Exhibit 4.4
Condensed Combined Financial Statements
of Granite Real Estate Investment Trust
and Granite REIT Inc.
For the three and six months ended June 30, 2019 and 2018
Condensed Combined Balance Sheets
(Canadian dollars in thousands)
(Unaudited)
As at | Note | June 30, 2019 | December 31, 2018 | |||||||||
ASSETS | ||||||||||||
Non-current assets: | ||||||||||||
Investment properties | 2(c), 4 | $ | 3,799,046 | $ | 3,424,978 | |||||||
Acquisition deposits | 3 | 60,121 | 34,288 | |||||||||
Deferred tax assets | 5,304 | 5,301 | ||||||||||
Fixed assets, net | 2(c) | 2,237 | 771 | |||||||||
Other assets | 6 | 1,454 | 13,425 | |||||||||
3,868,162 | 3,478,763 | |||||||||||
Current assets: | ||||||||||||
Assets held for sale | 5 | 50,461 | 44,238 | |||||||||
Other receivable | 7 | 11,325 | — | |||||||||
Accounts receivable | 3,968 | 4,316 | ||||||||||
Income taxes receivable | 536 | 212 | ||||||||||
Prepaid expenses and other | 2,024 | 2,510 | ||||||||||
Restricted cash | 475 | 470 | ||||||||||
Cash and cash equivalents | 14(d) | 496,862 | 658,246 | |||||||||
Total assets | $ | 4,433,813 | $ | 4,188,755 | ||||||||
LIABILITIES AND EQUITY | ||||||||||||
Non-current liabilities: | ||||||||||||
Unsecured debt, net | 8(a) | $ | 1,188,599 | $ | 1,198,414 | |||||||
Cross currency interest rate swaps | 8(b) | 63,794 | 104,757 | |||||||||
Long-term portion of lease obligations | 2(c) | 32,767 | — | |||||||||
Deferred tax liabilities | 312,954 | 303,965 | ||||||||||
1,598,114 | 1,607,136 | |||||||||||
Current liabilities: | ||||||||||||
Deferred revenue | 9 | 7,111 | 4,290 | |||||||||
Accounts payable and accrued liabilities | 9 | 45,311 | 41,967 | |||||||||
Distributions payable | 10 | 11,520 | 24,357 | |||||||||
Short-term portion of lease obligations | 2(c) | 431 | — | |||||||||
Income taxes payable | 13,591 | 14,020 | ||||||||||
Total liabilities | 1,676,078 | 1,691,770 | ||||||||||
Equity: | ||||||||||||
Stapled unitholders’ equity | 11 | 2,756,386 | 2,495,518 | |||||||||
Non-controlling interests | 1,349 | 1,467 | ||||||||||
Total equity | 2,757,735 | 2,496,985 | ||||||||||
Total liabilities and equity | $ | 4,433,813 | $ | 4,188,755 |
Commitments and contingencies (note 17)
See accompanying notes
2 Granite REIT 2019 Second Quarter Report
Condensed Combined Statements of Net Income
(Canadian dollars in thousands)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
Note | 2019(1) | 2018 | 2019(1) | 2018 | ||||||||||||||||
Rental revenue | $ | 59,595 | $ | 55,366 | $ | 115,443 | $ | 109,251 | ||||||||||||
Tenant recoveries | 12(a) | 7,719 | 6,774 | 15,032 | 13,548 | |||||||||||||||
Lease termination andclose-out fees | 589 | — | �� | 855 | 996 | |||||||||||||||
Revenue | 67,903 | 62,140 | 131,330 | 123,795 | ||||||||||||||||
Property operating costs | 12(b) | 8,798 | 7,430 | 17,034 | 15,310 | |||||||||||||||
Net operating income | 59,105 | 54,710 | 114,296 | 108,485 | ||||||||||||||||
General and administrative expenses | 12(c) | 8,636 | 7,147 | 16,510 | 14,635 | |||||||||||||||
Depreciation and amortization | 2(c) | 219 | 79 | 433 | 158 | |||||||||||||||
Interest income | (2,735 | ) | (567 | ) | (5,604 | ) | (1,711 | ) | ||||||||||||
Interest expense and other financing costs | 12(d) | 7,798 | 5,449 | 15,353 | 10,969 | |||||||||||||||
Foreign exchange losses (gains), net | 12(e) | 296 | 2,336 | 766 | (9,119 | ) | ||||||||||||||
Fair value gains on investment properties, net | 4, 5 | (69,580 | ) | (127,918 | ) | (119,650 | ) | (160,228 | ) | |||||||||||
Fair value losses (gains) on financial instruments | 12(f) | 1,655 | (1,438 | ) | 1,756 | 530 | ||||||||||||||
Acquisition transaction costs | 3 | — | 1,581 | — | 1,739 | |||||||||||||||
Loss on sale of investment properties | 5 | 635 | 147 | 1,383 | 1,234 | |||||||||||||||
Other income | 12(g) | — | (2,250 | ) | — | (2,250 | ) | |||||||||||||
Income before income taxes | 112,181 | 170,144 | 203,349 | 252,528 | ||||||||||||||||
Income tax expense | 13 | 13,504 | 20,935 | 26,344 | 30,916 | |||||||||||||||
Net income | $ | 98,677 | $ | 149,209 | $ | 177,005 | $ | 221,612 | ||||||||||||
Net income attributable to: | ||||||||||||||||||||
Stapled unitholders | $ | 98,668 | $ | 149,167 | $ | 176,923 | $ | 221,540 | ||||||||||||
Non-controlling interests | 9 | 42 | 82 | 72 | ||||||||||||||||
$ | 98,677 | $ | 149,209 | $ | 177,005 | $ | 221,612 |
(1) | The Trust has early adopted the amendments to IFRS 3, Business Combinations, in the three month period ended June 30, 2019 retrospectively to January 1, 2019 (note 2(c)). |
See accompanying notes
Granite REIT 2019 Second Quarter Report 3
Condensed Combined Statements of Comprehensive Income
(Canadian dollars in thousands)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
Note | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||
Net income | $ | 98,677 | $ | 149,209 | $ | 177,005 | $ | 221,612 | ||||||||||||
Other comprehensive (loss) income: | ||||||||||||||||||||
Foreign currency translation adjustment(1) | (39,279 | ) | (13,032 | ) | (121,839 | ) | 68,689 | |||||||||||||
Unrealized gain (loss) on net investment hedges, includes income taxes of nil(1) | 8(b) | (2,908 | ) | 19,179 | 51,284 | (18,357 | ) | |||||||||||||
Total other comprehensive (loss) income | (42,187 | ) | 6,147 | (70,555 | ) | 50,332 | ||||||||||||||
Comprehensive income | $ | 56,490 | $ | 155,356 | $ | 106,450 | $ | 271,944 | ||||||||||||
(1) Items that may be reclassified subsequently to net income if a foreign subsidiary is disposed of or hedges are terminated or no longer assessed as effective. |
| |||||||||||||||||||
Comprehensive income attributable to: | ||||||||||||||||||||
Stapled unitholders | $ | 56,471 | $ | 155,380 | $ | 106,418 | $ | 271,871 | ||||||||||||
Non-controlling interests | 19 | (24 | ) | 32 | 73 | |||||||||||||||
$ | 56,490 | $ | 155,356 | $ | 106,450 | $ | 271,944 |
See accompanying notes
4 Granite REIT 2019 Second Quarter Report
Condensed Combined Statements of Unitholders’ Equity
(Canadian dollars in thousands)
(Unaudited)
Six Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||
Number of units (000s) | Stapled units | Contributed surplus | Retained earnings | Accumulated other comprehensive income | Stapled unitholders’ equity | Non- controlling interests | Equity | |||||||||||||||||||||||||
As at January 1, 2019 | 45,685 | $ | 2,063,778 | $ | 95,787 | $ | 124,501 | $ | 211,452 | $ | 2,495,518 | $ | 1,467 | $ | 2,496,985 | |||||||||||||||||
Net income | — | — | — | 176,923 | — | 176,923 | 82 | 177,005 | ||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (70,505 | ) | (70,505 | ) | (50 | ) | (70,555 | ) | ||||||||||||||||||||
Stapled unit offering, net of issuance costs (note 11(c)) | 3,749 | 220,378 | — | — | — | 220,378 | — | 220,378 | ||||||||||||||||||||||||
Distributions (note 10) | — | — | — | (66,496 | ) | — | (66,496 | ) | (150 | ) | (66,646 | ) | ||||||||||||||||||||
Special distribution paid in units and immediately consolidated (note 10) | — | 41,128 | (41,128 | ) | — | — | — | — | — | |||||||||||||||||||||||
Units issued under the stapled unit plan (note 11(a)) | 10 | 605 | — | — | — | 605 | — | 605 | ||||||||||||||||||||||||
Units repurchased for cancellation | (1 | ) | (32 | ) | (5 | ) | — | — | (37 | ) | — | (37 | ) | |||||||||||||||||||
As at June 30, 2019 | 49,443 | $ | 2,325,857 | $ | 54,654 | $ | 234,928 | $ | 140,947 | $ | 2,756,386 | $ | 1,349 | $ | 2,757,735 | |||||||||||||||||
Six Months Ended June 30, 2018 | ||||||||||||||||||||||||||||||||
Number of units (000s) | Stapled units | Contributed surplus | Deficit | Accumulated other comprehensive income | Stapled unitholders’ equity | Non- controlling interests | Equity | |||||||||||||||||||||||||
As at January 1, 2018 | 46,903 | $ | 2,118,460 | $ | 60,274 | $ | (160,686 | ) | $ | 118,566 | $ | 2,136,614 | $ | 1,248 | $ | 2,137,862 | ||||||||||||||||
Net income | — | — | — | 221,540 | — | 221,540 | 72 | 221,612 | ||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 50,331 | 50,331 | 1 | 50,332 | ||||||||||||||||||||||||
Distributions (note 10) | — | — | — | (62,576 | ) | — | (62,576 | ) | (10 | ) | (62,586 | ) | ||||||||||||||||||||
Units issued under the stapled unit plan (note 11(a)) | 64 | 3,233 | — | — | — | 3,233 | — | 3,233 | ||||||||||||||||||||||||
Units repurchased for cancellation | (1,233 | ) | (55,714 | ) | (5,235 | ) | — | — | (60,949 | ) | — | (60,949 | ) | |||||||||||||||||||
As at June 30, 2018 | 45,734 | $ | 2,065,979 | $ | 55,039 | $ | (1,722 | ) | $ | 168,897 | $ | 2,288,193 | $ | 1,311 | $ | 2,289,504 |
See accompanying notes
Granite REIT 2019 Second Quarter Report 5
Condensed Combined Statements of Cash Flows
(Canadian dollars in thousands)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
Note | 2019(1) | 2018 | 2019(1) | 2018 | ||||||||||||||||
OPERATING ACTIVITIES | ||||||||||||||||||||
Net income | $ | 98,677 | $ | 149,209 | $ | 177,005 | $ | 221,612 | ||||||||||||
Items not involving operating cash flows | 14(a) | (53,754 | ) | (104,385 | ) | (89,264 | ) | (128,352 | ) | |||||||||||
Leasing commissions paid | — | (2,259 | ) | (224 | ) | (3,991 | ) | |||||||||||||
Tenant incentives paid | (25 | ) | (162 | ) | (204 | ) | (9,259 | ) | ||||||||||||
Current income tax expense | 13(a) | 1,678 | 2,839 | 3,597 | 4,832 | |||||||||||||||
Income taxes paid | (2,445 | ) | (3,058 | ) | (3,683 | ) | (3,968 | ) | ||||||||||||
Interest expense | 7,396 | 5,103 | 14,602 | 10,088 | ||||||||||||||||
Interest paid | (7,882 | ) | (5,654 | ) | (14,087 | ) | (9,510 | ) | ||||||||||||
Changes in working capital balances | 14(b) | 6,466 | 3,379 | 2,792 | 1,101 | |||||||||||||||
Cash provided by operating activities | 50,111 | 45,012 | 90,534 | 82,553 | ||||||||||||||||
INVESTING ACTIVITIES | ||||||||||||||||||||
Investment properties: | ||||||||||||||||||||
Property acquisitions | 3 | (219,126 | ) | (327,256 | ) | (383,744 | ) | (399,352 | ) | |||||||||||
Proceeds from disposals, net | (635 | ) | — | 25,628 | 356,479 | |||||||||||||||
Capital expenditures | ||||||||||||||||||||
— Maintenance or improvements | (560 | ) | (6,197 | ) | (1,785 | ) | (15,000 | ) | ||||||||||||
— Developments or expansions | (705 | ) | (55 | ) | (4,681 | ) | (860 | ) | ||||||||||||
Mortgage receivable proceeds | 5 | 16,845 | 30,000 | 16,845 | 30,000 | |||||||||||||||
Acquisition deposits | (33,940 | ) | (8,308 | ) | (33,940 | ) | (8,308 | ) | ||||||||||||
Fixed asset additions | (50 | ) | (26 | ) | (88 | ) | (53 | ) | ||||||||||||
Decrease in other assets | — | (145 | ) | — | (145 | ) | ||||||||||||||
Cash used in investing activities | (238,171 | ) | (311,987 | ) | (381,765 | ) | (37,239 | ) | ||||||||||||
FINANCING ACTIVITIES | ||||||||||||||||||||
Monthly distributions paid | (33,687 | ) | (31,181 | ) | (65,623 | ) | (62,841 | ) | ||||||||||||
Special distribution paid | 10 | — | — | (13,710 | ) | — | ||||||||||||||
Repayment of lease obligations | 2(c) | (589 | ) | — | (852 | ) | — | |||||||||||||
Proceeds from bank indebtedness | — | 98,833 | — | 127,833 | ||||||||||||||||
Repayments of bank indebtedness | — | (8,657 | ) | — | (70,420 | ) | ||||||||||||||
Financing costs paid | — | — | (25 | ) | (1,456 | ) | ||||||||||||||
Distributions tonon-controlling interests | (150 | ) | (10 | ) | (150 | ) | (10 | ) | ||||||||||||
Proceeds from stapled unit offering, net of issuance costs | 11(c) | 220,378 | — | 220,378 | — | |||||||||||||||
Repurchase of stapled units | 11(b) | — | (9,856 | ) | (37 | ) | (60,949 | ) | ||||||||||||
Cash provided by (used in) financing activities | 185,952 | 49,129 | 139,981 | (67,843 | ) | |||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (2,021 | ) | (5,781 | ) | (10,134 | ) | 3,653 | |||||||||||||
