BOARDWALK REAL ESTATE INVESTMENT TRUST RENEWAL ANNUAL INFORMATION FORM
DATE
February 27, 2020
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BOARDWALK REAL ESTATE INVESTMENT TRUST ANNUAL INFORMATION FORM TABLE OF CONTENTS
NOTE REGARDING FORWARD LOOKING STATEMENTS ...... 5 PRESENTATION OF FINANCIAL INFORMATION AND NON-GAAP MEASURES ...... 6 PRESENTATION OF FINANCIAL INFORMATION ...... 6 NON-GAAP FINANCIAL MEASURES ...... 6 NET OPERATING INCOME (“NOI”) ...... 6 FUNDS FROM OPERATIONS (“FFO”) ...... 7 ADJUSTED FUNDS FROM OPERATIONS (“AFFO”) ...... 7 ADJUSTED CASH FLOWS FROM OPERATIONS (“ACFO”) ...... 7 DISTRIBUTIONS AS A PERCENTAGE OF FFO, AFFO AND ACFO ...... 7 OPERATING MARGINS ...... 8 STABILIZED REVENUE GROWTH, STABILIZED OPERATING EXPENSE GROWTH AND STABILIZED NOI GROWTH ...... 8 ENTERPRISE VALUE ...... 8 CORPORATE STRUCTURE ...... 8 OVERVIEW OF THE ACQUISITION & THE ARRANGEMENT REPLACING THE CORPORATION AS A PUBLIC ENTITY WITH BOARDWALK REIT ...... 9 PRE-ARRANGEMENT REORGANIZATION ...... 9 ANCILLARY AGREEMENTS IN CONNECTION WITH THE ACQUISITION & THE ARRANGEMENT ...... 10 ARRANGEMENTS WITH BPCL ...... 12 SUBSIDIARIES ...... 12 OVERVIEW ...... 15 OBJECTIVES OF BOARDWALK REIT ...... 16 MANAGEMENT OF BOARDWALK REIT ...... 16 BOARD OF TRUSTEES ...... 16 COMMITTEES ...... 20 AUDIT AND RISK MANAGEMENT COMMITTEE ...... 20 COMPENSATION, GOVERNANCE & NOMINATIONS COMMITTEE ...... 22 CORPORATE DEVELOPMENT COMMITTEE (AD HOC) ...... 22 SENIOR MANAGEMENT ...... 23 BOARDWALK REIT ADMINISTRATIVE SERVICES AGREEMENT ...... 23 BUSINESS & PROPERTIES OF BOARDWALK REIT ...... 25 STRATEGY FOR GROWTH ...... 31 MAXIMIZING TENANT/CUSTOMER SATISFACTION ...... 32 ACQUIRING SELECT MULTI-FAMILY RESIDENTIAL PROPERTIES ...... 34 SALE OF PROPERTIES ...... 35 INVESTMENT PHILOSOPHY...... 36 COST OF CAPITAL ...... 36 LIQUIDITY ...... 37 BRAND DIVERSIFICATION ...... 38
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ENHANCING PROPERTY VALUES ...... 39 NET OPERATING INCOME OPTIMIZATION ...... 39 PORTFOLIO OCCUPANCY RATES ...... 40 NEW APARTMENT DEVELOPMENT ...... 43 INVESTING IN BOARDWALK’S PROPERTIES - VALUE ADDED CAPITAL IMPROVEMENTS AND PROPERTY RE-POSITIONING PROGRAMS ...... 45 NORMAL COURSE ISSUER BID ...... 47 MANAGING CAPITAL ...... 47 BOARDWALK REIT'S DEBT MATURITY CHART ...... 49 PURSUING PARTNERSHIPS OR JOINT VENTURES ...... 50 INVESTMENT GUIDELINES & OPERATING POLICIES OF BOARDWALK REIT ...... 50 INVESTMENT GUIDELINES ...... 50 OPERATING POLICIES ...... 53 DECLARATION OF TRUST & DESCRIPTION OF REIT UNITS ...... 55 REIT UNITS ...... 55 SPECIAL VOTING UNITS ...... 55 ISSUANCE OF REIT UNITS ...... 56 PURCHASE OF REIT UNITS ...... 56 REIT UNIT REDEMPTION RIGHT...... 56 MEETINGS OF UNITHOLDERS ...... 58 LIMITATION ON NON-RESIDENT OWNERSHIP ...... 59 AMENDMENTS TO THE DECLARATION OF TRUST & OTHER DOCUMENTS ...... 60 STOCK EXCHANGE LISTINGS, PRICE RANGE & TRADING VOLUME OF REIT UNITS ...... 62 CHALLENGES & RISKS ...... 62 RISKS DUE TO INVESTMENT IN REAL ESTATE ...... 63 MULTI-FAMILY RESIDENTIAL SECTOR RISK ...... 64 ENVIRONMENTAL RISKS ...... 67 CLIMATE-RELATED RISK ...... 67 GROUND LEASE RISK ...... 67 COMPETITION RISK ...... 68 GENERAL UNINSURED LOSSES ...... 68 CREDIT RISK ...... 68 MARKET RISK ...... 69 SUPPLY RISK ...... 69 RISK MANAGEMENT FOR SUPPLY ...... 69 REFINANCING RISK ...... 70 DEVELOPMENT RISK ...... 71 STRUCTURAL SUBORDINATION ...... 72 RENT CONTROL RISK ...... 72 UTILITY & TAX RISK ...... 74 RISKS DUE TO REAL ESTATE FINANCING ...... 74 INSURANCE POLICY DEDUCTIBLES & EXCLUSIONS ...... 75 OUTSTANDING INDEBTEDNESS ...... 75 ACQUISITION PERFORMANCE RISK ...... 76 OPERATIONAL RISK ...... 77 DEPENDENCE ON THE OPERATING TRUST & THE PARTNERSHIP ...... 77 FLUCTUATIONS OF CASH DISTRIBUTIONS ...... 77
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WORKFORCE AVAILABILITY ...... 77 MARKET PRICE OF REIT UNITS ...... 78 LEGAL RIGHTS NORMALLY ASSOCIATED WITH THE OWNERSHIP OF SHARES OF A CORPORATION ...... 78 UNITHOLDER LIABILITY ...... 78 ABILITY OF UNITHOLDERS TO REDEEM REIT UNITS ...... 79 REGULATORY APPROVALS MAY BE REQUIRED IN CONNECTION WITH A DISTRIBUTION OF SECURITIES ON A REDEMPTION OF REIT UNITS OR THE TERMINATION OF BOARDWALK REIT ...... 79 AN INVESTMENT IN REIT UNITS IS SUBJECT TO CERTAIN TAX RISKS ...... 79 RISKS ASSOCIATED WITH DISCLOSURE CONTROLS & PROCEDURES ON INTERNAL CONTROL OVER FINANCIAL REPORTING ...... 82 LIQUIDITY RISK ...... 83 ACCESS TO CAPITAL RISK ...... 83 CYBERSECURITY RISK ...... 83 JOINT VENTURES AND CO-OWNERSHIPS ...... 84 PROPERTY REDEVELOPMENT, RE-POSITIONING AND RENOVATIONS ...... 84 KEY PERSONNEL ...... 84 REGULATION AND CHANGES IN APPLICABLE LAWS ...... 85 DISEASE OUTBREAKS MAY NEGATIVELY IMPACT THE PERFORMANCE OF THE TRUST AND ITS SUBSIDIARIES ...... 85 DISTRIBUTION POLICY ...... 