Northern Property reports 2009 financial results
CALGARY, March 17 /CNW/ - Northern Property REIT (NPR.UN - TSX) announced its financial results for the 3 and 12 months ended December 31, 2009.
HIGHLIGHTS: - 2009 FFO of $2.20 per unit up 3.5% from $2.12 for 2008 - Q4 2009 FFO declined 6.0% from same quarter of 2008 to $0.52 - 2.9% same door revenue decline between full year 2008 to 2009 - higher vacancy, lower rents, accelerated maintenance and capex costs in Alberta apartments - NPR's western apartment rental markets improving in late 2009 - 2009 DIPU payout ratio 68.3% FINANCIAL PERFORMANCE AT A GLANCE: ------------------------------------------------------------------------- In $000's except Three Months Year Ended per unit amounts Ended December 31 December 31 ------------------------------------------------------------------------- 2009 2008 2009 2008 ------------------------------------------------------------------------- Total revenue 33,200 32,515 134,232 127,759 Net operating income "(NOI") 20,760 21,424 86,793 84,305 Earnings before taxes 5,483 6,803 25,929 26,417 Net earnings 653 6,427 21,316 22,702 Net earnings per unit, basic $0.026 $0.257 $0.850 $0.907 Distribution to unitholders 9,286 9,260 37,100 37,037 Distributions per unit $0.370 $0.370 $1.480 $1.480 Distributable Income ("DI") 12,792 13,560 54,336 52,139 DI per unit, basic $0.510 $0.542 $2.166 $2.083 Payout ratio 72.6% 68.3% 68.3% 71.0% Funds from operation ("FFO") 12,969 13,758 55,107 53,079 FFO per unit, basic $0.517 $0.550 $2.196 $2.121 FFO payout ratio 71.6% 67.3% 67.3% 69.8% -------------------------------------------------------------------------
"As we expected, NPR's Q4 results declined as the full financial impact of recessionary conditions was experienced. A weak rental market in northern Alberta was the principal culprit. Higher vacancy, lower rents and extraordinary costs associated with a push to catch up with needed maintenance and capex investment took place in these markets during the year," said Jim Britton, NPR's President and CEO.
"Fortunately, outside of Alberta our portfolios weathered the recession very well. We were helped by lower heating oil costs, lower mortgage interest rates and decreased trust administration expense. And the REIT is now experiencing apartment rental market improvement across our system."
Multi-family rental market conditions for NPR began to weaken early in 2009. Apartment vacancy rates increased every month between January and August. The increase was most evident in the northern Alberta cities of Fort McMurray, Grande Prairie and Lloydminster which suffered employment losses due to the sharp decline in activity in the oil and natural gas industries. Business conditions were also more challenging in the NWT, particularly execusuite operations in Yellowknife and Inuvik.
NPR's residential rental operations in Nunavut and Newfoundland showed strength throughout the year. Northeastern British Columbia operations also performed above expectations. Seniors' property leases remained in good standing in 2009 and commercial property occupancy remained consistent with prior years.
The REIT continued to operate in a fiscally conservative fashion during 2009 maintaining a payout ratio of 68.3% of distributable income. Weighted average interest rates decreased to 4.87% compared to 5.13% at the end of 2008. Debt to gross book value was 57.7%, the same as a year ago. Interest service coverage was among the best of Canadian REITs at 3.01 times.
NPR made a sharply higher sustaining capex investment of $11.8 million in 2009, double that of 2008. Much of this investment was directed to improving apartment buildings in northern Alberta, work which had been impossible to carry out in the low vacancy, boom conditions of the years prior to 2009. The accelerated capex investment was accompanied by a marked increase in building maintenance activity which had been deferred because of labour shortages during the boom years. The higher level of capex investment has been expensed for tax purposes in 2009 but amortized for accounting purposes over 5 years resulting in a non-cash, future tax charge of $4.2 million. 2009 cash distributions on trust units will be subject to lower taxation as a result of the temporarily higher capex expense. Approximately 68% of trust unit distributions are tax deferred for 2009, compared to 53% for 2008.
"While 2009 was challenging both operationally and financially, so far 2010 has been a much brighter story," Mr. Britton went on to say. "Apartment occupancy has strengthened every month since September. We are experiencing robust rental market performance in Nunavut, Newfoundland and recently in Yellowknife. Fort McMurray is beginning to improve. We also expect to conclude a modest amount of accretive apartment purchasing activity as the year goes on. We are pleased that NPR's low payout ratio has enabled us to get through a difficult year without conducting a dilutive equity issue."
NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST Consolidated Balance Sheets At December 31 (Thousands of dollars) ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- ASSETS Rental properties and other capital assets (Note 4) 836,251 833,967 Capital improvements in progress 7,046 3,773 Capital assets under development 20,423 8,996 Prepaid expenses and other assets (Note 5) 5,088 5,664 Cash - 731 Accounts receivable (Note 17) 4,158 5,085 Tenant security deposits 3,555 3,575 Deferred rent receivable 4,539 3,248 Loans receivable 2,456 1,742 Intangible assets (Note 6) 4,851 6,141 ------------------------------------------------------------------------- 888,367 872,922 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES Mortgages and loans payable (Note 7) 498,996 482,800 Operating facilities (Note 8) 33,698 26,600 Bank indebtedness 1,820 - Accounts payable and accrued liabilities (Note 17) 15,555 15,111 Distributions payable 3,096 3,092 Future income tax liability (Note 11) 43,751 39,489 Intangible liabilities (Note 6) 94 279 Non-controlling interest 464 441 ------------------------------------------------------------------------- 597,474 567,812 ------------------------------------------------------------------------- UNITHOLDERS' EQUITY 290,893 305,110 ------------------------------------------------------------------------- 888,367 872,922 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. Guarantees, commitments and contingencies (Note 14) APPROVED BY THE BOARD --------------------- Trustee "Signed" B. James Britton Trustee "Signed" Dennis J. Hoffman NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST Consolidated Statements of Earnings and Comprehensive Earnings Years ended December 31 (Thousands of dollars, except per unit amounts) ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- REVENUE Rental revenue 130,767 124,626 Other property income 3,465 3,133 ------------------------------------------------------------------------- 134,232 127,759 Operating expenses (47,439) (43,454) ------------------------------------------------------------------------- 86,793 84,305 ------------------------------------------------------------------------- OTHER EXPENSES Interest on mortgages and loans (26,435) (24,499) Amortization (28,789) (26,447) ------------------------------------------------------------------------- (55,224) (50,946) ------------------------------------------------------------------------- EARNINGS BEFORE THE UNDERNOTED 31,569 33,359 ------------------------------------------------------------------------- Trust administration (5,619) (6,796) Interest on operating facilities (755) (1,286) Interest and other income 458 509 Gain on settlement of debt 130 558 Gain on sale of rental properties 246 136 Non-controlling interest (100) (63) ------------------------------------------------------------------------- (5,640) (6,942) ------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES 25,929 26,417 ------------------------------------------------------------------------- INCOME TAXES (Note 11) Current (373) (409) Future (4,240) (3,306) ------------------------------------------------------------------------- (4,613) (3,715) ------------------------------------------------------------------------- NET EARNINGS 21,316 22,702 Other comprehensive earnings (loss) (123) 68 ------------------------------------------------------------------------- COMPREHENSIVE EARNINGS 21,193 22,770 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net earnings per unit (Note 13) Basic $0.850 $0.907 Diluted $0.847 $0.906 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST Consolidated Statements of Unitholders' Equity Year ended December 31 (Thousands of dollars) ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- TRUST UNITS (Note 12) Balance, beginning of year 367,446 