Net decrease in cash and cash equivalents during the period | (4,129 | ) | (223,627 | ) | (161,384 | ) | (18,876 | ) | ||||||||||||
Cash and cash equivalents, beginning of period | 500,991 | 273,770 | 658,246 | 69,019 | ||||||||||||||||
Cash and cash equivalents, end of period | $ | 496,862 | $ | 50,143 | $ | 496,862 | $ | 50,143 |
(1) | The Trust has early adopted the amendments to IFRS 3, Business Combinations, in the three month period ended June 30, 2019 retrospectively to January 1, 2019 (note 2(c)). |
See accompanying notes
6 Granite REIT 2019 Second Quarter Report
Notes to Condensed Combined Financial Statements
(All amounts in thousands of Canadian dollars unless otherwise noted)
(Unaudited)
1. NATURE AND DESCRIPTION OF THE TRUST |
Effective January 3, 2013, Granite Real Estate Inc. (“Granite Co.”) completed its conversion from a corporate structure to a stapled unit real estate investment trust (“REIT”) structure. All of the common shares of Granite Co. were exchanged, on aone-for-one basis, for stapled units, each of which consists of one unit of Granite Real Estate Investment Trust (“Granite REIT”) and one common share of Granite REIT Inc. (“Granite GP”). Granite REIT is an unincorporated, open-ended, limited purpose trust established under and governed by the laws of the province of Ontario and created pursuant to a Declaration of Trust dated September 28, 2012 and as subsequently amended on January 3, 2013 and December 20, 2017. Granite GP was incorporated on September 28, 2012 under theBusiness Corporations Act(British Columbia). Granite REIT, Granite GP and their subsidiaries (together “Granite” or the “Trust”) are carrying on the business previously conducted by Granite Co.
The stapled units trade on the Toronto Stock Exchange and on the New York Stock Exchange. The principal office of Granite REIT is 77 King Street West, Suite 4010, P.O. Box 159, Toronto-Dominion Centre, Toronto, Ontario, M5K 1H1, Canada.The registered office of Granite GP is Suite 2600, Three Bentall Centre, 595 Burrard Street, P.O. Box 49314, Vancouver, British Columbia, V7X 1L3, Canada.
The Trust is a Canadian-based REIT engaged in the acquisition, development, ownership and management of industrial, warehouse and logistics properties in North America and Europe. The Trust’s tenant base includes Magna International Inc. and its operating subsidiaries (together “Magna”) as its largest tenant, in addition to tenants from various other industries.
These condensed combined financial statements were approved by the Board of Trustees of Granite REIT and Board of Directors of Granite GP on July 31, 2019.
2. SIGNIFICANT ACCOUNTING POLICIES |
(a) | Basis of Presentation and Statement of Compliance |
The condensed combined financial statements for the three and six month periods ended June 30, 2019 have been prepared in accordance with International Accounting Standard 34,Interim Financial Reporting(“IAS 34”) as issued by the International Accounting Standards Board (“IASB”). These interim condensed combined financial statements do not include all the information and disclosures required in the annual financial statements, which were prepared in accordance with International Financial Reporting Standards (“IFRS”), and should be read in conjunction with the Trust’s annual financial statements as at and for the year ended December 31, 2018.
(b) | Combined Financial Statements and Basis of Consolidation |
As a result of the REIT conversion described in note 1, the Trust does not have a single parent; however, each unit of Granite REIT and each share of Granite GP trade as a single stapled unit and accordingly, Granite REIT and Granite GP have identical ownership. Therefore, these financial statements have been prepared on a combined basis whereby the assets, liabilities and results of Granite GP and Granite REIT have been combined. The combined financial statements include the subsidiaries of Granite GP and Granite REIT. Subsidiaries are fully consolidated by Granite GP or Granite REIT from the date of acquisition, being the date on which control is obtained. The subsidiaries continue to be consolidated until the date that such control ceases. Control exists when Granite GP or Granite REIT have power, exposure or rights to variable returns and the ability to use their power over the entity to affect the amount of returns it generates.
Granite REIT 2019 Second Quarter Report 7
All intercompany balances, income and expenses and unrealized gains and losses resulting from intercompany transactions are eliminated.
(c) | Accounting Policies and New Standards Adopted |
The condensed combined financial statements have been prepared using the same accounting policies as were used for the Trust’s annual combined financial statements and the notes thereto for the years ended December 31, 2018 and 2017, except for the adoption of the following new standards and interpretations effective January 1, 2019. As required by IAS 34, the nature and effect of these changes are disclosed below:
Amendments to IFRS 3,Business Combinations
In connection with the combined financial statements for the three and six month periods ended June 30, 2019, the Trust determined to early adopt the amendments to IFRS 3,Business Combinations (“IFRS 3 Amendments”) effective January 1, 2019 in advance of their mandatory effective date of January 1, 2020. The Trust adopted the IFRS 3 Amendments prospectively and therefore the comparative information presented for 2018 has not been restated. The IFRS 3 Amendments clarify the definition of a business in determining whether an acquisition is a business combination or an asset acquisition. The IFRS 3 Amendments have removed the requirement for an assessment of whether market participants are capable of replacing any missing inputs or processes and continuing to produce outputs; the reference to an ability to reduce costs; and require, at a minimum, the acquired set of activities and assets to include an input and a substantive process to meet the definition of a business. The IFRS 3 Amendments also provide for an optional concentration test to assess whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. The Trust has adopted the standard effective January 1, 2019 in the three and six month periods ended June 30, 2019. The Trust did not recognize the impact of adopting the IFRS 3 Amendments in the condensed combined financial statements for the three months ended March 31, 2019 and 2018, issued on May 7, 2019 as it had not determined to early adopt the IFRS 3 Amendments at that time. The condensed combined statements of net income and cash flows for the six month periods ended June 30, 2019 include the recognition of the IFRS 3 Amendments retroactive to January 1, 2019. The impact from the adoption of the IFRS 3 Amendments relating to the three month period ended March 31, 2019, and recognized in the six month period ended June 30, 2019 in each of the statements of net income and cash flows is as follows:
Relating to the Three Months Ended March 31, 2019 | ||||
Condensed Combined Statements of Net Income: | ||||
Reduction in acquisition transaction costs | $ | 411 | ||
Reduction in fair value gains on investment properties, net | (411 | ) | ||
Net impact to the Condensed Combined Statements of Net Income | $ | — | ||
Condensed Combined Statements of Cash Flows: | ||||
Reduction in fair value gains on investment properties within items not involving operating cash flows (operating activities) | $ | 411 | ||
Reduction in changes in working capital balances (operating activities) | 543 | |||
Increase in property acquisition costs (investing activities) | (954 | ) | ||
Net impact to the Condensed Combined Statements of Cash Flows | $ | — |
The adoption of the IFRS 3 Amendments had no impact to the combined balance sheet as at June 30, 2019 and the statements of comprehensive income for the three and six month periods ended June 30, 2019.
8 Granite REIT 2019 Second Quarter Report
Following the adoption of the IFRS 3 Amendments, the Trust continues to account for business combinations in which control is acquired under the acquisition method. When a property acquisition is made, the Trust considers the inputs, processes and outputs of the acquiree in assessing whether it meets the definition of a business. When the acquired set of activities and assets lack a substantive process in place and will be integrated into the Trust’s existing operations, the acquisition does not meet the definition of a business and is accounted for as an asset acquisition. An asset acquisition is accounted for as an acquisition of a group of assets and liabilities. The cost of the acquisition, including transaction costs, is allocated to the assets and liabilities acquired based on their relative fair values, and no goodwill or deferred tax is recognized. Subsequently, where the acquired asset represents an investment property, it is measured at fair value in accordance with IAS 40, Investment Properties.
IFRS 16,Leases
In January 2016, the IASB issued IFRS 16,Leases (“IFRS 16”) which replaced IAS 17,Leases and its associated interpretative guidance. For contracts that are or contain a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single,on-balance sheet accounting model that is similar to finance lease accounting, with limited exceptions for short-term leases or leases of low value assets. Lessor accounting remains substantially unchanged as the distinction between operating and finance leases is retained.
The Trust has applied IFRS 16 using the modified retrospective approach, and therefore the cumulative effect of initial application is recognized in retained earnings at January 1, 2019. Accordingly, the comparative information presented for 2018 has not been restated.
As a lessee
Definition of a lease
Previously, the Trust determined at contract inception whether an arrangement was or contained a lease under IAS 17. The Trust now assesses whether a contract is or contains a lease based on the new definition of a lease. Under IFRS 16, a contract is or contains a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.
On transition to IFRS 16, the Trust applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 and associated interpretative guidance were not reassessed as the practical expedient offered under the standard was applied. Therefore, the new definition of a lease under IFRS 16 has been applied only to contracts entered into or changed on or after January 1, 2019.
In accordance with IFRS 16, at inception or on modification of a contract that contains a lease component, the Trust allocates the consideration in the contract to each lease andnon-lease component based on their relative stand-alone prices.
Accounting policy
The Trust recognizes aright-of-use asset and a lease obligation at the lease commencement date. The Trust presentsright-of-use assets that do not meet the definition of investment property in “fixed assets” on the combined balance sheet, the same line item as it presents underlying assets of the same nature that it owns. Theright-of-use asset is initially measured at cost and, subsequently, at cost less any accumulated depreciation and impairment, and adjusted for certain remeasurements of the lease obligation. When aright-of-use asset meets the definition of investment property, it is presented in “investment properties” on the combined balance sheet. Theright-of-use asset is initially measured at cost and subsequently, it is measured at fair value in accordance with the Trust’s accounting policies.