85 GENERAL ...... 86 DISTRIBUTION REINVESTMENT PLAN (“DRIP”) ...... 88 SUSPENSION OF DISTRIBUTION REINVESTMENT PLAN ...... 88 INFORMATION CONCERNING THE OPERATING TRUST ...... 89 GENERAL ...... 89 TRUSTEES & OFFICERS ...... 90 OPERATING TRUST UNITS ...... 90 AMENDMENTS TO OPERATING TRUST DECLARATION OF TRUST ...... 90 REDEMPTION RIGHT ...... 91 CASH DISTRIBUTIONS ...... 92 REGISTRATION & TRANSFERS OF OPERATING TRUST UNITS ...... 92 INFORMATION CONCERNING THE PARTNERSHIP ...... 92 GENERAL ...... 92 THE GENERAL PARTNER ...... 93 LP UNITS ...... 93 INVESTMENT GUIDELINES & OPERATING POLICIES ...... 95 AMENDMENTS TO LIMITED PARTNERSHIP AGREEMENT ...... 95 DISTRIBUTIONS ...... 96 ALLOCATION OF PARTNERSHIP INCOME & PARTNERSHIP LOSSES ...... 97 ALLOCATION OF PARTNERSHIP TAX INCOME & PARTNERSHIP TAX LOSS ...... 99 FUNCTIONS & POWERS OF THE GENERAL PARTNER ...... 99 RESTRICTIONS ON THE AUTHORITY OF THE GENERAL PARTNER ...... 100 REIMBURSEMENT OF THE GENERAL PARTNER ...... 100 LIMITED LIABILITY ...... 100 MANAGEMENT ...... 100
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INFORMATION CONCERNING THE CORPORATION ...... 102 HISTORY ...... 102 BUSINESS OF THE CORPORATION FOLLOWING THE ACQUISITION & THE ARRANGEMENT ...... 102 LEGAL PROCEEDINGS ...... 103 AUDITORS, TRANSFER AGENT & REGISTRAR ...... 103 INTEREST OF MANAGEMENT & OTHERS IN MATERIAL TRANSACTIONS ...... 103 INTERESTS OF EXPERTS ...... 103 MATERIAL CONTRACTS ...... 104 ADDITIONAL INFORMATION ...... 104 SCHEDULE A: AUDIT AND RISK MANAGEMENT COMMITTEE CHARTER ...... 106
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BOARDWALK REAL ESTATE INVESTMENT TRUST RENEWAL ANNUAL INFORMATION FORM
NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain information included in this Annual Information Form (“AIF”) of Boardwalk Real Estate Investment Trust (“Boardwalk REIT”, “Boardwalk” or the “Trust”) contains forward-looking statements within the meaning of applicable securities laws. These statements include, but are not limited to, statements made in sections named “Boardwalk REIT’s Debt Maturity Chart”, “Portfolio Occupancy Rates”, “Business & Properties of Boardwalk REIT”, “New Apartment Development” and “Challenges & Risks”, as well as other statements concerning Boardwalk’s 2020 objectives, its strategies to achieve those objectives, as well as statements with respect to management’s beliefs, plans, estimates, and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Forward-looking statements generally can be identified by the use of forward- looking terminology such as “outlook”, “objective”, “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “plan”, “continue”, or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect management’s current beliefs and are based on information currently available to management. All forward-looking statements in this AIF are qualified by these cautionary statements. These statements are not guarantees of future events or performance and, by their nature, are based on Boardwalk’s estimates and assumptions, which are subject to risks and uncertainties, including those described under “Challenges & Risks” in this AIF, which could cause events or results to differ materially from the forward-looking statements contained in this AIF. Those risks and uncertainties include, but are not limited to, those related to: liquidity in the global marketplace associated with current economic conditions, tenant rental rate concessions, occupancy levels, access to debt and equity capital, changes to Canada Mortgage and Housing Corporation rules regarding mortgage insurance, interest rates, joint ventures/partnerships, the relative illiquidity of real property, unexpected costs or liabilities related to acquisitions, construction, environmental matters, uninsured perils, legal matters, reliance on key personnel, unitholder liability, income taxes and changes to income tax rates that impair the Trust’s ability to qualify for the REIT Exemption (as defined below). Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking information may include: a less robust rental environment than was seen prior to 2016; relatively stable interest costs; and access to equity and debt capital markets to fund, at acceptable costs, the future growth program and to enable the Trust to refinance debts as they mature and the availability of acquisition opportunities for growth in Canada. Although the forward-looking information contained in this AIF is based upon what management believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. Certain statements included in this AIF may be considered “financial outlook” for purposes of applicable securities laws, and such financial outlook may not be appropriate for purposes other than this AIF.