366,789 Issuance of units 65 - Exercise of unit options 528 - Units cancelled (13) - Issue costs (2) (8) Long term incentive plan units issued 666 665 ------------------------------------------------------------------------- Balance, December 31 368,690 367,446 ------------------------------------------------------------------------- CONTRIBUTED SURPLUS Balance, beginning of year 1,676 1,023 Unit-based compensation 504 631 Exercise of unit options (39) - Long term incentive plan units granted 634 687 Long term incentive plan units issued (666) (665) ------------------------------------------------------------------------- Balance, December 31 2,109 1,676 ------------------------------------------------------------------------- CUMULATIVE DEFICIT CUMULATIVE NET EARNINGS Balance, beginning of year 86,056 63,354 Units cancelled 13 - Net earnings 21,316 22,702 ------------------------------------------------------------------------- Balance, December 31 107,385 86,056 ------------------------------------------------------------------------- CUMULATIVE DISTRIBUTIONS TO UNITHOLDERS Balance, beginning of year (150,191) (113,154) Distributions declared to unitholders (37,100) (37,037) ------------------------------------------------------------------------- Balance, December 31 (187,291) (150,191) ------------------------------------------------------------------------- CUMULATIVE DEFICIT, December 31 (79,906) (64,135) ------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSS) Balance, beginning of year 123 55 Other comprehensive (loss) earnings (123) 68 ------------------------------------------------------------------------- Balance, December 31 - 123 ------------------------------------------------------------------------- TOTAL UNITHOLDERS' EQUITY 290,893 305,110 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST Consolidated Statements of Cash Flows Year ended December 31 (Thousands of dollars) ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- CASH FLOWS RELATED TO THE FOLLOWING ACTIVITIES: OPERATING Net earnings 21,316 22,702 Adjustments for: Deferred rental revenue (1,292) (1,209) Amortization 28,789 26,447 Amortization of fair value of debt 681 560 Amortization of above and below market leases (160) (291) Amortization of deferred financing fees 1,078 547 Gain on settlement of debt (130) (558) Gain on sale of rental properties (246) (136) Non-controlling interest 100 63 Unit-based compensation 1,138 1,318 Future income tax expense 4,240 3,306 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 55,514 52,749 Changes in non-cash working capital 679 885 ------------------------------------------------------------------------- 56,193 53,634 ------------------------------------------------------------------------- ------------------------------------------------------------------------- FINANCING Proceeds from mortgages and loans 56,563 144,603 Repayment of mortgages and loans (41,716) (58,659) Proceeds from operating facilities 7,098 1,400 Payments (to) from non-controlling interest (76) 377 Units issued under option plan 489 - Unit issue costs (2) (8) Distributions paid to unitholders (37,096) (37,029) ------------------------------------------------------------------------- (14,740) 50,684 ------------------------------------------------------------------------- ------------------------------------------------------------------------- INVESTING Acquisition of rental properties and other assets (12,764) (65,645) Proceeds from sale of rental properties 992 395 Capital assets under development (11,426) (25,450) Building capital maintenance (11,235) (5,902) Capital improvements (9,571) (6,881) ------------------------------------------------------------------------- (44,004) (103,483) ------------------------------------------------------------------------- ------------------------------------------------------------------------- NET (DECREASE) INCREASE IN CASH (2,551) 835 CASH (BANK INDEBTEDNESS), BEGINNING OF YEAR 731 (104) ------------------------------------------------------------------------- (BANK INDEBTEDNESS) CASH, END OF YEAR (1,820) 731 ------------------------------------------------------------------------- ------------------------------------------------------------------------- SUPPLEMENTARY INFORMATION Interest paid 25,346 24,444 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Interest received 282 371 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Income taxes paid 214 727 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST Notes to the Consolidated Financial Statements Year ended December 31, 2009 and 2008 (Columnar amounts expressed in thousands of dollars except where indicated) 1. DESCRIPTION OF THE TRUST Northern Property Real Estate Investment Trust ("NPR" or the "REIT") is an unincorporated open-ended real estate investment trust that invests in and owns a portfolio of residential and commercial income producing properties. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation NPR's consolidated financial statements are prepared in conformity with Canadian generally accepted accounting principles ("GAAP"). Principles of consolidation The consolidated financial statements include the accounts of NPR and its wholly-owned subsidiary, together with the proportionate share of the assets, liabilities, revenue and expenses of joint ventures. Use of estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and to make disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenue and expenses for the consolidated reported period. Actual results could differ from those estimates. Estimates are used to determine amounts reported as allowance for doubtful accounts, estimated useful lives and values of rental properties, intangible and other assets, accrued liabilities and capital adequacy. Actual amounts could differ from those estimates. Capital assets Rental properties, capital improvements in progress and capital assets under development are stated at the lower of cost less accumulated amortization and fair value. Cost of the properties includes the original acquisition costs of the property and other acquisition related costs. Costs associated with upgrading the existing facilities, other than ordinary repairs and maintenance, are capitalized as project improvements. The fair value represents the undiscounted, estimated future net cash flow expected to be received from the ongoing use of the property plus its residual worth and is intended to determine recovery of an investment and is not an expression of a property's fair market value. All capital assets are recorded at cost and are amortized using the following annual rates and methods: Buildings 30 - 40 years straight-line basis Furniture, fixtures and equipment 20% - 30% declining-balance Vehicles 20% - 30% declining-balance Capital and leasehold improvements 3 - 20 years straight-line basis Revenue and expenses associated with properties under development are capitalized until the properties achieve a satisfactory level of occupancy. Estimated useful lives of capital assets are periodically evaluated by management and any changes in these estimates are accounted for on a prospective basis. NPR reviews its capital assets and, if it is determined that the carrying value of a building exceeds the undiscounted estimated future net cash flow expected to be received from the ongoing use and residual worth of the property, the carrying value of the building is reduced to its fair value. Based on this review, a provision for impairment of $nil has been recorded for the year ended December 31, 2009 (December 31, 2008 - $nil). Disposal of long-lived assets When management considers transactions to be material, amounts related to the disposal of long-lived assets are classified as held for sale, and the results of operations and cash flows associated with the assets disposed are reported separately as discontinued operations, less applicable income taxes. A long-lived asset is classified as an asset held for sale at the point in time when it is available for immediate sale, management has committed to a plan to sell the asset and are actively locating a buyer for the asset at a sales price that is reasonable in relation to the current fair value of the asset, and the sale is probable and is expected to be completed within a one-year period. For unsolicited interest in a long-lived asset, the asset is classified as held for sale only if all the conditions of the purchase and sale agreement have been met, a sufficient purchaser deposit has been received and the sale is probable and expected to be completed shortly after the end of the current period. Land equity leases Prepaid land equity leases are amortized over the remaining lives of the related leases ranging from 15 to 30 years. Deferred financing costs