Granite REIT 2019 Second Quarter Report 9
The lease liability is initially measured at the present value of the lease payments at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, at the Trust’s incremental borrowing rate. Generally, the Trust uses its incremental borrowing rate as the discount rate. The Trust presents lease liabilities in “lease obligations” on the combined balance sheet.
The lease obligation is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate of the amount expected to be payable under a residual value guarantee or, as appropriate, a change in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised.
The Trust has applied judgment to determine the lease term for some lease contracts in which it is a lessee that include renewal or termination options. The assessment of whether the Trust is reasonably certain to exercise such options impacts the lease term which, in turn, significantly affects the amount of lease obligations andright-of-use assets recognized. The Trust also applies judgment in determining the discount rate used to present value the lease obligations.
Transition
In accordance with IFRS 16, the Trust recognizedright-of-use assets and lease obligations for applicable leases except for leases oflow-value assets for which the Trust has elected not to recognizeright-of-use assets and lease liabilities. The Trust recognizes the lease payments associated with theselow-value asset leases as an expense on a straight-line basis over the lease term.
The Trust leases assets related to ground leases, office space and office equipment. Lease obligations were measured at the present value of the remaining lease payments, discounted at the Trust’s incremental borrowing rate as at January 1, 2019.
Right-of-use assets are measured at either:
• | Their carrying amount as if IFRS 16 had been applied since the commencement date, discounted using the lessee’s incremental borrowing rate at the date of initial application; or |
• | An amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments. |
The Trust recognized aright-of-use asset at a value equal to the lease obligation and, therefore, there was no impact to retained earnings as at January 1, 2019.
The Trust used the following additional practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17:
• | Applied the exemption not to recognizeright-of-use assets and obligations for leases with less than 12 months of lease term; |
• | Applied the exemption not to allocate the consideration in a contract to each lease andnon-lease component; |
• | Excluded initial direct costs from measuring theright-of-use asset at the date of initial application; and |
• | Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease. |
Impact on transition
As at June 30, 2019, the Trust had leases for the use of office space, office and other equipment and three ground leases for the land upon which four income-producing properties in Europe and Canada are
10 Granite REIT 2019 Second Quarter Report
situated. In accordance with IFRS 16, the Trust recognized these operating leases asright-of-use assets and recorded related lease liability obligations as follows:
Fixed assets | Investment properties | Lease obligations | ||||||||||||||||||||||
Office space | Equipment | Total | Ground leases | |||||||||||||||||||||
Balance at January 1, 2019 | $ | 1,780 | $ | 46 | $ | 1,826 | $ | 11,801 | $ | 13,627 | ||||||||||||||
Balance at June 30, 2019 | $ | 1,489 | $ | 79 | $ | 1,568 | $ | 31,601 | $ | 33,198 |
When measuring lease liabilities for leases that were classified as operating leases, the Trust discounted lease payments using its incremental borrowing rate at January 1, 2019. The weighted average rate applied is 4.4%.
During the three and six month periods ended June 30, 2019, the Trust recorded an additionalright-of-use asset and related lease obligation of $20.5 million for the ground lease associated with the acquisition of two income-producing properties in Mississauga, Ontario in April 2019. The Trust also recorded additionalright-of-use assets and lease obligations of $39 thousand for equipment.
Also in accordance with IFRS 16, the Trust has recognized depreciation and interest costs, instead of operating lease expense. During the three and six month periods ended June 30, 2019, the Trust recognized $0.2 million and $0.3 million of depreciation and amortization expense, respectively, and $0.4 million and $0.5 million of interest expense from these leases, respectively. No depreciation is recognized for theright-of-use asset that meets the definition of investment property.
Future minimum lease payments relating to theright-of-use assets as at June 30, 2019 in aggregate and for the next five years and thereafter are as follows:
Remainder of 2019 | $ | 224 | ||
2020 | 578 | |||
2021 | 615 | |||
2022 | 360 | |||
2023 | 138 | |||
2024 and thereafter | 31,283 | |||
$ | 33,198 |
The lease commitments as at December 31, 2018 comprised $27.2 million related to two ground leases in Europe with annual payments of $0.5 million and $0.1 million expiring in 2049 and 2096, respectively, and $1.6 million related to certain other operating leases. On January 1, 2019, the Trust recognized lease obligations on the combined balance sheet of $13.6 million for these aforementioned lease commitments which include the impact from present value discounting of $15.4 million and certain other adjustments of $0.2 million.
As a lessor
The Trust leases its investment properties, includingright-of-use assets, to tenants and has determined that thein-place leases as at June 30, 2019 are operating leases. The accounting policies applicable to the Trust as a lessor are in accordance with IAS 17. The Trust is not required to make any adjustments on transition to IFRS 16 for leases in which it is a lessor.
Granite REIT 2019 Second Quarter Report 11
IFRIC 23,Uncertainty Over Income Tax Treatments
In June 2017, the IFRS Interpretations Committee issued IFRIC 23,Uncertainty Over Income Tax Treatments(“IFRIC 23”)which clarifies how the recognition and measurement requirements of IAS 12,Income Taxes, are applied where there is uncertainty over income tax treatments. This standard is effective for annual periods beginning on or after January 1, 2019. The adoption of this standard did not have an impact on the combined financial statements.
3. ACQUISITIONS |
During the six month periods ended June 30, 2019 and 2018, Granite acquired income-producing properties consisting of the following:
Acquisitions During the Six Months Ended June 30, 2019(1)
Property | Location | Date acquired | Property purchase price | Transaction costs | Total acquisition cost | |||||||||||||||
201 Sunridge Boulevard | Wilmer, TX | March 1, 2019 | $ | 58,087 | $ | 223 | $ | 58,310 | ||||||||||||
3501 North Lancaster Hutchins Road | Lancaster, TX | March 1, 2019 | 106,120 | 222 | 106,342 | |||||||||||||||
2020 & 2095 Logistics Drive(2) | Mississauga, ON | April 9, 2019 | 174,106 | 584 | 174,690 | |||||||||||||||
1901 Beggrow Street | Columbus, OH | May 23, 2019 | 71,607 | 255 | 71,862 | |||||||||||||||
$ | 409,920 | $ | 1,284 | $ | 411,204 |
(1) | The properties acquired in 2019 have been accounted for as asset acquisitions reflecting the early adoption of the IFRS 3 Amendments effective January 1, 2019 (note 2(c)). |
(2) | Includesright-of-use asset related to ground lease of $20.5 million (note 2(c)). |
Acquisitions During the Six Months Ended June 30, 2018
Property | Location | Date acquired | Property purchase price | |||||||||
3870 Ronald Reagan Parkway | Plainfield, IN | March 23, 2018 | $ | 50,835 | ||||||||
181 Antrim Commons Drive | Greencastle, PA | April 4, 2018 | 44,323 | |||||||||
Ohio portfolio (four properties): | ||||||||||||
10, 100 and 115 Enterprise Parkway and 15 Commerce Parkway | West Jefferson, OH | May 23, 2018 | 299,297 | |||||||||
$ | 394,455 |
During the three and six month periods ended June 30, 2018, the Trust recognized $3.9 million and $4.0 million of revenue, respectively, and $3.3 million and $3.4 million of net income, respectively, related to the aforementioned acquisitions. Had these acquisitions occurred on January 1, 2018, the Trust would have recognized proforma revenue and net income of approximately $13.5 million and $11.8 million, respectively, during the six month period ended June 30, 2018.
12 Granite REIT 2019 Second Quarter Report
The following table summarizes the total consideration paid for the income-producing property acquisitions and the fair value of the total identifiable net assets acquired at the acquisition dates:
Acquisitions During the Six Months Ended June 30, | 2018 | |||
Purchase consideration | ||||
Cash on hand | $ | 306,023 | ||
Cash sourced from credit facility | 93,329 | |||
Total cash consideration paid | $ | 399,352 | ||
Recognized amounts of identifiable net assets acquired measured at their respective fair values: | ||||
Investment properties | $ | 394,455 | ||
Working capital | 4,897 | |||
Total identifiable net assets | $ | 399,352 |
During the six month period ended June 30, 2018, the Trust incurred $1.5 million of legal and advisory costs associated with the aforementioned acquisitions. The Trust incurred an additional $0.2 million of costs related to pursuing other acquisition opportunities. These costs are included in acquisition transaction costs in the condensed combined statements of net income.
Acquisition Deposits
As at June 30, 2019, Granite had made deposits of $60.1 million relating to property acquisitions. A deposit of $26.2 million (US$20.0 million) was made in connection with a contractual commitment to acquire a property under development in the state of Texas. This commitment to purchase the property under development is subject to specific confidentiality provisions and customary closing conditions including certain purchase rights in favour of the tenant and is expected to close in the fourth quarter of 2019 following construction of the building and commencement of the lease. The contractual commitment to purchase this property as at June 30, 2019 is included in the commitments and contingencies note (note 17(b)).
As at June 30, 2019, $33.8 million (US$25.8 million) was also paid to acquire 190.6 acres of development land located in Harris County, Texas. Granite entered into a joint arrangement with a third-party and purchased the development land on July 1, 2019 for total cash consideration of $33.4 million (US$25.4 million) (note 18(a)).
4. INVESTMENT PROPERTIES |
As at | June 30, 2019 | December 31, 2018 | ||||||
Income-producing properties | $ | 3,775,947 | $ | 3,403,985 | ||||
Properties under development | 18,360 | 17,009 | ||||||
Land held for development | 4,739 | 3,984 | ||||||
$ | 3,799,046 | $ | 3,424,978 |
Granite REIT 2019 Second Quarter Report 13
Changes in investment properties are shown in the following table:
Six Months Ended June 30, 2019 | Year Ended December 31, 2018 | |||||||||||||||||||||||||||||||
Income- producing properties | Properties under development | Land held for development | Income- producing properties | Properties under | Land held for development | |||||||||||||||||||||||||||
Balance, beginning of period | $ | 3,403,985 | $ | 17,009 | $ | 3,984 | $ | 2,714,684 | $ | — | $ | 18,884 | ||||||||||||||||||||
Ground leases(1)(note 2(c)) | 11,801 | — | — | — | — | — | ||||||||||||||||||||||||||
Adjusted balance, beginning of period | $ | 3,415,786 | $ | 17,009 | $ | 3,984 | $ | 2,714,684 | $ | — | $ | 18,884 | ||||||||||||||||||||
Additions | ||||||||||||||||||||||||||||||||
— Capital expenditures: | ||||||||||||||||||||||||||||||||
Maintenance or improvements | 1,117 | — | — | 8,164 | — | — | ||||||||||||||||||||||||||
Developments or expansions | 3,382 | 2,150 | — | 19,986 | 287 | 66 | ||||||||||||||||||||||||||
— Acquisitions (note 3) | 411,204 | — | — | 542,998 | — | 1,232 | ||||||||||||||||||||||||||
— Leasing commissions | 305 | — | — | 3,340 | — | — | ||||||||||||||||||||||||||
— Tenant incentives | 303 | — | — | 816 | — | — | ||||||||||||||||||||||||||
Transfers to properties under development | — | — | — | (12,206 | ) | 16,473 | (4,267 | ) | ||||||||||||||||||||||||
Fair value gains, net | 118,509 | — | 911 | 353,258 | — | 1,253 | ||||||||||||||||||||||||||
Foreign currency translation, net | (123,602 | ) | (799 | ) | (156 | ) | 147,336 | 249 | 196 | |||||||||||||||||||||||
Amortization of straight-line rent | 2,688 | — | — | 4,274 | — | — | ||||||||||||||||||||||||||
Amortization of tenant incentives | (2,596 | ) | — | — | (5,402 | ) | — | — | ||||||||||||||||||||||||
Other changes | 92 | — | — | (972 | ) | — | — | |||||||||||||||||||||||||
Classified as assets held for sale (note 5) | (51,241 | ) | — | — | (372,291 | ) | — | (13,380 | ) | |||||||||||||||||||||||
Balance, end of period | $ | 3,775,947 | $ | 18,360 | $ | 4,739 | $ | 3,403,985 | $ | 17,009 | $ | 3,984 |
(1) | Impact of adoption of IFRS 16,Leases effective January 1, 2019. |
During the six month period ended June 30, 2019, the Trust disposed of six properties previously classified as assets held for sale for aggregate gross proceeds of $43.8 million (note 5). The fair value gains during the six month period ended June 30, 2019, excluding the six properties sold in the period, were $119.4 million. As at June 30, 2019, six properties with an aggregate fair value of $50.5 million were classified as assets held for sale (note 5).