The Income Tax Act (Canada) (the “Tax Act”) contains legislation affecting the tax treatment of publicly traded trusts (the “SIFT Legislation”). The SIFT Legislation generally does not impose tax on a trust which qualifies under such legislation as a real estate investment trust (the “REIT Exemption”) provided all of the Trust’s income each year is paid or made payable to the Unitholders. Boardwalk intends to qualify for the REIT Exemption on an ongoing basis, which may require certain statements contained in this AIF to be modified.
Except as required by applicable law, neither Boardwalk nor the Corporation (as defined herein) undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
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The following should also be read in conjunction with Boardwalk REIT's December 31, 2019 Financial Statements and the Notes thereto, along with other posted information concerning Boardwalk REIT, including Management's Discussion and Analysis (“MD&A”) for the year ended December 31, 2019. All of these documents are available in written and electronic versions either from the Trust on request, or at www.sedar.com or www.bwalk.com/en-ca.
PRESENTATION OF FINANCIAL INFORMATION AND NON-GAAP MEASURES Presentation of Financial Information
Financial results, including related historical comparatives, contained in this AIF are based on the Trust’s consolidated financial statements, unless otherwise specified. The Trust’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”), which have been adopted as Canadian generally accepted accounting principles (“GAAP”) for all Publicly Accountable Enterprises, effective January 1, 2011. Effective January 1, 2019, the Trust adopted IFRS 16-Leases (“IFRS 16”). The Trust leases several assets including land, warehouse space and office space. Rental payments were recognized as an operating expense prior to the adoption of IFRS 16. With the adoption of IFRS 16, such leases are accounted for as lease liabilities on the Trust’s consolidated statement of financial position and the respective rental payments are split between principal repayments and financing costs. This change resulted in an improvement to the Trust’s Net Operating Income as operating expenses are decreased with the removal of the operating lease payments. IFRS 16 was adopted using the modified retrospective approach and therefore the comparative information has not been restated. As a result, where appropriate, the Trust prepared reconciliations to ensure appropriate comparison between 2019 and 2018 financial information. Non-GAAP Financial Measures
Boardwalk REIT prepares its financial statements in accordance with International Financial Reporting Standards and with the recommendations of REALpac, Canada’s senior national industry association for owners and managers of investment real estate. REALpac has adopted measurements called Net Operating Income (“NOI”), Funds From Operations (“FFO”) and Adjusted Funds From Operations (“AFFO”) to supplement operating income and profits (or earnings) as measures of operating performance, as well as a cash flow metric called Adjusted Cash Flow From Operations (“ACFO”). These measurements are considered to be meaningful and useful measures of real estate operating performance. However, they are not measures defined by IFRS. As they do not have standardized meanings prescribed by IFRS, they may not be comparable to similar measurements presented by other entities and should not be construed as an alternative to IFRS defined measures.
The discussion below outlines the non-GAAP financial measures used by the Trust: Net Operating Income (“NOI”) NOI is defined as rental revenue less rental expenses. As it relates to the Trust, NOI can be found as a subtotal on the Trust’s Consolidated Statement of Comprehensive Income. However, it is typically considered a non-GAAP measure for real estate entities and, therefore, is included here. As noted above, where applicable, the Trust has provided both financial information as reported and revised 2018 financial information to reflect the impact of IFRS 16, if applied retroactively. As it relates to NOI, the adjustment involves removing the previously recorded operating lease payment from 2018 operating expenses, resulting in an increased 2018 NOI (relative to what was previously reported). This allows for a direct comparison between 2019 and 2018.
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Funds From Operations (“FFO”) The IFRS measurement most comparable to FFO is “profit”. Boardwalk defines FFO as income before fair value adjustments, distributions on the units of Boardwalk REIT Limited Partnership designated as "LP Class B Units", gains or losses on the sale of Investment Properties, depreciation, deferred income tax and certain other non-cash adjustments, if any, but after deducting the principal portion of lease liabilities. The adoption of IFRS 16 for the current period, therefore, does not materially change the amount of FFO compared to the amount calculated before the adoption of the accounting standard. The reconciliation from profit under IFRS to FFO can be found in the Trust’s MD&A, under the section titled “Performance Measures”, which information is incorporated herein by reference. Boardwalk REIT considers FFO to be an appropriate measurement of the financial performance of a publicly listed multi-family residential entity. In order to facilitate a clear understanding of the combined historical operating results of Boardwalk REIT, management feels FFO should be considered in conjunction with profit as presented in its consolidated financial statements. Adjusted Funds From Operations (“AFFO”) Similar to FFO, the IFRS measurement most comparable to AFFO is profit. AFFO is determined by taking the amounts reported as FFO and deducting what is commonly referred to as “Maintenance Capital Expenditures”. Maintenance Capital Expenditures are referred to as expenditures that, by standard accounting definition, are accounted for as capital because the expenditure itself has a useful life in excess of the current financial year and also adds or maintains the value of the related assets. A more detailed discussion of this topic is provided in the “Maintenance of Productive Capacity” section in the Trust’s MD&A, which is incorporated into this document by reference. The reconciliation of AFFO can also be found in the Trust’s MD&A, under the section titled “Performance Measures”, which is incorporated into this document by reference. Adjusted Cash Flows From Operations (“ACFO”) The IFRS measurement most comparable to ACFO is “cash flow from operating activities”. ACFO is a non-GAAP financial measure of sustainable economic cash flow available for distributions. ACFO should not be construed as an alternative to cash flow from operations as determined in accordance with IFRS. A reconciliation of ACFO to cash flow from operating activities as shown in the Trust’s Consolidated Statements of Cash Flows is also provided in the MD&A in the section titled, “Review of Consolidated Statement of Cash Flows”, along with added commentary on the sustainability of Boardwalk REIT’s Trust Unit distributions, which information is incorporated into this document by reference.