Deferred financing costs are amortized using the effective interest method over the amortization period of the related mortgages and loans payable. Income taxes NPR is taxed as a "mutual fund trust" for income tax purposes. Pursuant to the Declaration of Trust, the trustees of NPR will make distributions or designate all taxable income earned; including the taxable part of net realized capital gains, to unitholders and will deduct such distributions and designations for income tax purposes. Income taxes are accounted for using the liability method. Under this method, future income taxes are recognized for the expected future tax consequences of differences between the carrying amount of balance sheet items and their corresponding tax values. Future income taxes are computed using substantively enacted corporate income tax rates for the years in which tax and accounting basis differences are expected to reverse. Future income tax liabilities are primarily in relation to tax and accounting base differences in corporate subsidiaries of the REIT. Revenue recognition Revenue from a rental property is recognized when a tenant commences occupancy of a property and rent is due. NPR retains all benefits and risk of ownership of its rental properties, and therefore, accounts for leases with its tenants as operating leases. Rental revenue includes rent and other sundry revenue recoveries. Rental revenue to be received from leases with rental rates varying over the term of the lease is recorded on a straight-line basis over the term of the associated lease. Accordingly the difference between the rental revenue recorded on a straight line basis and the rent that is contractually due from the tenant has been recorded as deferred rent receivable for accounting purposes. Intangible assets and liabilities NPR allocates the purchase price of real property to land, building, and intangible assets and liabilities, such as the value of above-market and below-market leases, in-place leases and lease origination costs, if any. Intangible assets and liabilities are recorded at cost and amortized over their estimated useful lives ranging from 1 year to 18 years. The values of above-market and below-market leases for acquired properties are determined based on the present value of the difference between the contractual base rentals under the lease and fair market lease rates for similar in-place leases, measured from the date of acquisition to the end of the remaining lease term. The values of in-place leases are calculated as the present value of the net operating income lost during a hypothetical expected lease-up period required to replace the existing leases at the date of purchase. Intangible assets and liabilities associated with the acquisition of real property are amortized over the remaining term of the associated lease. Above and below market leases are amortized to rental revenue. The amortization of the remaining intangible assets is included in amortization expense. Financial Instruments Management has determined that the majority of the NPR's financial assets are designated as loans and receivables, as defined by Section 3855 of the CICA Handbook, and are carried at amortized cost. Management has also determined that all of its financial liabilities have been designated as other financial liabilities and are carried at amortized cost utilizing the effective interest method. Financial instruments include loans receivable, accounts receivable, tenant security deposits, mortgages and loans payable, operating facilities, distributions payable, accounts payable and accrued liabilities and bank indebtedness. Except for mortgages and loans payable, the fair value of financial instruments approximated carrying values due to the short-term nature of the financial instruments. The fair value of mortgages and loans payable is disclosed in note 7. Under NPR's Long Term Incentive Plan, the fair value of the units granted to trustees, officers and employees is recognized as compensation expense with an offsetting amount to contributed surplus based on the closing price of NPR's trust units on December 31 of the fiscal year. Upon issuance in accordance with the vesting policy, the units issued are credited to capital with an offsetting amount to contributed surplus based on the fair value of the units at the time of the grant. Unit-based compensation Under NPR's Unit Option Plan, options to acquire units are granted to trustees, officers and employees from time to time at exercise prices not less than the market value of the shares at the date of the grant. Options granted by NPR are accounted for in accordance with the fair- value method of accounting for stock-based compensation, and as such, the calculated fair value of the option is recognized as compensation expense with an offsetting amount recorded to contributed surplus, based on an estimate of the fair value using a Black-Scholes option-pricing model. Compensation expense is recognized over the vesting period of the related options. Upon exercise of the options, consideration paid, which approximates the market value of the shares on grant date, is credited to capital. In addition, contributed surplus, representing the calculated fair value of the options exercised, is reclassified to capital. Forfeitures of options are accounted for as they occur. 3. CHANGE IN ACCOUNTING POLICY AND RECENT ACCOUNTING PRONOUNCEMENTS Change in accounting policy On January 1, 2009, NPR adopted the June 2009 amendments to the Canadian Institute of Chartered Accountants ("CICA"), Handbook Section 3862, Financial Instruments - Disclosures. The amendments include enhanced disclosures related to the fair value of financial instruments and the liquidity risk associated with financial instruments. The amendment requires a three level hierarchy that reflects the significance of the inputs used in making the fair value measurements. The amendments will be effective for annual financial statements for fiscal years ending after September 30, 2009. The amendments are consistent with recent amendments to financial instrument disclosure standards in International Financial Reporting Standards ("IFRS"). On January 1, 2009 NPR adopted the August 2009 amendments to CICA Handbook Section 3855, Financial Instruments - Recognition and Measurement, relating to the impairment of financial assets. Amendments to this Section have revised the guidance on the assessment of embedded derivatives on reclassification of financial assets from the held-for- trading and available-for-sale categories into the loans and receivables category. The amendment also requires the use of the credit loss model when assessing instruments held to maturity for impairment. On January 1, 2009, NPR adopted EIC-173, Credit risk and the fair value of financial assets and financial liabilities. This abstract requires that an entity's own credit risk (for financial liabilities) and the credit risk of the counterparty (for financial assets) should be taken into account in determining the fair value of financial assets and financial liabilities, including derivative instruments. Effective January 1, 2009, NPR adopted CICA Handbook Section 3064, Goodwill and Intangible Assets. These new pronouncements establish standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. The new standards had no impact on NPR's consolidated financial statements. Recent Accounting Pronouncements On January 5, 2009, the AcSB released Handbook Section 1582 Business Combinations, Section 1601, Consolidated Financial Statements and Section 1602 Non-Controlling Interest which supersedes Section 1581, Business Combinations and Section 1600, Consolidated Financial Statements. The released sections apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011, and prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. The Sections are consistent with IFRS standards. Early application and adoption are permitted. On February 13, 2008 the Accounting Standards Board ("AcSB") confirmed that the transition date to IFRS from Canadian GAAP would be January 1, 2011 for all publicly accountable enterprises. In April 2008, the AcSB issued an exposure draft proposing to incorporate IFRS into the CICA Handbook as a replacement for current Canadian GAAP for most publicly accountable enterprises including the REIT. NPR will adopt IFRS as the basis for preparing its consolidated financial statements and will provide comparative financial information for the previous fiscal year using IFRS beginning with the quarter ending March 31, 2011. The impact of the adoption of IFRS on the consolidated financial statements of NPR is expected to be significant. NPR continues to evaluate the potential impact of IFRS to its consolidated financial statements. This is an ongoing process as the International Accounting Standards Board and the AcSB issue new standards and recommendations. 