The Trust determines the fair value of an income-producing property based upon, among other things, rental income from current leases and assumptions about rental income from future leases reflecting market conditions and lease renewals at the applicable balance sheet dates, less future cash outflows in respect of such leases. Fair values are primarily determined by discounting the expected future cash flows, generally over a term of 10 years, plus a terminal value based on the application of a capitalization rate to estimated year 11 cash flows. The fair values of properties under development are measured using a discounted cash flow model, net of costs to complete, as of the balance sheet date. The Trust measures its investment properties using valuations prepared by management. The Trust does not measure its investment properties based on valuations prepared by external appraisers but uses such external appraisals as data points, together with other external market information accumulated by management, in arriving at its own conclusions on values. Management uses valuation assumptions such as discount rates, terminal capitalization rates and market rental rates applied in external appraisals or sourced from valuation experts; however, the Trust also uses its historical renewal experience with tenants, its direct knowledge of the specialized nature of Granite’s portfolio and tenant profile and its knowledge of the actual condition of the properties in making business judgments about lease renewal probabilities, renewal rents and capital expenditures. There has been no change in the valuation methodology during the period.
14 Granite REIT 2019 Second Quarter Report
Included in investment properties is $16.8 million (December 31, 2018 — $14.8 million) of net straight-line rent receivable arising from the recognition of rental revenue on a straight-line basis over the lease term.
Details about contractual obligations to purchase, construct and develop properties can be found in the commitments and contingencies note (note 17).
Tenant minimum rental commitments payable to Granite onnon-cancellable operating leases (excluding assets held for sale) as at June 30, 2019 are as follows:
Not later than 1 year | $ | 237,168 | ||
Later than 1 year and not later than 5 years | 804,795 | |||
Later than 5 years | 565,859 | |||
$ | 1,607,822 |
Valuations are most sensitive to changes in discount rates and terminal capitalization rates. The key valuation metrics for income-producing properties by country are set out below:
As at | June 30, 2019(1) | December 31, 2018(1) | ||||||||||||||||||||||||||||||
Weighted average(2) | Maximum | Minimum | Weighted average(2) | Maximum | Minimum | |||||||||||||||||||||||||||
Canada | ||||||||||||||||||||||||||||||||
Discount rate | 5.86% | 7.00% | 5.00% | 5.63% | 7.75% | 5.00% | ||||||||||||||||||||||||||
Terminal capitalization rate | 5.87% | 7.00% | 5.00% | 6.01% | 7.00% | 5.00% | ||||||||||||||||||||||||||
United States | ||||||||||||||||||||||||||||||||
Discount rate | 6.53% | 9.50% | 5.00% | 6.68% | 10.00% | 5.75% | ||||||||||||||||||||||||||
Terminal capitalization rate | 6.45% | 8.75% | 5.25% | 6.46% | 9.75% | 5.25% | ||||||||||||||||||||||||||
Germany | ||||||||||||||||||||||||||||||||
Discount rate | 6.90% | 8.25% | 5.70% | 6.89% | 8.25% | 5.70% | ||||||||||||||||||||||||||
Terminal capitalization rate | 6.63% | 8.75% | 5.00% | 6.89% | 8.75% | 5.25% | ||||||||||||||||||||||||||
Austria | ||||||||||||||||||||||||||||||||
Discount rate | 7.95% | 10.00% | 7.00% | 8.37% | 10.00% | 8.00% | ||||||||||||||||||||||||||
Terminal capitalization rate | 7.33% | 9.75% | 6.75% | 7.88% | 10.00% | 7.00% | ||||||||||||||||||||||||||
Netherlands | ||||||||||||||||||||||||||||||||
Discount rate | 5.40% | 6.00% | 5.15% | 5.93% | 6.50% | 5.70% | ||||||||||||||||||||||||||
Terminal capitalization rate | 6.52% | 8.26% | 5.60% | 6.48% | 7.45% | 6.00% | ||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||
Discount rate | 8.34% | 9.50% | 6.75% | 8.23% | 9.50% | 6.75% | ||||||||||||||||||||||||||
Terminal capitalization rate | 8.42% | 10.00% | 6.50% | 8.48% | 10.00% | 6.75% | ||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||
Discount rate | 6.70% | 10.00% | 5.00% | 6.90% | 10.00% | 5.00% | ||||||||||||||||||||||||||
Terminal capitalization rate | 6.56% | 10.00% | 5.00% | 6.81% | 10.00% | 5.00% |
(1) | Excludes assets held for sale at the respective period end (note 5). |
(2) | Weighted based on income-producing property fair value. |
Granite REIT 2019 Second Quarter Report 15
5. ASSETS HELD FOR SALE AND DISPOSITIONS |
Assets Held for Sale
At June 30, 2019, six investment properties located in the United States and Canada are classified as assets held for sale. The six properties, having an aggregate fair value of $50.5 million, consist of the following:
Property | Location | Fair value | ||||||
Michigan properties (five properties): | ||||||||
6151 Bancroft Avenue | Alto, MI | |||||||
3501 John F Donnelly Drive | Holland, MI | |||||||
3575 128th Avenue | Holland, MI | |||||||
3601 John F Donnelly Drive | Holland, MI | |||||||
1800 Hayes Street | Grand Haven, MI | $ | 37,961 | |||||
330 Finchdene Square | Toronto, ON | 12,500 | ||||||
$ | 50,461 |
Dispositions
During the six month period ended June 30, 2019, six properties located in Canada and the United States previously classified as assets held for sale at December 31, 2018 were disposed. The properties consist of the following:
Property | Location | Date disposed | Sale price | |||||||||
3 Walker Drive | Brampton, ON | January 15, 2019 | $ | 13,380 | ||||||||
Iowa properties (four properties): | ||||||||||||
403 S 8th Street | Montezuma, IA | |||||||||||
1951 A Avenue | Victor, IA | |||||||||||
408 N Maplewood Avenue | Williamsburg, IA | |||||||||||
411 N Maplewood Avenue | Williamsburg, IA | February 25, 2019 | 22,323 | |||||||||
375 Edward Street | Richmond Hill, ON | February 27, 2019 | 8,050 | |||||||||
$ | 43,753 |
The gross proceeds of $22.3 million (US$16.9 million) for the four properties in Iowa included a vendor take-back mortgage of $16.8 million (US$12.7 million). The mortgage receivable bore interest at 5.25% per annum and was repaid on June 18, 2019.
The following table summarizes the fair value changes in properties classified as assets held for sale:
Six Months Ended June 30, 2019 | Year Ended December 31, 2018 | |||||||
Balance, beginning of period | $ | 44,238 | $ | 391,453 | ||||
Fair value gains, net | 230 | 196 | ||||||
Foreign currency translation, net | (1,495 | ) | (3,466 | ) | ||||
Disposals | (43,753 | ) | (729,608 | ) | ||||
Classified as assets held for sale from investment properties (note 4) | 51,241 | 385,671 | ||||||
Other | — | (8 | ) | |||||
Balance, end of period | $ | 50,461 | $ | 44,238 |
16 Granite REIT 2019 Second Quarter Report
During the six month period ended June 30, 2019, Granite incurred $1.4 million (2018 — $1.2 million) of broker commissions and legal and advisory costs associated with the disposal or planned disposal of the assets held for sale which are included in loss on sale of investment properties on the condensed combined statements of net income.
6. OTHER ASSETS |
Other assets consist of:
As at | June 30, 2019 | December 31, 2018 | ||||||
Deferred financing costs associated with the revolving credit facility | $ | 1,041 | $ | 1,172 | ||||
Long-term receivables | 413 | 448 | ||||||
Long-term proceeds receivable associated with a property disposal (note 7) | — | 11,805 | ||||||
$ | 1,454 | $ | 13,425 |
7. CURRENT ASSETS |
Other Receivable
As at June 30, 2019, other receivable includes $11.3 million (US$8.7 million) of proceeds receivable associated with the disposal of a property in South Carolina in September 2018 that is expected to be received in the first quarter of 2020. The estimated sale price for the property was determined using an income approach that assumed a forecast consumer price index inflation factor at the date of disposition. Accordingly, the proceeds receivable is subject to change and will be dependent upon the actual consumer price index inflation factor as at December 31, 2019. At December 31, 2018, the proceeds receivable was $11.8 million (US$8.7 million) and was recorded in other assets (note 6).
8. UNSECURED DEBT AND CROSS CURRENCY INTEREST RATE SWAPS |
(a) | Unsecured Debentures and Term Loans, Net |
As at | June 30, 2019 | December 31, 2018 | ||||||||||||||||||
Maturity Date | Amortized Cost(1) | Principal issued and | Amortized Cost(1) | Principal issued and | ||||||||||||||||
2021 Debentures | July 5, 2021 | $ | 249,535 | $ | 250,000 | $ | 249,424 | $ | 250,000 | |||||||||||
2023 Debentures | November 30, 2023 | 398,584 | 400,000 | 398,425 | 400,000 | |||||||||||||||
2022 Term Loan(2) | December 19, 2022 | 241,674 | 242,165 | 251,853 | 252,414 | |||||||||||||||
2025 Term Loan | December 12, 2025 | 298,806 | 300,000 | 298,712 | 300,000 | |||||||||||||||
$ | 1,188,599 | $ | 1,192,165 | $ | 1,198,414 | $ | 1,202,414 |
(1) | The amounts outstanding are net of deferred financing costs. The deferred financing costs are amortized using the effective interest method and are recorded in interest expense. |
(2) | The term loan maturing on December 19, 2022 is denominated in US dollars and was originally drawn in the amount of US$185.0 million. As at June 30, 2019 and December 31, 2018, US$185.0 million remains outstanding. |
Granite REIT 2019 Second Quarter Report 17
(b) | Cross Currency Interest Rate Swaps |
As at | June 30, 2019 | December 31, 2018 | ||||||
Financial liabilities at fair value | ||||||||
2021 Cross Currency Interest Rate Swap | $ | 11,018 | $ | 26,877 | ||||
2023 Cross Currency Interest Rate Swap | 33,438 | 56,922 | ||||||
2022 Cross Currency Interest Rate Swap | 5,448 | 3,826 | ||||||
2025 Cross Currency Interest Rate Swap | 13,890 | 17,132 | ||||||
$ | 63,794 | $ | 104,757 |
On July 3, 2014, the Trust entered into a cross currency interest rate swap (the “2021 Cross Currency Interest Rate Swap”) to exchange the 3.788% semi-annual interest payments from the debentures that mature in 2021 (“2021 Debentures”) for Euro denominated payments at a 2.68% fixed interest rate. In addition, under the terms of the swap, the Trust will pay principal proceeds of€171.9 million in exchange for which it will receive $250.0 million on July 5, 2021.
On December 20, 2016, the Trust entered into a cross currency interest rate swap (the “2023 Cross Currency Interest Rate Swap”) to exchange the 3.873% semi-annual interest payments from the debentures that mature in 2023 (“2023 Debentures”) for Euro denominated payments at a 2.43% fixed interest rate. In addition, under the terms of the swap, the Trust will pay principal proceeds of€281.1 million in exchange for which it will receive $400.0 million on November 30, 2023.