Boardwalk REIT’s presentation of FFO, AFFO and ACFO are materially consistent with the definitions provided by REALpac. These measurements, however, are not necessarily indicative of cash that is available to fund cash needs and should not be considered alternatives to cash flow as a measure of liquidity. FFO, AFFO and ACFO do not represent earnings or cash flow from operations as defined by IFRS. FFO and AFFO should not be construed as an alternative to profit determined in accordance with IFRS as indicators of Boardwalk REIT’s performance. In addition, Boardwalk REIT’s calculation methodology for FFO, AFFO and ACFO may differ from that of other real estate companies and trusts. Distributions as a Percentage of FFO, AFFO and ACFO Distributions as a percentage of FFO, AFFO and ACFO are supplementary non-GAAP measures of a REIT’s ability to pay distributions. These ratios are computed by dividing Trust Unit distributions paid (including distributions on the LP Class B Units) by FFO, AFFO and ACFO, respectively. The Trust’s method of calculating these ratios may differ from other real estate entities, and accordingly, may not be comparable to other issuers.
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Operating Margins Operating margins are a supplementary non-GAAP measure of the Trust’s operating performance. This ratio is calculated by dividing NOI by rental revenue allowing management to assess the percentage of rental revenue which generated profit. Stabilized Revenue Growth, Stabilized Operating Expense Growth and Stabilized NOI Growth Stabilized revenue growth, stabilized operating expense growth and stabilized NOI growth are supplementary non-GAAP financial measures used by the Trust to assess period over period performance of those properties which Boardwalk has owned and operated for over 24 months. These ratios are calculated by determining the percentage change in stabilized revenue, stabilized operating expenses and stabilized NOI from one period to the next. Stabilized property performance is a meaningful measure of operating performance as it allows management to assess rent growth and expense changes from its portfolio on a stabilized property basis.
In calculating stabilized operating expense growth, as a result of IFRS 16, previously recorded operating lease payments were removed from the 2018 operating expenses, resulting in decreased 2018 stabilized operating expenses (relative to what was previously reported). Similarly, with stabilized NOI growth, previously recorded operating lease payments were removed from the 2018 operating expenses, resulting in an increased 2018 stabilized NOI (relative to what was previously recorded). Lastly, stabilized operating expenses and stabilized net operating income were adjusted from the reported values for wage allocations between operating expenses and administration. All adjustments are done to allow for direct comparison between 2019 and 2018. Enterprise Value Enterprise Value is a non-GAAP measure calculated as the sum of the Trust’s total debt and Trust Unit market capitalization. This non-GAAP measure is used by management and the industry as a measure of the total value of the REIT based on debt and market price of equity instead of IFRS total assets.
CORPORATE STRUCTURE
In this Annual Information Form, unless the context indicates otherwise, a reference to "Boardwalk REIT", “Boardwalk” or the "Trust" means Boardwalk Real Estate Investment Trust. A reference to the "Corporation" means BPCL Holdings Inc. (formerly called Boardwalk Equities Inc.). Boardwalk REIT is an unincorporated, open ended real estate investment trust created by a declaration of trust, dated January 9, 2004, as amended and restated on May 3, 2004, May 10, 2006, May 10, 2007, May 13, 2008, May 12, 2009, May 18, 2010, May 12, 2011, May 15, 2012, May 15, 2014, May 12, 2016, May 11, 2017 and May 15, 2018 (the "Declaration of Trust"), and governed by the laws of Alberta.
The Trust's principal office is located at Suite 200, 1501 - First Street SW, Calgary, Alberta T2R 0W1. Its registered office is located at Suite 1400, 700 – 2nd Street S.W., Calgary, Alberta T2P 4V5.
In this AIF, unless the context indicates otherwise, a reference to "business day" means a day, other than a Saturday or Sunday, on which Schedule 1 Canadian chartered banks are open for business in Calgary, Alberta and Toronto, Ontario; and a reference to "person" means an individual, partnership, limited partnership, corporation, unlimited liability company, trust, unincorporated organization, association, government or any department or agency thereof and the successors and assigns thereof or the heirs, executors, administrators or other legal representatives of an individual thereof, or any other entity recognized by law.