4. RENTAL PROPERTIES AND OTHER CAPITAL ASSETS ------------------------------------------------------------------------- 2009 2008 Accumulated Net Accumulated Net Amortiz- Book Amortiz- Book Cost ation Value Cost ation Value ------------------------------------------------------------------------- Land 90,906 - 90,906 90,676 - 90,676 Buildings 815,985 98,983 717,002 800,612 76,187 724,425 Furniture, fixtures and equipment 10,326 4,956 5,370 9,006 3,757 5,249 Vehicles 1,307 674 633 1,193 732 461 Capital and leasehold improvements 36,491 14,151 22,340 23,026 9,870 13,156 ------------------------------------------------------------------------- 955,015 118,764 836,251 924,513 90,546 833,967 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NPR acquired properties and completed development projects in the year ended December 31, 2009 for a total purchase price of $11.7 million (2008 - $80.4 million). During the year, NPR completed the sale of three non- core assets for gross proceeds of $992,000 (2008 - $395,000) and a gain on sale of $246,000 (2008 - $136,000). Acquisitions and development projects were financed as follows: ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- Cash paid 9,800 80,391 Mortgages payable 1,788 - Class B LP Units issued 65 - ------------------------------------------------------------------------- Total 11,653 80,391 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Residential rental units 40 724 Seniors' units 111 94 ------------------------------------------------------------------------- Units acquired 151 818 ------------------------------------------------------------------------- Commercial square feet - 40,233 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 5. PREPAID EXPENSES AND OTHER ASSETS ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- Prepaid expenses 2,543 2,812 Prepaid equity leases 1,997 2,167 Other 548 500 Refundable deposits and mortgage proceeds held in trust - 185 ------------------------------------------------------------------------- 5,088 5,664 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 6. INTANGIBLE ASSETS AND LIABILITIES ------------------------------------------------------------------------- 2009 2008 Accumulated Net Accumulated Net Amortiz- Book Amortiz- Book Cost ation Value Cost ation Value ------------------------------------------------------------------------- Above-market leases 173 (139) 34 173 (114) 59 In-place leases 6,474 (2,466) 4,008 6,565 (1,588) 4,977 Lease origination costs 1,643 (834) 809 1,669 (564) 1,105 ------------------------------------------------------------------------- 8,290 (3,439) 4,851 8,407 (2,266) 6,141 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Below-market leases 1,220 (1,126) 94 1,220 (941) 279 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Intangible assets are comprised of the value of above-market leases, in- place leases and lease origination costs for rental property acquisitions completed. Intangible liabilities are comprised of the value of below- market leases for rental property acquisitions completed. 7. MORTGAGES AND LOANS PAYABLE ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- Mortgages and loans payable 518,912 502,277 Fair value adjustment (8,217) (8,574) Deferred financing costs (11,699) (10,903) ------------------------------------------------------------------------- 498,996 482,800 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Mortgages and loans payable bear interest at rates ranging from 2.31% to 12.13% and have a weighted average rate of 4.87% as at December 31, 2009 (December 31, 2008 - 5.13%). Mortgages and loans are payable in monthly installments of blended principal and interest of approximately $3.5 million. The mortgages mature between 2010 and 2025 and are secured by charges against specific properties. Land and buildings with a carrying value of $679 million have been pledged to secure mortgages and loans payable of NPR. The fair value of mortgages and loans payable at December 31, 2009 is approximately $535.0 million (December 31, 2008 - $517.7 million). Minimum required future principal repayments, including maturities, are as follows: ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2010 46,541 2011 44,882 2012 50,281 2013 91,003 2014 78,218 Subsequent 207,987 ------------------------------------------------------------------------- 518,912 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 8. OPERATING FACILITIES NPR has two revolving credit facilities totaling $57.5 million (December 31, 2008 - $50.0 million) for acquisition and operating purposes. The $50.0 million facility bears interest at prime plus 1.50% or bankers' acceptance plus 3.00% with a maturity date of May 21, 2010. The $7.5 million facility bears interest at prime plus 1.50% or bankers' acceptance plus 3.00% with a maturity date of July 31, 2010. Specific properties with a carrying value of $92.9 million have been pledged as collateral security for the operating facilities. At December 31, 2009 NPR had utilized $33.7 million (December 31, 2008 - $26.6 million) of the operating facilities. 9. LONG-TERM INCENTIVE PLAN AND UNIT OPTION PLAN NPR has a Long-Term Incentive Plan ("LTIP") for the executives of NPR, based on the results of each fiscal year. Units granted and issued under the LTIP are as follows: ------------------------------------------------------------------------- Number of Units ------------------------------------------------------------------------- Balance - December 31, 2008 56,440 Units vested and issued - January, 2009 (8,408) Units vested and issued - February, 2009 (28,509) Units granted - December 31, 2009 28,950 ------------------------------------------------------------------------- Balance - December 31, 2009 48,473 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The total amount of LTIP awards are determined at the end of each fiscal year by the Board of Trustees based on an assessment of the performance of NPR and the individual performance of the executives. The number of units issued is based on the trading price on December 31 of each year. Pursuant to the policy, rights to units generally vest in 1/3 tranches: immediately upon award, then 12 and 24 months following. As at December 31, 2009, a total of 192,136 LTIP units had vested and been issued (December 31, 2008 - 155,219). NPR has a Unit Option Plan (the "Option Plan"), which is subject to the rules of the Toronto Stock Exchange ("TSX"). In accordance with the Option Plan, NPR may grant options to acquire units up to a total of 1,830,429 units. All options to acquire units expire after 5 years and vest as determined by the Governance and Compensation Committee of NPR. The exercise price is determined using the weighted average trading price of the units on the five days prior to the options being granted. The following table summarized the outstanding unit options as at December 31, 2009: ------------------------------------------------------------------------- Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Exercise Outstanding at Contractual Exercise Exercisable at Exercise Price December 31 Life In Years Price December 31 Price ------------------------------------------------------------------------- $23.12 735,000 3.4 $23.12 489,999 $23.12 $15.05 124,997 4.2 $15.05 20,004 $15.05 ------------------------------------------------------------------------- 859,997 3.7 $21.95 510,003 $22.80 ------------------------------------------------------------------------- ------------------------------------------------------------------------- On May 20, 2008, 735,000 options with an exercise price of $23.12 and expiring on May 20, 2013 were granted to trustees and officers. 245,002 options vested immediately, 245,001 options vested on May 20, 2009 and 244,997 will vest on May 20, 2010. On March 12, 2009, 157,500 options with an exercise price of $15.05 and expiring on March 12, 2014 were granted to trustees and officers. 52,507 options vested immediately, 52,497 options will vest on March 12, 2010 and 52,496 will vest on March 12, 2011. During the year ended December 31, 2009, 32,503 options were exercised at an exercise price of $15.05 per unit. The REIT accounts for its Option Plan using the fair value method, under which compensation expense is measured at the date the options are granted using the Black-Scholes model and recognized over the vesting period. The following assumptions were used in calculating the fair value of the options granted on May 20, 2008; expected annual dividend rate of 6.40%, expected volatility of 18%, risk-free rate of return of 3.10% and expected life of 5 years. The following assumptions were used in calculating the fair value of the options granted on March 12, 2009; expected annual dividend rate of 9.83%, expected volatility of 28.8%, risk-free rate of return of 1.75% and expected life of 5 years. Compensation expense for the year ended December 31, 2009 relating to options granted was $504,000 (2008 - $631,000). 