On December 19, 2018, the Trust entered into a cross currency interest rate swap (the “2022 Cross Currency Interest Rate Swap”) to exchange the LIBOR plus margin monthly interest payments from the term loan that matures in 2022 (“2022 Term Loan”) for Euro denominated payments at a 1.225% fixed interest rate. In addition, under the terms of the swap, the Trust will pay principal proceeds of€163.0 million in exchange for which it will receive US$185.0 million on December 19, 2022.
On December 12, 2018, the Trust entered into a cross currency interest rate swap (the “2025 Cross Currency Interest Rate Swap”) to exchange the CDOR plus margin monthly interest payments from the term loan that matures in 2025 (“2025 Term Loan”) for Euro denominated payments at a 2.202% fixed interest rate. In addition, under the terms of the swap, the Trust will pay principal proceeds of€198.2 million in exchange for which it will receive $300.0 million on December 12, 2025.
The cross currency interest rate swaps are designated as net investment hedges of the Trust’s investment in foreign operations. In addition, the Trust has on occasion designated its US dollar draws from the credit facility as net investment hedges of its investment in the US operations. The effectiveness of the hedges are assessed quarterly. For the three and six month periods ended June 30, 2019, the Trust has assessed that the hedges continued to be effective. As an effective hedge, the fair value gains or losses on the cross currency interest rate swaps and the foreign exchange gains or losses on the outstanding 2022 Term Loan are recognized in other comprehensive income. The Trust has elected to record the differences resulting from the lower interest rate associated with the cross currency interest rate swaps in the condensed combined statements of net income.
18 Granite REIT 2019 Second Quarter Report
9. CURRENT LIABILITIES |
Deferred Revenue
Deferred revenue relates to prepaid and unearned revenue received from tenants and fluctuates with the timing of rental receipts.
Bank Indebtedness
On February 1, 2018, the Trust entered into an unsecured revolving credit facility in the amount of $500.0 million that is available by way of Canadian dollar, US dollar or Euro denominated loans or letters of credit and matures on February 1, 2023. The Trust has the option to extend the maturity date by one year to February 1, 2024 subject to the agreement of lenders in respect of a minimum of 662⁄3% of the aggregate amount committed under the facility. The credit facility provides the Trust with the ability to increase the amount of the commitment by an additional aggregate principal amount of up to $100.0 million with the consent of the participating lenders. As at June 30, 2019, the Trust had no amounts (December 31, 2018 — nil) drawn from the credit facility and $1.1 million (December 31, 2018 — $0.1 million) in letters of credit issued against the facility.
Accounts Payable and Accrued Liabilities
As at | June 30, 2019 | December 31, 2018 | ||||||
Accounts payable | $ | 7,573 | $ | 5,352 | ||||
Accrued salaries, incentives and benefits | 4,691 | 5,364 | ||||||
Accrued interest payable | 6,528 | 6,606 | ||||||
Accrued construction payable | 2,610 | 2,429 | ||||||
Accrued professional fees | 4,247 | 2,910 | ||||||
Accrued employee unit-based compensation | 4,576 | 3,193 | ||||||
Accrued trustee/director unit-based compensation | 2,539 | 2,330 | ||||||
Accrued property operating costs | 4,320 | 2,013 | ||||||
Accrued land transfer tax in connection with an acquisition | — | 5,499 | ||||||
Accrued leasing commissions | 486 | 407 | ||||||
Accrual associated with a property disposal | 1,964 | 2,047 | ||||||
Unrealized foreign exchange forward contracts | 1,655 | 10 | ||||||
Other accrued liabilities | 4,122 | 3,807 | ||||||
$ | 45,311 | $ | 41,967 |
In connection with the disposal of a property in South Carolina in September 2018, Granite has retained an obligation to make certain repairs to the building. Accordingly, as at June 30, 2019, a liability of approximately $2.0 million (December 31, 2018 — $2.0 million) is included in the accrual associated with a property disposal above. The estimated amount was determined using a third-party report but can change over time as the repairs are completed.
10. DISTRIBUTIONS TO STAPLED UNITHOLDERS |
Total distributions declared to stapled unitholders in the three month period ended June 30, 2019 were $34.6 million (2018 — $31.1 million) or 69.9 cents per stapled unit (2018 — 68.1 cents per stapled unit). Total distributions declared to stapled unitholders in the six month period ended June 30, 2019 were $66.5 million (2018 — $62.6 million) or $1.40 per stapled unit (2018 — $1.36 per stapled unit). Distributions payable at June 30, 2019 of $11.5 million, representing the June 2019 distribution, were paid on July 15, 2019. Distributions payable at December 31, 2018 of $24.3 million were paid on January 15, 2019 and represented
Granite REIT 2019 Second Quarter Report 19
the December 2018 monthly distributions of $10.6 million and the cash portion of a special distribution of $13.7 million (30.0 cents per stapled unit).
A special distribution was declared in December 2018 of $1.20 per stapled unit, which comprised of 30.0 cents per unit payable in cash and 90.0 cents per unit payable by the issuance of stapled units. On January 15, 2019, immediately following the issuance of the stapled units, the stapled units were consolidated such that each unitholder held the same number of stapled units after the consolidation as each unitholder held prior to the special distribution. The special distribution declared of $41.1 million was recorded to contributed surplus in December 2018, in accordance with IAS 32,Financial Instruments: Presentation,as the Trust was settling the distribution with a fixed number of its own equity instruments. In January 2019, upon the issuance of the stapled units, the stapled units account increased and contributed surplus decreased by $41.1 million, respectively.
On July 17, 2019, distributions of $11.5 million or 23.3 cents per stapled unit were declared and will be paid on August 15, 2019.
11. STAPLED UNITHOLDERS’ EQUITY |
(a) | Unit-Based Compensation |
Incentive Stock Option Plan
The Incentive Stock Option Plan allows for the grant of stock options or stock appreciation rights to directors, officers, employees and consultants. As at June 30, 2019 and December 31, 2018, there were no options outstanding under this plan.
Director/Trustee Deferred Share Unit Plan
The Trust has twoNon-Employee Director Share-Based Compensation Plans (the “DSPs”) which provide for a deferral of up to 100% of eachnon-employee director’s total annual remuneration, at specified levels elected by each director, until such director ceases to be a director. A reconciliation of the changes in the notional deferred share units (“DSUs”) outstanding is presented below:
2019 | 2018 | |||||||||||||||
Number (000s) | Weighted Average Fair Value | Number (000s) | Weighted Average Grant Date Fair Value | |||||||||||||
DSUs outstanding, January 1 | 44 | $ | 46.01 | 28 | $ | 41.88 | ||||||||||
Granted | 9 | 54.45 | 8 | 51.69 | ||||||||||||
Settled | (11 | ) | 51.57 | — | — | |||||||||||
DSUs outstanding, June 30 | 42 | $ | 46.33 | 36 | $ | 44.14 |
20 Granite REIT 2019 Second Quarter Report
Executive Deferred Stapled Unit Plan
The Trust has an Executive Share Unit Plan (the “Restricted Stapled Unit Plan”) which is designed to provide equity-based compensation in the form of stapled units to executives and other employees. A reconciliation of the changes in notional stapled units outstanding under the Restricted Stapled Unit Plan is presented below:
2019 | 2018 | |||||||||||||||
Number (000s) | Weighted Average Grant Date Fair Value | Number (000s) | Weighted Average Grant Date Fair Value | |||||||||||||
Restricted stapled units outstanding, January 1 | 117 | $ | 50.34 | 106 | $ | 43.32 | ||||||||||
New grants(1) | 42 | 60.68 | 23 | 50.19 | ||||||||||||
Forfeited | (1 | ) | 47.06 | — | — | |||||||||||
Settled in cash | (12 | ) | 45.10 | — | — | |||||||||||
Settled in stapled units | (10 | ) | 45.10 | (64 | ) | 42.14 | ||||||||||
Restricted stapled units outstanding, June 30(1) | 136 | $ | 54.47 | 65 | $ | 46.91 |
(1) | New grants include 9,418 performance based units granted during the six month period ended June 30, 2019 (2018 — nil). Total stapled units outstanding at June 30, 2019 include a total of 13,148 performance based units granted (June 30, 2018 — nil). |
The Trust’s unit-based compensation expense recognized in general and administrative expenses was:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
DSPs for trustees/directors | $ | 135 | $ | 311 | $ | 883 | $ | 563 | ||||||||
Restricted Stapled Unit Plan for executives and employees | 1,361 | 502 | 2,786 | 1,460 | ||||||||||||
Unit-based compensation expense | $ | 1,496 | $ | 813 | $ | 3,669 | $ | 2,023 | ||||||||
Fair value remeasurement (recovery) expense included in the above | $ | (176 | ) | $ | 237 | $ | 1,033 | $ | 454 |
(b) | Normal Course Issuer Bid |
On May 14, 2019, Granite announced the acceptance by the Toronto Stock Exchange (“TSX”) of Granite’s Notice of Intention to Make a Normal Course Issuer Bid (“NCIB”). Pursuant to the NCIB, Granite proposes to purchase through the facilities of the TSX and any alternative trading system in Canada, from time to time and if considered advisable, up to an aggregate of 4,853,666 of Granite’s issued and outstanding stapled units. The NCIB commenced on May 21, 2019 and will conclude on the earlier of the date on which purchases under the bid have been completed and May 20, 2020. Pursuant to the policies of the TSX, daily purchases made by Granite through the TSX may not exceed 41,484 stapled units, subject to certain exceptions. Granite entered into an automatic securities purchase plan with a broker in order to facilitate repurchases of the stapled units under the NCIB during specified blackout periods. Pursuant to a previous notice of intention to conduct a NCIB, Granite received approval from the TSX to purchase stapled units for the period May 18, 2018 to May 17, 2019.
Granite REIT 2019 Second Quarter Report 21
During the six month period ended June 30, 2019, Granite repurchased 700 stapled units (2018 — 1,233,459 stapled units) for consideration of less than $0.1 million (2018 — $60.9 million). The difference between the repurchase price and the average cost of the stapled units of less than $0.1 million (2018 — $5.2 million) was recorded to contributed surplus.
(c) | Stapled Unit Offering |
On April 30, 2019, Granite completed an offering of 3,749,000 stapled units at a price of $61.50 per unit for gross proceeds of $230.6 million, including 489,000 stapled units issued pursuant to the exercise of the over-allotment option granted to the underwriters. Total costs related to the offering totaled $10.2 million and were recorded directly to stapled unitholders’ equity.