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OVERVIEW OF THE ACQUISITION & THE ARRANGEMENT REPLACING THE CORPORATION AS A PUBLIC ENTITY WITH BOARDWALK REIT
On May 3, 2004 (the "Effective Date"), Boardwalk REIT acquired substantially all of the assets of the Corporation (the "Assets") pursuant to a plan of arrangement under section 193 of the Business Corporations Act (Alberta) (the "Acquisition and the Arrangement"). The Acquisition and the Arrangement were multi-step transactions that resulted in: (i) the indirect acquisition by Boardwalk REIT of all of the Assets; (ii) the indirect acquisition of the Corporation by Boardwalk Properties Company Limited ("BPCL"), a corporation incorporated in 1984 pursuant to the laws of Alberta and indirectly controlled by Sam Kolias and Van Kolias, itself a control block holder of trust units of Boardwalk REIT ("REIT Units", “Trust Units” or “Units”), by the acquisition of all of the outstanding common shares of the Corporation ("Common Shares"); and (iii) after taking into account the preferred partnership distribution and other entitlements of the units of interest in Boardwalk REIT Limited Partnership (the "Partnership") designated as "LP Class C Units" held indirectly by BPCL through the Corporation, the indirect interest of the public holders of Common Shares ("Public Shareholders") in approximately 73% of the Assets through the ownership of the outstanding REIT Units and the indirect interest of BPCL in approximately 27% of the Assets.
After giving effect to the Acquisition and the Arrangement: (a) BPCL acquired the Corporation and the Corporation is now an indirect, wholly owned subsidiary of BPCL; (b) the former holders of Common Shares ("Shareholders") were the initial owners of all of the outstanding REIT Units, which are listed for trading on the Toronto Stock Exchange (the “TSX”); (c) Boardwalk REIT indirectly holds, through its indirect interest in the units of the Partnership designated as "LP Class A Units", an approximately 92% interest in the Partnership (after the preferred partnership distribution and other entitlements of the LP Class C Units; see "Information Concerning the Partnership — Distributions"), which holds, directly or indirectly, all of the Assets previously comprising the business of the Corporation; and (d) the remaining approximately 8% interest in the Partnership (after the preferred partnership distribution and other entitlements of the LP Class C Units indirectly held by BPCL) is indirectly held by BPCL through its indirect interest in LP Class B Units. The LP Class B Units have equivalent voting and distribution entitlements to the REIT Units into which they are exchangeable. Pre-Arrangement Reorganization Immediately prior to the effective time of the Acquisition and the Arrangement (the "Effective Time"), the Corporation and certain of its subsidiaries effected a series of transactions to facilitate the transfer of the Assets to the Partnership. References in this AIF to "Common Shares" refer to the common shares of the Corporation.
Prior to the transfer of the Assets, the Corporation subscribed for 4,475,000 LP Class B Units and 334,168,959 LP Class C Units, both for nominal consideration. Following this subscription and immediately
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The Retained Debt was not assumed by the Partnership and remains as indebtedness of the Corporation and the Corporation is obligated to make interest payments and principal repayments on a periodic basis in respect of the Retained Debt. Partnership distributions on the LP Class C Units held by the Corporation will, if paid, be in amounts at least sufficient to make such payments. The Partnership has provided the Corporation's creditors with a guarantee in respect of the Retained Debt to ensure the lenders are not prejudiced in their ability to collect from the Corporation in the event that payments in respect of the Retained Debt are not made by BPCL as expected and Boardwalk REIT has provided a guarantee of the Partnership's obligations. The Corporation has indemnified the Partnership for any losses suffered by the Partnership in the event payments on the Retained Debt are not made as required, provided such losses are not attributable to any action or failure to act on the part of the Partnership. Also, as the Partnership acquired the Assets, which comprise all of the historic business of the Corporation, the Partnership indemnified the Corporation for all claims and losses relating to the Assets except if the claim or loss is a result of gross negligence or wilful misconduct of the Corporation after the Effective Date. See "Overview of the Acquisition & the Arrangement Replacing the Corporation as a Public Entity with Boardwalk REIT — Ancillary Agreements in Connection with the Acquisition & the Arrangement — Master Asset Contribution Agreement". Ancillary Agreements in Connection with the Acquisition & the Arrangement Exchange and Support Agreement On the Effective Date, Boardwalk REIT, Top Hat Operating Trust3 (the "Operating Trust), the Partnership, the Corporation and 1103891 Alberta Ltd.4 ("BEI Subco") entered into an exchange and support agreement (the "Exchange and Support Agreement") to create certain support obligations with respect to the LP Class B Units.
Under the Exchange and Support Agreement, Boardwalk REIT and/or Boardwalk Real Estate Management Ltd.5 (the "General Partner"), as applicable, agreed to take such actions as are reasonably necessary to ensure that the distributions on the LP Class B Units will be of the same nature and amount, on a per unit basis, as the corresponding distributions on the REIT Units (except to the extent that the holder of the LP Class B Units has elected to receive distributions in the form of LP Class B Units and/or REIT Units pursuant to the Limited Partnership Agreement6).
The Exchange and Support Agreement also provides that Boardwalk REIT will not, subject to certain exceptions, issue or distribute REIT Units (or securities exchangeable for or convertible into or
1 ''Plan of Arrangement'' means the plan of arrangement under the provisions of Section 193 of the Business Corporations Act (Alberta) (the "ABCA") in connection with the Acquisition and the Arrangement. 2 ''Retained Debt'' means the indebtedness of the Corporation that relates to and is secured by a charge of certain real property of the Corporation beneficially transferred, assigned, conveyed and set over by the Corporation to the Partnership, which indebtedness was not assumed by the Partnership on such transfer, assignment, conveyance and set over and remains indebtedness of the Corporation in respect of which the Corporation is and will remain the primary obligor to make principal, interest and other payments in respect of such indebtedness as such amounts become due and payable. 3 An open-ended unit trust formed under the laws of the Province of British Columbia, all of the units of which are owned by Boardwalk REIT. 4 A corporation incorporated immediately prior to the Effective Date pursuant to the laws of Alberta as a wholly-owned subsidiary of the Corporation. 5 A corporation incorporated pursuant to the laws of Alberta and the general partner of the Partnership. 6 ''Limited Partnership Agreement'' means the limited partnership agreement dated January 9, 2004, as amended and restated on May 3, 2004, creating the Partnership.