10. EMPLOYEE UNIT PURCHASE PLAN Under the terms of the Employee Unit Purchase Plan (the "EUPP"), employees may invest a maximum of 5% of their salary in NPR trust units and NPR contributes one unit for every three units acquired by an employee. The units are purchased on the TSX at market prices. During the year ended December 31, 2009, employees invested a total of $117,434 (2008 - $115,562) and NPR contributed $39,166 (2008 - $38,555). During the year ended December 31, 2009, 8,955 units (2008 - 7,974 units) were purchased at an average cost of $18.71 per unit (2008 - $20.65 per unit). 11. INCOME TAXES NPR has certain corporate subsidiaries which are subject to income tax on their respective taxable income at the applicable legislated tax rates. On October 31, 2006, a "Distribution Tax" on publicly traded investment trusts and publicly listed partnerships was announced by the federal Minister of Finance. The announcement created a new tax regime for Specified Investment Flow Throughs ("SIFTs"), which include certain publicly listed income trusts and publicly listed partnerships. These entities will be taxed in effect as corporations (at a rate comparable to the general combined federal/provincial corporate income tax rate). Certain real estate investment trusts are excluded from the SIFT definition and therefore are not subject to the new regime. The legislation provides for a transition period for publicly traded entities that existed prior to November 1, 2006 and is not expected to apply to NPR until 2011, The new tax regime, does not apply to entities that qualify for the REIT Exemption. Where an entity does not qualify for the REIT Exemption certain distributions will not be deductible in computing income for tax purposes and will be subject to tax on such distributions at a rate comparable to the general corporate income tax rate. At December 31, 2009, NPR does not appear to qualify for the REIT exemption. GAAP requires NPR to recognize future income tax assets and liabilities based on estimated temporary differences expected as at January 1, 2011. Under the current legislation, NPR does not appear to qualify for the REIT Exemption. The future income tax provision arises from temporary differences between the estimated accounting and tax values of NPR's assets and liabilities at January 1, 2011 and has been calculated using the expected tax rates of 19.13% to 28.4% (December 31, 2008 - 19.63% to 29.5%). The future tax liabilities arise from the temporary differences summarized below: ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- Future tax liabilities arising from temporary differences between accounting and tax basis of: Rental property assets in corporate subsidiaries 9,304 9,614 Rental properties 28,868 24,963 Deferred financing costs 1,574 981 Other assets 4,005 3,931 ------------------------------------------------------------------------- 43,751 39,489 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The provision for income taxes differs from the results which would be obtained by applying the combined federal and provincial income tax rate to net income before taxes. The provision for income taxes is comprised of the following: ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- Current income tax expense 373 409 Future income tax expense 4,240 3,306 ------------------------------------------------------------------------- Total income tax expense 4,613 3,715 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The provision for income taxes differs from the results which would be obtained by applying the combined federal and provincial income tax rate to net income before taxes. The difference results from the following: ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- Earnings from before income taxes 25,929 26,417 Less income attributable to NPR not subject to future income tax (23,999) (24,529) ------------------------------------------------------------------------- Income in corporate subsidiaries 1,930 1,888 Income tax rate based on basic and weighted average rates 19.13% 19.63% ------------------------------------------------------------------------- Expected income tax expense from statutory income tax rate 369 371 Increase (decrease) in current taxes resulting from: Non-deductible expenses 57 (88) Sale of rental properties 48 9 Other (101) 117 ------------------------------------------------------------------------- Current income tax expense 373 409 ------------------------------------------------------------------------- Increase (decrease) in future taxes resulting from: Future income taxes - corporate subsidiaries (310) (394) Decrease in future income tax rates (1,250) - Future income taxes relating to Bill-C52 5,800 3,700 ------------------------------------------------------------------------- Future income tax expense 4,240 3,306 ------------------------------------------------------------------------- Total income tax expense 4,613 3,715 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 12. UNITHOLDERS' CAPITAL Trust units The total authorized number of trust units is unlimited. The total number of trust units of the REIT outstanding as at December 31, 2009 is 23,020,538 (December 31, 2008 - 22,755,010) representing a net book value of $343.3 million (December 31, 2008 - $338.3 million), net of issue costs. Class B Exchangeable Limited Partnership Units and Special Voting Units The Class B Units can be exchanged for trust units at any time at the option of the holder of the Class B units. Each Class B unit has a "Special Voting Unit" attached to it, which entitles the holder to one vote, either in person or by proxy at the meeting of unitholders of the trust as if he or she was a unitholder of the trust. Total number of Class B LP Units and special voting units of Northern Property Limited Partnership, a controlled limited partnership, outstanding as at December 31, 2009, is 2,085,090 (December 31, 2008 - 2,278,635) representing a net book value of $25.4 million (December 31, 2008 - $29.1 million). Distributions to Unitholders Pursuant to the Trust Declaration, holders of Trust units and Class B units are entitled to receive distributions made on each distribution date as approved by the Trustees. Distributions for the year are required to be at least equal to the net income as determined in accordance with the Income Tax Act. The total number of NPR Trust units and Class B units issued, as the result of an exchange of Class B limited partnership units of Northern Property Limited Partnership (the "Class B LP Units"), outstanding and eligible for distributions at December 31, 2009 is 25,105,628 (December 31, 2008 - 25,033,645), representing net proceeds of $368.7 million, net of issue costs of $19.6 million (December 31, 2008 - $367.5 million, net of issue costs of $19.6 million). The number of units issued and outstanding is as follows: ------------------------------------------------------------------------- Trust Class Units Issue B LP ------------------------------------------------------------------------- December 31, 2007 22,536,988 2,467,101 January 02, LTIP units 2008 issued 6,033 $23.12 - February 16, LTIP units 2008 issued 11,592 $22.35 - May 26, 2008 LTIP units issued 11,931 $22.35 - Issue costs - - - Class B LP units exchanged 188,466 - (188,466) ------------------------------------------------------------------------- December 31, 2008 22,755,010 - 2,278,635 ------------------------------------------------------------------------- January 2, LTIP units 2009 issued 8,408 $24.20 - January 6, Property 2009 acquisition - - 3,833 February 5, LTIP units 2009 issued 28,509 $16.21 - Options exercised 32,503 $15.05 - July 24, 2009 Units cancelled (1,270) $10.00 - Issue costs - - - Class B LP units exchanged 197,378 - (197,378) ------------------------------------------------------------------------- December 31, 2009 23,020,538 2,085,090 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Issue Total ------------------------------------------------------------------------- December 31, 2007 25,004,089 366,789 January 02, LTIP units 2008 issued - 6,033 139 February 16, LTIP units 2008 issued - 11,592 259 May 26, 2008 LTIP units issued - 11,931 267 Issue costs - - (8) Class B LP units exchanged - - - ------------------------------------------------------------------------- December 31, 2008 - 25,033,645 367,446 ------------------------------------------------------------------------- January 2, LTIP units 2009 issued - 8,408 204 January 