(d) | Accumulated Other Comprehensive Income |
Accumulated other comprehensive income consists of the following:
As at June 30, | 2019 | 2018 | ||||||
Foreign currency translation gains on investments in subsidiaries, net of related hedging activities andnon-controlling interests(1) | $ | 208,618 | $ | 249,445 | ||||
Fair value losses on derivatives designated as net investment hedges | (67,671 | ) | (80,548 | ) | ||||
$ | 140,947 | $ | 168,897 |
(1) | Includes foreign currency translation gains and losses fromnon-derivative financial instruments designated as net investment hedges. |
12. RECOVERIES, COSTS AND EXPENSES |
(a) | Tenant recoveries revenue consists of: |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Property taxes | $ | 5,481 | $ | 4,819 | $ | 10,165 | $ | 10,036 | ||||||||
Property insurance | 538 | 510 | 1,056 | 1,046 | ||||||||||||
Operating costs | 1,700 | 1,445 | 3,811 | 2,466 | ||||||||||||
$ | 7,719 | $ | 6,774 | $ | 15,032 | $ | 13,548 |
22 Granite REIT 2019 Second Quarter Report
(b) | Property operating costs consist of: |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Non-recoverable from tenants: | ||||||||||||||||
Property taxes and utilities | $ | 355 | $ | 236 | $ | 755 | $ | 399 | ||||||||
Legal | 58 | 77 | 144 | 259 | ||||||||||||
Consulting | 14 | 28 | 36 | 40 | ||||||||||||
Environmental and appraisals | 319 | 110 | 370 | 297 | ||||||||||||
Repairs and maintenance | 161 | 155 | 407 | 255 | ||||||||||||
Ground rents | — | 167 | — | 335 | ||||||||||||
Other | 170 | 189 | 355 | 345 | ||||||||||||
$ | 1,077 | $ | 962 | $ | 2,067 | $ | 1,930 | |||||||||
Recoverable from tenants: | ||||||||||||||||
Property taxes and utilities | $ | 5,884 | $ | 5,102 | $ | 10,852 | $ | 10,624 | ||||||||
Property insurance | 628 | 535 | 1,154 | 1,056 | ||||||||||||
Repairs and maintenance | 676 | 428 | 1,179 | 711 | ||||||||||||
Property management fees | 489 | 337 | 913 | 572 | ||||||||||||
Other | 44 | 66 | 869 | 417 | ||||||||||||
$ | 7,721 | $ | 6,468 | $ | 14,967 | $ | 13,380 | |||||||||
Property operating costs | $ | 8,798 | $ | 7,430 | $ | 17,034 | $ | 15,310 |
(c) | General and administrative expenses consist of: |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Salaries, incentives and benefits | $ | 4,372 | $ | 3,622 | $ | 7,383 | $ | 8,064 | ||||||||
Audit, legal and consulting | 1,143 | 1,090 | 2,477 | 1,890 | ||||||||||||
Trustee/director fees and related expenses | 357 | 270 | 641 | 573 | ||||||||||||
Unit-based compensation including distributions and revaluations | 1,258 | 632 | 3,204 | 1,644 | ||||||||||||
Other public entity costs | 746 | 546 | 1,190 | 946 | ||||||||||||
Office rents including property taxes and common area maintenance costs | 100 | 231 | 181 | 455 | ||||||||||||
Other | 660 | 756 | 1,434 | 1,063 | ||||||||||||
$ | 8,636 | $ | 7,147 | $ | 16,510 | $ | 14,635 |
Granite REIT 2019 Second Quarter Report 23
(d) | Interest expense and other financing costs consist of: |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Interest and amortized issuance costs relating to debentures and term loans | $ | 6,878 | $ | 4,534 | $ | 13,801 | $ | 9,122 | ||||||||
Amortization of deferred financing costs and other interest expense and charges | 546 | 915 | 1,035 | 1,847 | ||||||||||||
Interest expense related to lease obligations (note 2(c)) | 374 | — | 517 | — | ||||||||||||
$ | 7,798 | $ | 5,449 | $ | 15,353 | $ | 10,969 |
(e) For the six month period ended June 30, 2018, foreign exchange gains (losses) included an $8.5 million foreign exchange gain realized from the remeasurement of the US dollar proceeds received from the sale of three investment properties in January 2018.
(f) | Fair value losses (gains) on financial instruments consist of: |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Foreign exchange forward contracts, net | $ | 1,655 | $ | (1,438 | ) | $ | 1,756 | $ | 530 |
(g) During the three and six month periods ended June 30, 2018, Granite entered into a settlement agreement related to a land use matter for a property in Ontario, Canada and was awarded a settlement amount of $2.3 million.
13. INCOME TAXES |
(a) | The major components of the income tax expense are: |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Current income tax expense | $ | 1,678 | $ | 2,839 | $ | 3,597 | $ | 4,832 | ||||||||
Deferred income tax expense | 11,826 | 18,096 | 22,747 | 26,084 | ||||||||||||
Income tax expense | $ | 13,504 | $ | 20,935 | $ | 26,344 | $ | 30,916 |
24 Granite REIT 2019 Second Quarter Report
(b) The effective income tax rate reported in the condensed combined statements of net income varies from the Canadian statutory rate for the following reasons:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Income before income taxes | $ | 112,181 | $ | 170,144 | $ | 203,349 | $ | 252,528 | ||||||||
Expected income taxes at the Canadian statutory tax rate of 26.5% (2018 — 26.5%) | $ | 29,727 | $ | 45,088 | $ | 53,887 | $ | 66,920 | ||||||||
Income distributed and taxable to unitholders | (14,690 | ) | (24,678 | ) | (24,549 | ) | (36,598 | ) | ||||||||
Net foreign rate differentials | (2,157 | ) | (1,638 | ) | (4,064 | ) | (3,025 | ) | ||||||||
Net change in provisions for uncertain tax positions | 445 | 483 | 808 | 923 | ||||||||||||
Net permanent differences | 156 | 2,226 | 170 | 2,184 | ||||||||||||
Withholding taxes and other | 23 | (546 | ) | 92 | 512 | |||||||||||
Income tax expense | $ | 13,504 | $ | 20,935 | $ | 26,344 | $ | 30,916 |
14. DETAILS OF CASH FLOWS |
(a) | Items not involving operating cash flows are shown in the following table: |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Straight-line rent amortization | $ | (1,539 | ) | $ | (814 | ) | $ | (2,688 | ) | $ | (2,729 | ) | ||||
Tenant incentive amortization | 1,290 | 1,325 | 2,596 | 2,717 | ||||||||||||
Unit-based compensation expense (note 11(a)) | 1,496 | 813 | 3,669 | 2,023 | ||||||||||||
Fair value gains on investment properties | (69,580 | ) | (127,918 | ) | (119,650 | ) | (160,228 | ) | ||||||||
Unrealized foreign exchange loss | — | 6,406 | — | — | ||||||||||||
Depreciation and amortization | 219 | 79 | 433 | 158 | ||||||||||||
Fair value losses (gains) on financial instruments | 1,655 | (1,438 | ) | 1,756 | 530 | |||||||||||
Loss on sale of investment properties | 635 | 147 | 1,383 | 1,234 | ||||||||||||
Amortization of issuance costs relating to debentures and term loans | 216 | 135 | 433 | 270 | ||||||||||||
Amortization of deferred financing costs | 78 | 78 | 156 | 341 | ||||||||||||
Deferred income taxes | 11,826 | 18,096 | 22,747 | 26,084 | ||||||||||||
Other | (50 | ) | (1,294 | ) | (99 | ) | 1,248 | |||||||||
$ | (53,754 | ) | $ | (104,385 | ) | $ | (89,264 | ) | $ | (128,352 | ) |
Granite REIT 2019 Second Quarter Report 25
(b) | Changes in working capital balances are shown in the following table: |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Accounts receivable | $ | (130 | ) | $ | 3,604 | $ | 223 | $ | (1,897 | ) | ||||||
Prepaid expenses and other | 121 | 532 | 385 | 538 | ||||||||||||
Accounts payable and accrued liabilities | 6,912 | 701 | (846 | ) | (2,180 | ) | ||||||||||
Deferred revenue | (432 | ) | (1,456 | ) | 3,035 | 4,644 | ||||||||||
Restricted cash | (5 | ) | (2 | ) | (5 | ) | (4 | ) | ||||||||
$ | 6,466 | $ | 3,379 | $ | 2,792 | $ | 1,101 |
(c) | Non-cash investing and financing activities |
The condensed combined statements of cash flows for the three and six month periods ended June 30, 2019 do not include theright-of-use asset and lease obligation of $20.5 million, respectively, associated with the acquisition of the leasehold interest in two Canadian properties (note 3). The condensed combined statement of cash flows for the six month period ended June 30, 2019 does not include the issuance and consolidation of stapled units associated with the special distribution in the amount of $41.1 million (note 10). In addition, during the six month period ended June 30, 2019, 10 thousand stapled units (2018 — 64 thousand stapled units) with a value of $0.6 million (2018 — $3.2 million) were issued under the Restricted Stapled Unit Plan (note 11(a)) and are not recorded in the condensed combined statements of cash flows.
(d) | Cash and cash equivalents consist of: |
As at | June 30, 2019 | December 31, 2018 | ||||||
Cash | $ | 363,607 | $ | 534,975 | ||||
Short-term deposits | 133,255 | 123,271 | ||||||
$ | 496,862 | $ | 658,246 |
26 Granite REIT 2019 Second Quarter Report
15. FAIR VALUE AND RISK MANAGEMENT |
(a) | Fair Value of Financial Instruments |
The following table provides the measurement basis of financial assets and liabilities as at June 30, 2019 and December 31, 2018:
As at | June 30, 2019 | December 31, 2018 | ||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Financial assets | ||||||||||||||||
Other assets | $ | 413 | (1) | $ | 413 | $ | 12,253 | (1) | $ | 12,253 | ||||||
Other receivable | 11,325 | 11,325 | — | — | ||||||||||||
Accounts receivable | 3,968 | 3,968 | 4,316 | 4,316 | ||||||||||||
Prepaid expenses and other | — | — | 111 | (2) | 111 | |||||||||||
Restricted cash | 475 | 475 | 470 | 470 | ||||||||||||
Cash and cash equivalents | 496,862 | 496,862 | 658,246 | 658,246 | ||||||||||||
$ | 513,043 | $ | 513,043 | $ | 675,396 | $ | 675,396 | |||||||||
Financial liabilities | ||||||||||||||||
Unsecured debentures, net | $ | 648,119 | $ | 672,840 | $ | 647,849 | $ | 654,365 | ||||||||
Unsecured term loans, net | 540,480 | 540,480 | 550,565 | 550,565 | ||||||||||||
Cross currency interest rate swaps | 63,794 | 63,794 | 104,757 | 104,757 | ||||||||||||
Accounts payable and accrued liabilities | 43,656 | 43,656 | 41,957 | �� | 41,957 | |||||||||||
Accounts payable and accrued liabilities | 1,655 | (3) | 1,655 | 10 | (3) | 10 | ||||||||||
Distributions payable | 11,520 | 11,520 | 24,357 | 24,357 | ||||||||||||
$ | 1,309,224 | $ | 1,333,945 | $ | 1,369,495 | $ | 1,376,011 |
(1) | Long-term receivables included in other assets (note 6). |
(2) | Foreign exchange forward contracts included in prepaid expenses. |
(3) | Foreign exchange forward contracts included in accounts payable and accrued liabilities. |
The fair values of the Trust’s accounts receivable, restricted cash, cash and cash equivalents, accounts payable and accrued liabilities and distributions payable approximate their carrying amounts due to the relatively short periods to maturity of these financial instruments. The fair value of the long-term receivable included in other assets approximates its carrying amount as the receivables bears interest at rates comparable to current market rates. The fair value of the other receivable associated with proceeds from a 2018 property disposal approximates its carrying amount as the amount is revalued at each reporting period. The fair values of the unsecured debentures are determined using quoted market prices. The fair values of the term loans approximate their carrying amounts as the term loans bear interest at rates comparable to the current market rates and were recently drawn. The fair values of the cross currency interest rate swaps are determined using market inputs quoted by their counterparties. The fair value of the foreign exchange forward contracts approximate their carrying value as the asset or liability is revalued at the reporting date.
The Trust periodically purchases foreign exchange forward contracts to hedge specific anticipated foreign currency transactions and to mitigate its foreign exchange exposure on its net cash flows. At June 30, 2019, the Trust held nine outstanding foreign exchange forward contracts (December 31, 2018 — three contracts outstanding). The foreign exchange contracts are comprised of contracts to purchase US$105.0 million and sell $139.1 million. For the three and six month periods ended June 30, 2019, the Trust recorded a net fair value loss of $1.7 million (2018 — net fair value gain of $1.4 million) and $1.8 million (2018 — $0.5 million), respectively, related to foreign exchange forward contracts (note 12(f)).
