT expects to continue paying distributions based on the current plan.

RISK AND UNCERTAINTIES

We are exposed to various risks and uncertainties, many of which are beyond our control. Material risks and uncertainties that could materially affect our operations and future performance are described in our prospectus dated March 28, 2013, in our short-form equity offering prospectus dated October 30, 2014 and in our 2015 annual report which are available at www.sedar.com.

OUTLOOK

We believe that the current market environment is a favorable one for the REIT to prosper. In addition to actively managing our properties, we are continuously assessing potential acquisitions in our target markets and will focus on the ones offering value and stability. Our long-term credit worthy tenants, low cost of debt with proper maturity and the foreign exchange rate contracts for our distributions until April 2019, not only provide investors with steady cash flows, but also serve as a basis for future growth. In addition of the cash available, we can also sell some portion of assets that we own to get access to additional cash and at the same time diversify our portfolio risk.

CRITICAL ACCOUNTING POLICIES

The preparation of the REIT's condensed interim consolidated financial statements in conformity with IFRS requires management to make judgments and estimates affecting the reported amounts of revenues and investment properties owned directly and indirectly at the reporting date. However, uncertainty about these estimates could result in outcomes requiring a material adjustment to the carrying amount of the asset or liability affected in future periods.

We consider the following policies and estimates to be the most critical in understanding the assumptions and judgments that are involved in preparing our financial statements and the uncertainties that could affect our financial results, financial condition and cash flows: (i) recognition and valuation of investment properties; (ii) distinction between business combinations or asset acquisitions and (iii) classification of and accounting for joint arrangements.

A more detailed description of significant accounting policies and critical accounting judgment and estimates that we apply under IFRS is provided in notes 3 and 4 of the consolidated financial statements for the year ended December 31, 2015.

DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

The REIT's Chief Executive Officer (the "CEO"), and the Chief Financial Officer (the "CFO") of the REIT are responsible for establishing and maintaining the REIT's disclosure controls and procedures ("DCP") including adherence to the Disclosure Policy adopted by the Board of Trustees. The Disclosure Policy requires all staff and certain other personnel providing services to the REIT to keep senior management fully apprised of all material information affecting the REIT so that they may evaluate and discuss this information and determine the appropriateness and timing for public release.

The REIT's CEO and the CFO are also responsible for the design of internal controls over financial reporting ("ICFR"). Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the REIT, (2) provide reasonable assurance that all transactions are recorded as necessary to permit the preparation of financial statements in accordance with International Financial Reporting Standards, and that receipts and expenditures of the REIT are being made only in accordance with authorizations of the management and Trustees of the REIT, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the REIT's assets that could have a material effect on the REIT's financial statements.

A control system, no matter how well conceived and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system are met. As a result of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, including instances of fraud, if any, have been detected. These inherent limitations include, amongst other items: (i) that Management's assumptions and judgments could ultimately prove to be incorrect under varying conditions and circumstances; or (ii) the impact of isolated errors. Additionally, controls may be circumvented by the unauthorized acts of individuals, by collusion of two or more people, or by Management override. The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals.

Given the continued growth and diversification of the REIT's investments portfolio, principally through the acquisition of interests in properties that are accounted for using the equity method, and given the addition or growth of several financial statement lines, several internal controls were newly implemented or modified. These changes were aimed principally at mitigating the risk of misstatement with respect to new investments accounted for using the equity method. In preparation for anticipated additional acquisitions, some additional changes and improvements are being planned in the coming months.

SUBSEQUENT EVENTS

Reimbursement of the partner loan in the Cologne transaction
On May 4, 2016, the REIT repurchased its 49% share of the loans, for an amount of 4,312 Euros ($6,381 as of May 4, 2016), provided by the other partner in the joint venture that was provided in November 2015 for the purpose of the acquisition of the Cologne investment property.

SOURCE Inovalis Real Estate Investment Trust

David Giraud, Chief Executive Officer, Inovalis Real Estate Investment Trust, Tel: [phone], [email protected]; Antoine Tronquoy, Chief Financial Officer, Inovalis Real Estate Investment Trust, Tel: [phone], [email protected]