6, Property 2009 acquisition $16.91 3,833 65 February 5, LTIP units 2009 issued - 28,509 462 Options exercised - 32,503 528 July 24, 2009 Units cancelled - (1,270) (13) Issue costs - - (2) Class B LP units exchanged - - - ------------------------------------------------------------------------- December 31, 2009 25,105,628 368,690 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 13. NET EARNINGS PER UNIT ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- Net earnings 21,316 22,702 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average units for basic net earnings per unit 25,088,584 25,027,697 Dilutive effect of units to be issued under the LTIP 22,280 19,978 Dilutive effect of Option Plan 44,264 13,270 ------------------------------------------------------------------------- Weighted average units for diluted net earnings per unit 25,155,128 25,060,945 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net earnings per unit: Basic $0.850 $0.907 Diluted $0.847 $0.906 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 14. GUARANTEES, COMMITMENTS AND CONTINGENCIES In the ordinary course of business, NPR may provide indemnification commitments to counterparties in transactions such as credit facilities, leasing transactions, service arrangements, director and officer indemnification agreements and sales of assets. These indemnification agreements may require NPR to compensate the counterparties for costs incurred as a result of changes in laws and regulations (including tax legislation) or as a result of litigation claims or statutory sanctions that may be suffered by counterparties as a consequence of the transaction. The terms of these indemnification agreements may vary based on the contract and do not provide any limit on the maximum potential liability. To date, NPR has not made any significant payments under such indemnifications and no amount has been accrued in the financial statements with respect to these indemnification commitments. In the normal course of operations, NPR becomes subject to various legal and other claims. Management and its legal counsel evaluate these claims and, where required, accrue the best estimate of costs relating to these claims. Management believes the outcome of claims of this nature at December 31, 2009 will not have a material impact on NPR. During the normal course of operations, NPR provided guarantees for mortgages and loans payable relating to investments in corporations and joint ventures where NPR owns less than 100%. The mortgages and loans payable are secured by specific charges against the properties owned by the corporations and joint ventures. In the event of a default of the corporation or joint venture, NPR may be liable for 100% of the outstanding balances of these mortgages and loans payable. At December 31, 2009, NPR has provided guarantees totaling $6.1 million (December 31, 2008 - $10.4 million). The mortgages bear interest at rates ranging from 3.06% to 6.10% and mature July 2010 to December 2013 (December 2008 - 4.54% to 7.90% and mature June 2009 to December 2013). As at December 31, 2009, land and buildings with a carrying value of $6.3 million have been pledged to secure these mortgage and loans payable (December 2008 - $6.5 million). NPR has included its proportionate share of its joint ventures' mortgages and loans payable totaling $4.9 million at December 31, 2009 (December 31, 2008 - $5.2 million) in these consolidated financial statements. In connection with the acquisition of certain seniors' properties in Newfoundland, the tenants have agreed to expand certain properties purchased by NPR. NPR has entered into agreements to purchase these expansions once completed. In total, NPR has commitments totalling $2.0 million. 15. SEGMENTED INFORMATION The primary business segments used by management are geographic segments (i.e. provinces and territories). NPR operates in 5 geographic segments, British Columbia, Alberta, the Northwest Territories, Nunavut and Newfoundland. Within its geographic business segments, NPR has two business operating segments: residential and commercial income producing properties. The REIT's residential properties are comprised of three components: apartments, townhomes and single family rental units; execusuite apartment rental units, where the rental periods range from a few days to several months; and seniors' properties where the properties are leased on a long term basis to qualified operators who provide services to individual residents. The commercial business segment is comprised of office, industrial and retail properties in areas where NPR has residential operations. All items, except gain on sale of rental properties and gain on settlement of debt which are related only to the REIT and are included in the Consolidated Statement of Earnings, are not allocated to the defined segments. As such, NPR has not provided a reconciliation of Earnings before Other Items to Net Earnings. In 2008, gain on sale of rental properties was earned in the residential rental and commercial business segments in Nunavut and the Northwest Territories, respectively. Gain on settlement of debt was earned in the residential business segments in all geographic segments. Segmented information for NPR is provided below: Total Assets ------------------------------------------------------------------------- December 31, 2009 BC Alberta NWT Nunavut Nfld Total ------------------------------------------------------------------------- Residential Multi-family 92,488 176,982 85,046 113,105 58,392 526,013 Execusuites - - 10,470 9,537 9,428 29,435 Seniors' 16,230 121,691 - - 49,610 187,531 ------------------------------------------------------------------------- 108,718 298,673 95,516 122,642 117,430 742,979 Commercial 21,289 9,083 90,388 19,660 1,192 141,612 Trust - 3,776 - - - 3,776 ------------------------------------------------------------------------- TOTAL ASSETS 130,007 311,532 185,904 142,302 118,622 888,367 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total Assets ------------------------------------------------------------------------- December 31, 2008 BC Alberta NWT Nunavut Nfld Total ------------------------------------------------------------------------- Residential Multi-family 90,384 161,176 86,323 115,131 56,109 509,123 Execusuites - - 8,019 9,853 9,495 27,367 Seniors' 15,710 123,794 - - 40,965 180,469 ------------------------------------------------------------------------- 106,094 284,970 94,342 124,984 106,569 716,959 Commercial 21,409 8,912 97,868 20,992 1,222 150,403 Trust - 5,560 - - - 5,560 ------------------------------------------------------------------------- TOTAL ASSETS 127,503 299,442 192,210 145,976 107,791 872,922 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Geographic Segments ------------------------------------------------------------------------- Year ended December 31, 2009 BC Alberta NWT Nunavut Nfld Total ------------------------------------------------------------------------- Rental revenue 16,169 33,963 36,364 25,812 18,459 130,767 Other income 462 943 1,106 553 401 3,465 Operating expenses (6,292) (9,816) (16,495) (8,596) (6,240) (47,439) ------------------------------------------------------------------------- 10,339 25,090 20,975 17,769 12,620 86,793 Interest on mortgages (3,002) (10,978) (5,908) (3,867) (2,680) (26,435) Amortization (4,085) (7,500) (7,899) (5,715) (3,590) (28,789) ------------------------------------------------------------------------- EARNINGS BEFORE OTHER ITEMS 3,252 6,612 7,168 8,187 6,350 31,569 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Geographic Segments ------------------------------------------------------------------------- Year ended December 31, 2008 BC Alberta NWT Nunavut Nfld Total ------------------------------------------------------------------------- Rental revenue 14,082 32,875 36,556 24,861 16,252 124,626 Other income 427 830 1,097 347 432 3,133 Operating expenses (6,145) (6,960) (16,851) (7,597) (5,901) (43,454) ------------------------------------------------------------------------- 8,364 26,745 20,802 17,611 10,783 84,305 Interest on mortgages (2,452) (9,814) (5,464) (4,397) (2,372) (24,499) Amortization (3,254) (6,940) (7,246) (5,797) (3,210) (26,447) ------------------------------------------------------------------------- EARNINGS BEFORE OTHER ITEMS 2,658 9,991 8,092 7,417 5,201 33,359 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Business Segments ------------------------------------------------------------------------- Total Year ended Multi- Execu- Residen- Commer- December 31, 2009 family suites Seniors' tial cial Total ------------------------------------------------------------------------- Rental revenue 82,352 8,190 17,486 108,028 22,739 130,767 Other income 2,942 208 - 3,150 