Granite REIT 2019 Second Quarter Report 27
(b) | Fair Value Hierarchy |
Fair value measurements are based on inputs of observable and unobservable market data that a market participant would use in pricing an asset or liability. IFRS establishes a fair value hierarchy which is summarized below:
Level 1: | Fair value determined using quoted prices in active markets for identical assets or liabilities. |
Level 2: | Fair value determined using significant observable inputs, generally either quoted prices in active markets for similar assets or liabilities or quoted prices in markets that are not active. |
Level 3: | Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows or similar techniques. |
The following tables represent information related to the Trust’s assets and liabilities measured or disclosed at fair value on a recurring andnon-recurring basis and the level within the fair value hierarchy in which the fair value measurements fall.
As at June 30, 2019 | Level 1 | Level 2 | Level 3 | |||||||||
ASSETS AND LIABILITIES MEASURED OR DISCLOSED AT FAIR VALUE | ||||||||||||
Assets measured at fair value | ||||||||||||
Investment properties | $ | — | $ | — | $ | 3,799,046 | ||||||
Assets held for sale | — | — | 50,461 | |||||||||
Short-term proceeds receivable associated with a property disposal included in other receivable (note 7) | — | — | 11,325 | |||||||||
Liabilities measured or disclosed at fair value | ||||||||||||
Unsecured debentures, net | 672,840 | — | — | |||||||||
Unsecured term loans, net | — | 540,480 | — | |||||||||
Cross currency interest rate swaps | — | 63,794 | — | |||||||||
Foreign exchange forward contracts included in accounts payable and accrued liabilities | — | 1,655 | — | |||||||||
Net assets (liabilities) measured or disclosed at fair value | $ | (672,840 | ) | $ | (605,929 | ) | $ | 3,860,832 |
As at December 31, 2018 | Level 1 | Level 2 | Level 3 | |||||||||
ASSETS AND LIABILITIES MEASURED OR DISCLOSED AT FAIR VALUE | ||||||||||||
Assets measured at fair value | ||||||||||||
Investment properties | $ | — | $ | — | $ | 3,424,978 | ||||||
Assets held for sale | — | — | 44,238 | |||||||||
Long-term proceeds receivable associated with a property disposal included in other assets (note 6) | — | — | 11,805 | |||||||||
Short-term proceeds receivable associated with a property disposal included in accounts receivable | 231 | |||||||||||
Foreign exchange forward contracts included in prepaid expenses and other | — | 111 | — | |||||||||
Liabilities measured or disclosed at fair value | ||||||||||||
Unsecured debentures, net | 654,365 | — | — | |||||||||
Unsecured term loans, net | 550,565 | |||||||||||
Cross currency interest rate swaps | — | 104,757 | — | |||||||||
Foreign exchange forward contracts included in accounts payable and accrued liabilities | — | 10 | — | |||||||||
Net assets (liabilities) measured or disclosed at fair value | $ | (654,365 | ) | $ | (655,221 | ) | $ | 3,481,252 |
28 Granite REIT 2019 Second Quarter Report
For assets and liabilities that are measured at fair value on a recurring basis, the Trust determines whether transfers between the levels of the fair value hierarchy have occurred by reassessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the three and six month periods ended June 30, 2019 and the year ended December 31, 2018, there were no transfers between the levels.
(c) | Risk Management |
Foreign exchange risk
As at June 30, 2019, the Trust is exposed to foreign exchange risk primarily in respect of movements in the Euro and the US dollar. The Trust is structured such that its foreign operations are primarily conducted by entities with a functional currency which is the same as the economic environment in which the operations take place. As a result, the net income impact of currency risk associated with financial instruments is limited as its financial assets and liabilities are generally denominated in the functional currency of the subsidiary that holds the financial instrument. However, the Trust is exposed to foreign currency risk on its net investment in its foreign currency denominated operations and certain Trust level foreign currency denominated assets and liabilities. At June 30, 2019, the Trust’s foreign currency denominated net assets are $2.8 billion primarily in US dollars and Euros. A 1% change in the US dollar and Euro exchange rates relative to the Canadian dollar would result in a gain or loss of approximately $14.8 million and $12.5 million, respectively, to comprehensive income.
Granite REIT 2019 Second Quarter Report 29
16. COMBINED FINANCIAL INFORMATION |
The condensed combined financial statements include the financial position and results of operations and cash flows of each of Granite REIT and GraniteGP. Below is a summary of the financial information for each entity along with the elimination entries and other adjustments that aggregate to the condensed combined financial statements:
Balance Sheet | As at June 30, 2019 | |||||||||||||||
Granite REIT | Granite GP | Eliminations/ Adjustments | Granite REIT and Granite GP Combined | |||||||||||||
ASSETS | ||||||||||||||||
Non-current assets: | ||||||||||||||||
Investment properties | $ | 3,799,046 | $ | 3,799,046 | ||||||||||||
Investment in Granite LP(1) | — | 19 | (19 | ) | — | |||||||||||
Othernon-current assets | 69,116 | 69,116 | ||||||||||||||
3,868,162 | 19 | (19 | ) | 3,868,162 | ||||||||||||
Current assets: | ||||||||||||||||
Assets held for sale | 50,461 | 50,461 | ||||||||||||||
Other current assets | 18,272 | 56 | 18,328 | |||||||||||||
Intercompany receivable(2) | — | 9,907 | (9,907 | ) | — | |||||||||||
Cash and cash equivalents | 496,628 | 234 | 496,862 | |||||||||||||
Total assets | $ | 4,433,523 | 10,216 | (9,926 | ) | $ | 4,433,813 | |||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
Non-current liabilities: | ||||||||||||||||
Unsecured debt, net | $ | 1,188,599 | $ | 1,188,599 | ||||||||||||
Othernon-current liabilities | 409,515 | 409,515 | ||||||||||||||
1,598,114 | 1,598,114 | |||||||||||||||
Current liabilities: | ||||||||||||||||
Intercompany payable(2) | 9,907 | (9,907 | ) | — | ||||||||||||
Other current liabilities | 67,767 | 10,197 | 77,964 | |||||||||||||
Total liabilities | 1,675,788 | 10,197 | (9,907 | ) | 1,676,078 | |||||||||||
Equity: | ||||||||||||||||
Stapled unitholders’ equity | 2,756,367 | 19 | 2,756,386 | |||||||||||||
Non-controlling interests | 1,368 | (19 | ) | 1,349 | ||||||||||||
Total liabilities and equity | $ | 4,433,523 | 10,216 | (9,926 | ) | $ | 4,433,813 |
(1) | Granite REIT Holdings Limited Partnership (“Granite LP”) is 100% owned by Granite REIT and Granite GP. |
(2) | Represents employee and trustee/director compensation related amounts which will be reimbursed by Granite LP. |
30 Granite REIT 2019 Second Quarter Report
Balance Sheet | As at December 31, 2018 | |||||||||||||||
Granite REIT | Granite GP | Eliminations/ Adjustments | Granite REIT and Granite GP Combined | |||||||||||||
ASSETS | ||||||||||||||||
Non-current assets: | ||||||||||||||||
Investment properties | $ | 3,424,978 | $ | 3,424,978 | ||||||||||||
Investment in Granite LP(1) | — | 17 | (17 | ) | — | |||||||||||
Othernon-current assets | 53,785 | 53,785 | ||||||||||||||
3,478,763 | 17 | (17 | ) | 3,478,763 | ||||||||||||
Current assets: | ||||||||||||||||
Assets held for sale | 44,238 | 44,238 | ||||||||||||||
Other current assets | 7,462 | 46 | 7,508 | |||||||||||||
Intercompany receivable(2) | — | 7,130 | (7,130 | ) | — | |||||||||||
Cash and cash equivalents | 657,432 | 814 | 658,246 | |||||||||||||
Total assets | $ | 4,187,895 | 8,007 | (7,147 | ) | $ | 4,188,755 | |||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
Non-current liabilities: | ||||||||||||||||
Unsecured debt, net | $ | 1,198,414 | $ | 1,198,414 | ||||||||||||
Othernon-current liabilities | 408,722 | 408,722 | ||||||||||||||
1,607,136 | 1,607,136 | |||||||||||||||
Current liabilities: | ||||||||||||||||
Intercompany payable(2) | 7,130 | (7,130 | ) | — | ||||||||||||
Other current liabilities | 76,644 | 7,990 | 84,634 | |||||||||||||
Total liabilities | 1,690,910 | 7,990 | (7,130 | ) | 1,691,770 | |||||||||||
Equity: | ||||||||||||||||
Stapled unitholders’ equity | 2,495,501 | 17 | 2,495,518 | |||||||||||||
Non-controlling interests | 1,484 | (17 | ) | 1,467 | ||||||||||||
Total liabilities and equity | $ | 4,187,895 | 8,007 | (7,147 | ) | $ | 4,188,755 |
(1) | Granite LP is 100% owned by Granite REIT and Granite GP. |
(2) | Represents employee and trustee/director compensation related amounts which will be reimbursed by Granite LP. |
Granite REIT 2019 Second Quarter Report 31
Income Statement | Three Months Ended June 30, 2019 | |||||||||||||||
Granite REIT | Granite GP | Eliminations/ Adjustments | Granite REIT and Granite GP Combined | |||||||||||||
Revenue | $ | 67,903 | $ | 67,903 | ||||||||||||
General and administrative expenses | 8,636 | 8,636 | ||||||||||||||
Interest expense and other financing costs | 7,798 | 7,798 | ||||||||||||||
Other costs and expenses, net | 6,578 | 6,578 | ||||||||||||||
Share of (income) loss of Granite LP | — | (1 | ) | 1 | — | |||||||||||
Fair value gains on investment properties, net | (69,580 | ) | (69,580 | ) | ||||||||||||
Fair value loss on financial instruments | 1,655 | 1,655 | ||||||||||||||
Loss on sale of investment properties | 635 | 635 | ||||||||||||||
Income before income taxes | 112,181 | 1 | (1 | ) | 112,181 | |||||||||||
Income tax expense | 13,504 | 13,504 | ||||||||||||||
Net income | 98,677 | 1 | (1 | ) | 98,677 | |||||||||||
Less net income attributable to | 10 | (1 | ) | 9 | ||||||||||||
Net income attributable to stapled unitholders | $ | 98,667 | 1 | — | $ | 98,668 | ||||||||||
Income Statement | Three Months Ended June 30, 2018 | |||||||||||||||
Granite REIT | Granite GP | Eliminations/ Adjustments | Granite REIT and Granite GP Combined | |||||||||||||
Revenue | $ | 62,140 | $ | 62,140 | ||||||||||||
General and administrative expenses | 7,147 | 7,147 | ||||||||||||||
Interest expense and other financing costs | 5,449 | 5,449 | ||||||||||||||
Other costs and expenses, net | 7,028 | 7,028 | ||||||||||||||
Share of (income) loss of Granite LP | — | (1 | ) | 1 | — | |||||||||||
Fair value gains on investment properties, net | (127,918 | ) | (127,918 | ) | ||||||||||||
Fair value gains on financial instruments | (1,438 | ) | (1,438 | ) | ||||||||||||
Acquisition transaction costs | 1,581 | 1,581 | ||||||||||||||
Loss on sale of investment properties | 147 | 147 | ||||||||||||||
Income before income taxes | 170,144 | 1 | (1 | ) | 170,144 | |||||||||||
Income tax expense | 20,935 | 20,935 | ||||||||||||||
Net income | 149,209 | 1 | (1 | ) | 149,209 | |||||||||||
Less net income attributable to | 43 | (1 | ) | 42 | ||||||||||||
Net income attributable to stapled unitholders | $ | 149,166 | 1 | — | $ | 149,167 |
32 Granite REIT 2019 Second Quarter Report
Income Statement | Six Months Ended June 30, 2019 | |||||||||||||||