- 11 - carrying rights to acquire REIT Units) to the holders of all or substantially all of the then outstanding REIT Units; issue or distribute rights, options or warrants to the holders of all or substantially all of the then outstanding REIT Units entitling them to subscribe for or to purchase REIT Units (or securities exchangeable for or convertible into or carrying rights to acquire REIT Units); or issue or distribute to the holders of all or substantially all of the then outstanding REIT Units evidences of indebtedness of Boardwalk REIT or assets of Boardwalk REIT except in accordance with the provisions of the REIT Units; unless the economic equivalent on a per unit basis of such rights, options, securities, units, evidences of indebtedness or other assets is issued or distributed simultaneously to the holders of LP Class B Units. In addition, Boardwalk REIT will not, subject to certain exceptions, subdivide, re-divide or change the then outstanding REIT Units into a greater number of REIT Units; reduce, combine, consolidate or change the then outstanding REIT Units into a lesser number of REIT Units; or reclassify, amend the terms of, or otherwise change the REIT Units or effect an amalgamation, merger, reorganization or other transaction affecting the REIT Units; unless the same or an economically equivalent change is made simultaneously to, or in the rights of the holders of LP Class B Units.
Pursuant to the Exchange and Support Agreement, upon notice from the Partnership that a holder of LP Class B Units has: (i) surrendered LP Class B Units for withdrawal in accordance with the terms of the LP Class B Units; or (ii) elected pursuant to the Limited Partnership Agreement to receive REIT Units from the Partnership in lieu of cash distributions from the Partnership to which such holder is entitled, Boardwalk REIT will issue and deliver or cause to be issued and delivered to the Partnership the requisite number of REIT Units to be received by, and issued to or to the order of, the holder of LP Class B Units.
Master Asset Contribution Agreement On the Effective Date, the Corporation and the Partnership entered into an agreement (the “Master Asset Contribution Agreement”) pursuant to which the Corporation caused the Assets to be transferred to the Partnership, some of which were pledged to lenders in connection with the Retained Debt. In the case of properties which secure the Retained Debt, the entire beneficial interest was sold to the Partnership but legal title remained with the Corporation. Following the Effective Date, the Partnership registered a caveat against each of such properties disclosing its beneficial interest.
In the case of other revenue producing properties, legal title to such properties was transferred into the name of a nominee holding company.
The Partnership, as part of the Master Asset Contribution Agreement, indemnified the Corporation for any losses, claims or demands associated with the Corporation's operation and transfer of the Assets. As of the date of this AIF, management of Boardwalk REIT is not aware of any material claims related to the Assets. See "Overview of the Acquisition & the Arrangement Replacing the Corporation as a Public Entity with Boardwalk REIT— Arrangements with BPCL".
In order to effect the Acquisition and the Arrangement for the benefit of all Shareholders, the Corporation remains liable, as principal obligor, for the Retained Debt. The Partnership is, however, the beneficial owner of the Assets associated with the Retained Debt and accordingly could suffer impairment of these assets if the Corporation fails to discharge its obligations pursuant to the Retained Debt. Accordingly, the Corporation has indemnified the Partnership for losses caused by the Corporation's failure to discharge obligations pursuant to the Retained Debt. Certain obligations under the Retained Debt such as adequate insurance and repairs and maintenance are the responsibility of the Partnership and as a result, such indemnification does not extend to defaults outside the scope of responsibility of the Corporation.
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Arrangements with BPCL As part of the Acquisition and the Arrangement, BPCL agreed to take certain steps in order to effect the transactions. Specifically, BPCL: (i) acquired control of the Corporation; (ii) indirectly holds unlisted LP Class B Units and LP Class C Units; (iii) indirectly retains the Retained Debt as its indebtedness; and (iv) entered into certain agreements providing for ongoing arrangements with Boardwalk REIT and the Partnership in order to facilitate the foregoing. These steps were, in part, intended to ensure that Boardwalk REIT be put in a commercially advantageous position with respect to its peer group following completion of the Acquisition and the Arrangement. As a consequence of these steps, however, various commercial arrangements between the Partnership, the Corporation and BPCL were necessary. Among these arrangements are the following: (a) pursuant to the Master Asset Contribution Agreement, although the Partnership acquired the beneficial interest in the Assets associated with the Retained Debt, the Retained Debt was not assumed by the Partnership and remains indebtedness of the Corporation. As such, the Corporation continues to be liable as principal obligor to pay all principal, interest and other amounts under the Retained Debt as such amounts become due and payable and the Corporation has indemnified the Partnership for any losses as a result of the Corporation's failure to meet its obligations, provided such losses are not attributable to any action or failure to act on the part of the Partnership; (b) since the Master Asset Contribution Agreement represented a transfer of the existing business of the Corporation, the Partnership indemnified the Corporation for all claims and losses relating to the Assets except if the claim or loss is a result of gross negligence or wilful misconduct of the Corporation after the Effective Date; (c) as the beneficial owner of the Assets associated with the Retained Debt, the Partnership indemnified the Corporation for losses resulting from the Partnership's failure to manage such Assets in a safe and prudent manner where such failure results in a claim against the Corporation; and (d) since the legal title to the Assets associated with the Retained Debt remains with the Corporation but all beneficial interest in such Assets as well as all other Assets was transferred to the Partnership, the Partnership has provided guarantees of the Corporation's obligations under the Retained Debt in favour of the lenders of such indebtedness and Boardwalk REIT has provided a guarantee of the Partnership's obligations. These arrangements are designed to protect the respective interests of the Partnership, Boardwalk REIT, BPCL and the Corporation. These arrangements are, in the opinion of management of Boardwalk REIT, appropriate in light of the significant benefits realized by the Public Shareholders as a result of the Acquisition and the Arrangement and the transfer of the Assets pursuant to the Master Asset Contribution Agreement (collectively, the "Transaction").