315 3,465 Operating expenses (33,935) (4,334) (24) (38,293) (9,146) (47,439) ------------------------------------------------------------------------- 51,359 4,064 17,462 72,885 13,908 86,793 Interest on mortgages (16,670) (969) (6,130) (23,769) (2,666) (26,435) Amortization (18,062) (1,305) (4,460) (23,827) (4,962) (28,789) ------------------------------------------------------------------------- EARNINGS BEFORE OTHER ITEMS 16,627 1,790 6,872 25,289 6,280 31,569 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Business Segments ------------------------------------------------------------------------- Total Year ended Multi- Execu- Residen- Commer- December 31, 2008 family suites Seniors' tial cial Total ------------------------------------------------------------------------- Rental revenue 77,162 8,369 16,494 102,025 22,601 124,626 Other income 2,677 128 - 2,805 328 3,133 Operating expenses (30,389) (4,270) (23) (34,682) (8,772) (43,454) ------------------------------------------------------------------------- 49,450 4,227 16,471 70,148 14,157 84,305 Interest on mortgages (14,631) (872) (6,286) (21,789) (2,710) (24,499) Amortization (16,374) (1,035) (4,217) (21,626) (4,821) (26,447) ------------------------------------------------------------------------- EARNINGS BEFORE OTHER ITEMS 18,445 2,320 5,968 26,733 6,626 33,359 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 16. RELATED PARTY TRANSACTIONS Related party transactions are conducted in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed upon by the related parties. A Trustee of NPR is the Chairman of AgeCare Investment Ltd. ("AgeCare"), which leases six seniors' properties from NPR. For the year ended December 31, 2009, NPR earned rental income, including rental revenue earned on a straight-line basis over the term of the lease, totaling $12.6 million (2008 - $12.6 million) from AgeCare. Amounts outstanding in accounts receivable pertaining to this lease were $nil at December 31, 2009 (December 31, 2008 - $nil). In addition, AgeCare is paid an annual fee for advisory services provided to NPR respecting prospective acquisitions of seniors' properties. For the year ended December 31, 2009, NPR paid $120,000 for these services (2008 - $120,000). During the first quarter of 2009, NPR completed renovations totaling $2.15 million to a seniors' facility in BC which is leased to AgeCare. At December 31, 2009, In accordance with the lease agreement, AgeCare is repaying this amount over 15 years. Interest revenue of $112,800 was earned for the year ended December 31, 2009 (2008 - $nil) relating to this receivable. Amounts outstanding at December 31, 2009 was $2.1 million (December 31, 2008 - $nil). A company owned by a Trustee of NPR leases commercial space from NPR under normal commercial terms. NPR earned rental revenue from that arrangement of $481,000 for the year ended December 31, 2009 (2008 - $454,000). Amounts outstanding in accounts receivable pertaining to this lease were $nil at December 31, 2009 (December 31, 2008 - $nil). 17. FINANCIAL INSTRUMENTS NPR's accounts and loans receivable and other financial liabilities are substantially carried at amortized cost, which approximates fair value. Such fair value estimates are not necessarily indicative of the amounts the Trust might pay or receive in actual market transactions. The fair value hierarchy of financial instruments measured at fair value on the balance sheet is as follows: ------------------------------------------------------------------------- December 31, 2009 December 31, 2008 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 ------------------------------------------------------------------------- Financial assets and liabilities: Cash - - - 731 - - Bank indebtedness 1,820 - - - - - ------------------------------------------------------------------------- ------------------------------------------------------------------------- The three levels of the fair value hierarchy are described as follows: Level 1: Values based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities. Level 2: Values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3: Values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. NPR had no embedded derivatives requiring separate recognition for the years ended December 31, 2009 and 2008. Utility cost risk NPR is exposed to utility cost risk, which results from the fluctuation in utility prices for fuel oil, natural gas and electricity, the primary utilities used to heat the REITs properties. The exposure to utility cost risk is restricted primarily to the REIT's residential rental and execusuites portfolio. The leases in the remainder of the portfolio generally provide for recovery of operating costs, including utilities. Because of the northern location of a portion of NPR's portfolio, the exposure to utility price fluctuations is more pronounced in the first and last fiscal quarter of the year.NPR manages its exposure to utility risk through a number of preventative measures, including retrofitting properties with energy efficient appliances, fixtures and windows. With the exception of a fixed price utility contract in place for certain residential rental units in Alberta, NPR does not utilize hedges or forward contracts to manage exposure to utility cost risk. Heating oil is the primary source of fuel for heating properties located in Nunavut and the Northwest Territories. Over the last two years, NPR converted heating systems for certain properties in Yellowknife from fuel oil based boilers to wood pellet boilers. The investment in these environmentally friendly boilers continues to reduce NPR's exposure to volatile heating oil prices. Exposure to increases in the cost of heating oil is partially offset by the ability to recover these increases from a significant proportion of its commercial and some residential tenants. Natural gas is the significant source of fuel for heating properties located in Alberta, BC and Inuvik, NWT. NPR has fixed price contracts for certain of its properties which accounts for approximately 31% of the REIT's usage in Alberta. During 2009, NPR received approximately $40,000 in rebates under the Natural Gas Rebate Program which provided for rebates to consumers when natural gas prices exceeded $5.50 per gigajoule from October to March. The government of Alberta did not renew the Natural Gas Rebate Program for the 2009-2010 heating season. Natural gas prices in Inuvik and BC are not subject to regulated price control and the REIT does not use financial instruments to manage the exposure to the price risk. Management prepared a sensitivity analysis on the impact of price changes in the cost of heating oil and natural gas. A 10% change over the average price of heating oil and natural gas would impact NPR's net earnings by $283,000 for the year ended December 31, 2009. Electricity is the primary source of fuel for heating properties located in Newfoundland as well as parts of north eastern BC. In Newfoundland, electricity is purchased from the provincially regulated utility and is directly paid by the tenants for a significant portion of the REIT's multi-family rental units. As there is not a significant direct risk to NPR regarding the price of electricity, a sensitivity analysis has not been prepared. Liquidity risk Ultimate responsibility for monitoring liquidity risk management lies with management and the Board of Trustees of the REIT. The REIT moderates liquidity risk by managing mortgage and loan maturities to ensure a relatively even amount of mortgage maturities in each year. At December 31, 2009 the REIT has operating facilities totaling $57.5 million (December 31, 2008 - $50.0 million). At December 31, 2009, $33.7 million of the operating facilities were utilized (December 31, 2008 - $26.6 million). Cash flow projections are completed on a regular basis to ensure there will be adequate liquidity to maintain operating and investment activities in addition to making monthly distributions to unitholders. The Board of Trustees reviews current financial results and the annual business plan in determining appropriate distribution levels. Credit risk NPR's credit risk primarily arises from the possibility that tenants may not be able to fulfill their lease commitments. Tenant receivables are comprised of a large number of tenants spread across the geographic areas in which the REIT operates. There are no significant exposures to single tenants with the exception of AgeCare Investments Ltd. (See note 16), which leases seniors' properties in Alberta and BC from the REIT, and the Governments of Canada, the Northwest Territories and Nunavut, which leases a large number of residential units and commercial property in the Northwest Territories and Nunavut. NPR mitigates this risk through conducting