Granite REIT | Granite GP | Eliminations/ Adjustments | Granite REIT and Granite GP Combined | |||||||||||||
Revenue | $ | 131,330 | $ | 131,330 | ||||||||||||
General and administrative expenses | 16,510 | 16,510 | ||||||||||||||
Interest expense and other financing costs | 15,353 | 15,353 | ||||||||||||||
Other costs and expenses, net | 12,629 | 12,629 | ||||||||||||||
Share of (income) loss of Granite LP | — | (2 | ) | 2 | — | |||||||||||
Fair value gains on investment properties, net | (119,650 | ) | (119,650 | ) | ||||||||||||
Fair value loss on financial instruments | 1,756 | 1,756 | ||||||||||||||
Loss on sale of investment properties | 1,383 | 1,383 | ||||||||||||||
Income before income taxes | 203,349 | 2 | (2 | ) | 203,349 | |||||||||||
Income tax expense | 26,344 | 26,344 | ||||||||||||||
Net income | 177,005 | 2 | (2 | ) | 177,005 | |||||||||||
Less net income attributable to | 84 | (2 | ) | 82 | ||||||||||||
Net income attributable to stapled unitholders | $ | 176,921 | 2 | — | $ | 176,923 | ||||||||||
Income Statement | Six Months Ended June 30, 2018 | |||||||||||||||
Granite REIT | Granite GP | Eliminations/ Adjustments | Granite REIT and Granite GP Combined | |||||||||||||
Revenue | $ | 123,795 | $ | 123,795 | ||||||||||||
General and administrative expenses | 14,635 | 14,635 | ||||||||||||||
Interest expense and other financing costs | 10,969 | 10,969 | ||||||||||||||
Other costs and expenses, net | 2,388 | 2,388 | ||||||||||||||
Share of (income) loss of Granite LP | — | (2 | ) | 2 | — | |||||||||||
Fair value gains on investment properties, net | (160,228 | ) | (160,228 | ) | ||||||||||||
Fair value losses on financial instruments | 530 | 530 | ||||||||||||||
Acquisition transaction costs | 1,739 | 1,739 | ||||||||||||||
Loss on sale of investment properties | 1,234 | 1,234 | ||||||||||||||
Income before income taxes | 252,528 | 2 | (2 | ) | 252,528 | |||||||||||
Income tax expense | 30,916 | 30,916 | ||||||||||||||
Net income | 221,612 | 2 | (2 | ) | 221,612 | |||||||||||
Less net income attributable tonon-controlling interests | 74 | (2 | ) | 72 | ||||||||||||
Net income attributable to stapled unitholders | $ | 221,538 | 2 | — | $ | 221,540 |
Granite REIT 2019 Second Quarter Report 33
Statement of Cash Flows | Three Months Ended June 30, 2019 | |||||||||||||||
Granite REIT | Granite GP | Eliminations/ Adjustments | Granite REIT and Granite GP Combined | |||||||||||||
OPERATING ACTIVITIES | ||||||||||||||||
Net income | $ | 98,677 | 1 | (1 | ) | $ | 98,677 | |||||||||
Items not involving operating cash flows | (53,754 | ) | (1 | ) | 1 | (53,754 | ) | |||||||||
Changes in working capital balances | 6,304 | 162 | 6,466 | |||||||||||||
Other operating activities | (1,278 | ) | (1,278 | ) | ||||||||||||
Cash provided by operating activities | 49,949 | 162 | — | 50,111 | ||||||||||||
INVESTING ACTIVITIES | ||||||||||||||||
Property acquisitions | (219,126 | ) | (219,126 | ) | ||||||||||||
Proceeds from disposals, net | (635 | ) | (635 | ) | ||||||||||||
Investment property capital additions | ||||||||||||||||
— Maintenance or improvements | (560 | ) | (560 | ) | ||||||||||||
— Developments or expansions | (705 | ) | (705 | ) | ||||||||||||
Acquisition deposits | (33,940 | ) | (33,940 | ) | ||||||||||||
Other investing activities | 16,795 | 16,795 | ||||||||||||||
Cash used in investing activities | (238,171 | ) | — | — | (238,171 | ) | ||||||||||
FINANCING ACTIVITIES | ||||||||||||||||
Distributions paid | (33,687 | ) | (33,687 | ) | ||||||||||||
Other financing activities | 219,639 | 219,639 | ||||||||||||||
Cash provided by financing activities | 185,952 | — | — | 185,952 | ||||||||||||
Effect of exchange rate changes | (2,021 | ) | (2,021 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents during the period | $ | (4,291 | ) | 162 | — | $ | (4,129 | ) | ||||||||
Statement of Cash Flows | Three Months Ended June 30, 2018 | |||||||||||||||
Granite REIT | Granite GP | Eliminations/ Adjustments | Granite REIT and Granite GP Combined | |||||||||||||
OPERATING ACTIVITIES | ||||||||||||||||
Net income | $ | 149,209 | 1 | (1 | ) | $ | 149,209 | |||||||||
Items not involving operating cash flows | (104,385 | ) | (1 | ) | 1 | (104,385 | ) | |||||||||
Changes in working capital balances | 3,549 | (170 | ) | 3,379 | ||||||||||||
Other operating activities | (3,191 | ) | (3,191 | ) | ||||||||||||
Cash provided by (used in) operating activities | 45,182 | (170 | ) | — | 45,012 | |||||||||||
INVESTING ACTIVITIES | ||||||||||||||||
Property acquisitions | (327,256 | ) | (327,256 | ) | ||||||||||||
Investment property capital additions | ||||||||||||||||
— Maintenance or improvements | (6,197 | ) | (6,197 | ) | ||||||||||||
— Developments or expansions | (55 | ) | (55 | ) | ||||||||||||
Acquisition deposit | (8,308 | ) | (8,308 | ) | ||||||||||||
Other investing activities | 29,829 | 29,829 | ||||||||||||||
Cash used in investing activities | (311,987 | ) | — | — | (311,987 | ) | ||||||||||
FINANCING ACTIVITIES | ||||||||||||||||
Distributions paid | (31,181 | ) | (31,181 | ) | ||||||||||||
Other financing activities | 80,310 | 80,310 | ||||||||||||||
Cash provided by financing activities | 49,129 | — | — | 49,129 | ||||||||||||
Effect of exchange rate changes | (5,781 | ) | (5,781 | ) | ||||||||||||
Net decrease in cash and cash equivalents during the period | $ | (223,457 | ) | (170 | ) | — | $ | (223,627 | ) |
34 Granite REIT 2019 Second Quarter Report
Statement of Cash Flows | Six Months Ended June 30, 2019 | |||||||||||||||
Granite REIT | Granite GP | Eliminations/ Adjustments | Granite REIT and Granite GP Combined | |||||||||||||
OPERATING ACTIVITIES | ||||||||||||||||
Net income | $ | 177,005 | 2 | (2 | ) | $ | 177,005 | |||||||||
Items not involving operating cash flows | (89,264 | ) | (2 | ) | 2 | (89,264 | ) | |||||||||
Changes in working capital balances | 3,372 | (580 | ) | 2,792 | ||||||||||||
Other operating activities | 1 | 1 | ||||||||||||||
Cash provided by (used in) operating activities | 91,114 | (580 | ) | — | 90,534 | |||||||||||
INVESTING ACTIVITIES | ||||||||||||||||
Property acquisitions | (383,744 | ) | (383,744 | ) | ||||||||||||
Proceeds from disposals, net | 25,628 | 25,628 | ||||||||||||||
Investment property capital additions | ||||||||||||||||
— Maintenance or improvements | (1,785 | ) | (1,785 | ) | ||||||||||||
— Developments or expansions | (4,681 | ) | (4,681 | ) | ||||||||||||
Acquisition deposits | (33,940 | ) | (33,940 | ) | ||||||||||||
Other investing activities | 16,757 | 16,757 | ||||||||||||||
Cash used in investing activities | (381,765 | ) | — | — | (381,765 | ) | ||||||||||
FINANCING ACTIVITIES | ||||||||||||||||
Distributions paid | (65,623 | ) | (65,623 | ) | ||||||||||||
Other financing activities | 205,604 | 205,604 | ||||||||||||||
Cash provided by financing activities | 139,981 | — | — | 139,981 | ||||||||||||
Effect of exchange rate changes | (10,134 | ) | (10,134 | ) | ||||||||||||
Net decrease in cash and cash equivalents during the period | $ | (160,804 | ) | (580 | ) | — | $ | (161,384 | ) | |||||||
Statement of Cash Flows | Six Months Ended June 30, 2018 | |||||||||||||||
Granite REIT | Granite GP | Eliminations/ Adjustments | Granite REIT and Granite GP Combined | |||||||||||||
OPERATING ACTIVITIES | ||||||||||||||||
Net income | $ | 221,612 | 2 | (2 | ) | $ | 221,612 | |||||||||
Items not involving operating cash flows | (128,352 | ) | (2 | ) | 2 | (128,352 | ) | |||||||||
Changes in working capital balances | 1,274 | (173 | ) | 1,101 | ||||||||||||
Other operating activities | (11,808 | ) | (11,808 | ) | ||||||||||||
Cash provided by (used in) operating activities | 82,726 | (173 | ) | — | 82,553 | |||||||||||
INVESTING ACTIVITIES | ||||||||||||||||
Property acquisitions | (399,352 | ) | (399,352 | ) | ||||||||||||
Proceeds from disposals, net | 356,479 | 356,479 | ||||||||||||||
Investment property capital additions | ||||||||||||||||
— Maintenance or improvements | (15,000 | ) | (15,000 | ) | ||||||||||||
— Developments or expansions | (860 | ) | (860 | ) | ||||||||||||
Acquisition deposit | (8,308 | ) | (8,308 | ) | ||||||||||||
Other investing activities | 29,802 | 29,802 | ||||||||||||||
Cash used in investing activities | (37,239 | ) | — | — | (37,239 | ) | ||||||||||
FINANCING ACTIVITIES | ||||||||||||||||
Distributions paid | (62,841 | ) | (62,841 | ) | ||||||||||||
Other financing activities | (5,002 | ) | (5,002 | ) | ||||||||||||
Cash used in financing activities | (67,843 | ) | — | — | (67,843 | ) | ||||||||||
Effect of exchange rate changes | 3,653 | 3,653 | ||||||||||||||
Net decrease in cash and cash equivalents during the period | $ | (18,703 | ) | (173 | ) | — | $ | (18,876 | ) |
Granite REIT 2019 Second Quarter Report 35
17. COMMITMENTS AND CONTINGENCIES |
(a) The Trust is subject to various legal proceedings and claims that arise in the ordinary course of business. Management evaluates all claims with the advice of legal counsel. Management believes these claims are generally covered by Granite’s insurance policies and that any liability from remaining claims is not probable to occur and would not have a material adverse effect on the condensed combined financial statements. However, actual outcomes may differ from management’s expectations.
(b) At June 30, 2019, the Trust’s contractual commitments related to construction and development projects, and the purchase of a property in the United States amounted to approximately $300.3 million.
(c) The Trust owns a property located in Canada for which the tenant has a purchase option to acquire the property from Granite at a stipulated price included in the lease agreement. Subsequent to June 30, 2019, the tenant has exercised its option to acquire the property (note 18(e)).
18. SUBSEQUENT EVENTS |
(a) Granite entered into a joint arrangement with a third-party and on July 1, 2019, completed the purchase of 190.6 acres of development land located in Harris County, Texas for a purchase price of $33.4 million (US$25.4 million). Granite had made an initial capital contribution to the joint arrangement of $33.8 million (US$25.8 million) to fund the acquisition of the land.
(b) On July 8, 2019, Granite acquired an income-producing property located in Born, Netherlands at a purchase price of $25.7 million (€17.5 million) which was funded with cash on hand.
(c) On July 17, 2019, the Trust declared monthly distributions for July 2019 of $11.5 million (note 10).
(d) On July 17, 2019, Granite agreed to acquire an income-producing property located in Horn Lake, Mississippi for $24.0 million (US$18.5 million). The acquisition is subject to customary closing conditions and is expected to close in the third quarter of 2019.
(e) On July 24, 2019, a tenant has exercised its purchase option to acquire one of the Trust’s properties located in Canada at a stipulated price included in the lease agreement. The property is expected to be sold in the fourth quarter of 2019.
36 Granite REIT 2019 Second Quarter Report