See "Information Concerning the Corporation — Business of the Corporation Following the Acquisition & the Arrangement".
SUBSIDIARIES
The following sets forth the principal subsidiaries of the Trust and their jurisdictions of incorporation or formation, as applicable. All of such subsidiaries are directly or indirectly owned by the Trust:
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OVERVIEW
Boardwalk REIT is a tenant/customer-oriented real estate investment trust focused exclusively on and specializing in the acquisition, refurbishment, management, ownership and, where deemed appropriate, the development of multi-family residential communities. As of December 31, 2019, the Trust owned over 200 properties containing 33,263 (December 31, 2018 – 33,411) residential units within the Provinces of Alberta, Saskatchewan, Ontario and Quebec, representing over 28 million net rentable square feet. During the year ended December 31, 2019, Boardwalk REIT sold 278 non-core apartment units in Saskatoon, Saskatchewan and purchased 124 units in Edmonton, Alberta. Boardwalk REIT currently has in excess of 1,600 employees working in 15 different cities across Canada. Boardwalk REIT focuses on maximizing internal growth combined with a focused and disciplined acquisition program. In recent years, due to the compression of capitalization rates, Boardwalk REIT has also begun exploring and executing development opportunities on excess land density the Trust currently owns. To that end, Boardwalk continued its strategic partnership with RioCan REIT (“RioCan”) with the purchase of a 50% interest in a well-located, transit-oriented community in Mississauga, Ontario to develop a 25- and 16-storey mixed-use development with an estimated 470 residential units connected by a retail podium. Subject to zoning approval and confirmation of total buildable area, the total purchase price for the Trust’s 50% interest is $14.9 million or $80 per square foot buildable. Zoning is anticipated in early 2020; and aligns with the completion of BRIO in Calgary, RioCan and Boardwalk’s first joint-venture development described in more detail below. This development will be Boardwalk’s second in the Great Toronto Area, and is an opportunity for Boardwalk to recycle capital and, coupled with the Trust’s minimum distribution/maximum re-investment policy, Boardwalk’s growing free cashflow may then be used in the Trust’s long-term growth strategy of improving its existing communities, while high-grading and geographically diversifying its portfolio into other housing constrained rental markets.
The Trust also looks to acquire, develop, own and manage quality rental communities concentrated in attractive markets characterized by high barriers to new supply. To that end, in Q4 2016, the Trust announced the formation of a joint venture arrangement between RioCan and Boardwalk REIT to develop a mixed-use tower consisting of an at-grade retail podium totaling approximately 10,000 square feet and a 12-storey residential tower with approximately 130,000 square feet of residential space, totaling approximately 162 apartment units at RioCan’s Brentwood Village Shopping Centre in Calgary, AB. The development will include two (2) levels of underground parking and will provide premium rental housing minutes from downtown Calgary along the Northwest Light Rail Transit Line, while providing close proximity to the University of Calgary, McMahon Stadium and Foothills Hospital. The joint venture involves equal 50% interests in which both RioCan and Boardwalk will provide their retail and residential expertise, respectively, to co-develop the asset. Closing on Boardwalk’s purchase of a 50% interest in the land being developed occurred on November 23, 2017. Based on the determination of total buildable area, Boardwalk paid RioCan $3.2 million for a 50% interest in the sub-divided land at closing. Construction of the project began in Q4 2017 and was substantially completed, and the occupancy certificate was received, at the end of January 2020. For the year ended December 31, 2019, Boardwalk incurred $16.8 million in development costs for its 50% interest (2018 - $9.9 million). It is estimated that the total construction costs for the project will be between $75 million to $80 million ($37.5 million to $40 million per partner).
In the fourth quarter of 2018, Boardwalk also entered into a 50:50 joint venture partnership agreement to develop a 365-unit multi-residential, purpose-built rental complex, located near downtown Brampton, Ontario, directly adjacent to the Brampton Go Transit Station. It is estimated that the total cost for the project will be approximately $200 to $215 million. The proposed project is a rental complex with approximately 10,700 square feet of retail space, above and underground parking, and 380,000 square feet of residential space spread between two (2) concrete high-rise towers. This project is underway with concrete forming and pouring having commenced on both towers. For the year ended December 31, 2019, the Trust contributed $15.9 million of capital to this limited partnership.
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Due to Boardwalk REIT's size and relationship with various commercial lenders and Canada Mortgage and Housing Corporation ("CMHC"), financing for such acquisitions can often be negotiated on favourable terms. The Management of Boardwalk REIT has over 35 years’ experience in the ownership and management of multi-family residential communities. This experience, coupled with Management’s significant ownership of Trust Units and Boardwalk’s advanced and unique information systems platform, allows Boardwalk REIT to be an industry leader in Canada's multi-family rental industry and has allowed Boardwalk to grow its operations into a national platform.
Boardwalk REIT only owns the beneficial interest in the Operating Trust, and the Operating Trust owns LP Class A Units. As a result, the activities described below will be those of the Partnership and its subsidiaries.
Boardwalk REIT’s Trust Units trade on the TSX under the trading symbol “BEI.UN”.