thorough credit checks on prospective tenants, requiring rental payments on the first of the month, obtaining security deposits approximating one month's rent from tenants where legislation permits, and geographic diversification in its portfolio. Tenants are required to pay rent on the first of each month, with the exception of certain government leases where rent is due at the end of the month and certain commercial tenants where operating cost recoveries are billed in arrears. As such, the majority of tenant receivables are past due at the balance sheet date. The following is an aging of current tenant and other receivables: ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- 0-30 days 1,405 987 31-60 days 221 267 61-90 days 58 130 Over 90 days 730 722 ------------------------------------------------------------------------- Tenant receivables 2,414 2,106 Other receivables 2,094 3,329 Allowance for doubtful accounts (350) (350) ------------------------------------------------------------------------- 4,158 5,085 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NPR classifies tenants as past tenants on the date of their move out from a residential unit. NPR records a specific allowance for doubtful accounts on all balances owed by past tenants. Any subsequent recovery of balances owed from past tenants is recorded as a reduction in the bad debt provision for the period. In addition, NPR records an allowance for doubtful accounts from current tenants and other receivables where the expected amount to be collected is less than the actual accounts receivable. The amounts disclosed on the balance sheet are net of allowances for uncollectible accounts from current and past tenants and other receivables, estimated by Management based on prior experience and current economic conditions. The reconciliation of changes in allowance for doubtful accounts is as follows: ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- Balance, beginning of period 350 250 Accounts receivable written off (532) (690) Accounts recovered 590 355 Increase (decrease) in allowance (58) 435 ------------------------------------------------------------------------- Balance, December 31 350 350 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The following is an aging of accounts payable and accrued liabilities: ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- 0-6 months 10,629 9,916 6 months to 1 year 1,193 1,251 Over 1 year 212 51 ------------------------------------------------------------------------- 12,034 11,218 Tenant security deposits 3,521 3,893 ------------------------------------------------------------------------- 15,555 15,111 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Management believes that future cash flows from operations and availability under the current operating facilities provide sufficient available funds through the foreseeable future to support these financial liabilities. Interest rate risk NPR is exposed to interest rate risk on mortgages and loans payable and does not hold any financial instruments to mitigate that risk. NPR utilizes both fixed and floating rate debt. Interest rate risk related to floating interest rates is limited primarily to the utilization of operating facilities. Management mitigates interest rate risk by utilizing fixed rate mortgages, ensuring access to a number of sources of funding and staggering mortgage maturities with the objective of achieving relatively even annual debt maturities. To the extent possible, NPR maximizes the amount of mortgages on residential rental properties where it is possible to lower interest rates through Canada Mortgage and Housing Corporation mortgage insurance. The sensitivity analysis for floating rate debt has been completed based on the exposure to interest rates at the balance sheet date. Floating rate debt includes all mortgage and loans payable which are not subject to fixed interest rates and the revolving line of credit. If interest rates changed by 0.50% and all other variables remained constant, NPR's net earnings for the year ended December 31, 2009 would have changed by $228,000. 18. CAPITAL MANAGEMENT NPR's objective when managing its capital is to safeguard its assets while maximizing the growth of its business, returns to unitholders and maintaining the sustainability of cash distributions. NPR's capital consists of mortgages and loans payable, operating and acquisition facilities, Trust Units and Class B LP Units. Management monitors the REIT's capital structure on an ongoing basis to determine the appropriate level of mortgage debt and loans payable to be placed on specific properties at the time of acquisition or when existing debt matures. NPR follows conservative guidelines which are set out in the Trust Declaration. In determining the most appropriate debt, consideration is given to strength of cash flow generated from the specific property, interest rate, amortization period, maturity of the debt in relation to the existing debt of the REIT, interest and debt service ratios, and limits on the amount of floating rate debt. NPR has operating facilities which is used to fund acquisitions and capital expenditures until specific mortgage debt is placed or additional equity is raised. Consistent with others in the industry, NPR monitors capital on the basis of debt to gross book value ratio. The Declaration of Trust provides for a maximum debt to gross book value ratio of 70%. The REIT does not anticipate operating above a debt to gross book value ratio of 60%. NPR's debt to gross book value is as follows: ------------------------------------------------------------------------- December 31, December 31, 2009 2008 ------------------------------------------------------------------------- Bank indebtedness (cash) 1,820 (731) Operating facilities 33,698 26,600 Mortgages and loans payable 518,912 502,277 ------------------------------------------------------------------------- Debt 554,430 528,146 ------------------------------------------------------------------------- Rental properties and other capital assets 836,251 833,967 Capital assets improvements in progress 7,046 3,773 Capital assets under development 20,423 8,996 Refundable deposits and mortgage proceeds held in trust - 185 Accumulated amortization 118,764 90,546 Future income taxes on acquisitions (21,647) (21,625) ------------------------------------------------------------------------- Gross Book Value 960,837 915,842 ------------------------------------------------------------------------- Debt to Gross Book Value 57.7% 57.7% ------------------------------------------------------------------------- ------------------------------------------------------------------------- NPR is subject to three principal financial covenants in its mortgage and loans payable and operating facilities. The financial covenants are described as follows: - Debt Service Coverage - calculated as Net earnings before interest, taxes and amortization divided by the debt service payments (total interest expense and principal repayments); - Interest Coverage - calculated as Net earnings before interest, taxes and amortization divided by total interest expense; - Debt to Gross Book Value as calculated above. ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- Earnings from continuing operations before taxes 25,929 26,417 Amortization 28,789 26,447 Interest on mortgages 26,435 24,499 Interest on operating facilities 755 1,286 ------------------------------------------------------------------------- Net earnings before interest, taxes and amortization 81,908 78,649 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Interest on mortgages 26,435 24,499 Interest on operating facilities 755 1,286 ------------------------------------------------------------------------- Total Interest Expense 27,190 25,785 Principal repayments 16,198 14,983 ------------------------------------------------------------------------- Debt Service Payments 43,388 40,768 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Interest Coverage 3.01 3.05 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Debt Service Coverage 1.89 1.93 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at and during the year ended December 31, 2009, NPR complied with all externally imposed capital requirements and all covenants relating to its debt facilities. 19. SUBSEQUENT EVENTS Between January 1, 2010 and March 17, 2010 NPR completed mortgage financings and renewals totalling $22.4 million with interest rates from 2.97% to 6.05% and terms to maturity from 6 months to 10 years. Proceeds from the mortgage financings were used to repay existing mortgage debt and a portion of the operating facility.
For further information: contact Todd Cook, Chief Financial Officer, at (403) 531-0720
Share this article