OBJECTIVES OF BOARDWALK REIT
The objectives of Boardwalk REIT are to: (i) provide its residents with superior quality rental communities and the best tenant/customer service; (ii) provide Unitholders with stable monthly cash distributions from investments in the Assets and any additional revenue producing multi-family residential properties or interests acquired or developed by Boardwalk REIT; and (iii) increase REIT Unit value through the effective management of its residential, multi-family revenue producing properties, renovations and upgrades to its current portfolio, and the acquisition and/or development of additional, accretive properties or interests therein.
MANAGEMENT OF BOARDWALK REIT
The overall operations and affairs of Boardwalk REIT are subject to the control of the trustees of Boardwalk REIT (the "Trustees"), while the day-to-day activities of Boardwalk REIT are under the direction of Boardwalk REIT's senior Management team. Board of Trustees
The Declaration of Trust provides that the assets and operations of Boardwalk REIT are subject to the control and authority of a board of a minimum of five (5) Trustees and a maximum of 12 Trustees, a majority of whom shall be "independent trustees", as such term is defined in National Policy 58-201, entitled "Corporate Governance Guidelines" ("Independent Trustees"). Currently, the Board size is fixed at, and there are, seven (7) Trustees. Pursuant to the Declaration of Trust, BPCL is entitled to appoint one (1) Trustee to serve on the board provided that BPCL and its affiliates continue to beneficially own, in the aggregate, a number of REIT Units and/or LP Class B Units that, upon surrender or exchange of the LP Class B Units would equal at least five percent (5%) of the outstanding REIT Units (on a fully-diluted basis). The remaining Trustees will be elected by holders of REIT Units ("Unitholders") in the manner provided below. Any Trustee appointed by BPCL may be changed by BPCL at any time. BPCL has not appointed a Trustee since the Effective Date. The number of Trustees may be changed by the Unitholders or, if authorized by the Unitholders, by the Trustees, provided that the Trustees may not, between meetings of Unitholders, unless otherwise approved by a majority of the Independent Trustees, appoint an additional Trustee if, after such appointment, the total number of Trustees would increase by more than one-third (1/3) the number of Trustees in office immediately following the last annual meeting of Unitholders. A vacancy occurring among the Trustees, other than the appointee of BPCL, may be filled by resolution of the remaining Trustees, so long as they constitute a quorum, or by the Unitholders at a meeting of the Unitholders. A vacancy occurring among the Trustees resulting from the resignation or removal of the appointee of BPCL may be filled only by an appointment by BPCL.
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The Trustees, other than the appointee of BPCL, hold office for a term expiring at the next annual meeting of the Unitholders or until their respective successors are elected or appointed and are eligible for re-election. BPCL will, if it exercises its right to, appoint its Trustee at each annual meeting of Boardwalk REIT for a term expiring at the next annual meeting unless removed prior to such meeting at the direction of BPCL. A Trustee appointed by the Trustees between meetings of Unitholders or to fill a vacancy will be appointed for a term expiring at the conclusion of the next annual meeting of Boardwalk REIT or until his or her successor is elected or appointed and will be eligible for election or re-election.
The Declaration of Trust provides that a Trustee may resign at any time upon written notice delivered to the Chair or, if there is no Chair, the President of Boardwalk REIT. A Trustee (other than an appointee of BPCL) may be removed with or without cause by a majority of the votes cast at a meeting of Unitholders or with cause by two-thirds (2/3) of the remaining Trustees.
Each Trustee is required to exercise the powers and discharge the duties of his or her office honestly and in good faith with a view to the best interests of Boardwalk REIT and the Unitholders and, in connection therewith, to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
The following table sets forth the name, province or state and country of residence, office held with Boardwalk REIT and principal occupation of each of the Trustees of Boardwalk REIT: Director of Name, Position Corporation and Municipality or Trustee of Residence Position Held Principal Occupation Since Andrea Goertz(1) Independent Andrea has extensive experience as an executive and May 15, 2019 Calgary, Canada Trustee board member. Andrea was Chief Communications and Sustainability Officer at TELUS from 2011 to 2018, stewarding real estate, provincial government relations, corporate communications and marketing, privacy, and corporate social responsibility. She is a 2-time recipient of WXN Canada's Most Powerful Women: Top 100 Awards. In addition to Boardwalk, Andrea serves on the Board of the YYC Airport Authority and is a co-founder of Women on Boards. Andrea holds a Bachelor of Commerce degree in Finance (Distinction) and a Master of Business Administration degree, both from the University of Alberta and is a graduate of the ICD Director’s Education Program. Gary Goodman(1) Independent Executive Vice-President of Reichmann International May 13, 2009 Ontario, Canada Trustee Development Corporation and International Property Corporation (December 2007 - June 2010). Previously, CFO (December 2001 - November 2006) and President & CEO (December 2006 - December 2007) of IPC US REIT, a TSX listed Real Estate Investment Trust which was sold to Behringer Harvard in December 2007. Arthur L. Havener, Jr.(2) Independent Principal, Stampede Capital, LLC, (April 2007 to May 10, 2007 Missouri, USA Lead Trustee present). Prior thereto, Mr. Havener was a Vice President of A.G. Edwards and Sons Inc. (June 1989 to March 2007) and Head of Real Estate research (2002- 2007). Mr. Havener was an Alderman and Chair of the Finance Committee of the Municipality of Sunset Hills, Missouri (2012-2014). Effective January 2015, Mr. Havener was elected to the Board of Life Storage, Inc. (LSI – NYSE).
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Director of Name, Position Corporation and Municipality or Trustee of Residence Position Held Principal Occupation Since Sam Kolias Chairman of Executive of the Trust since the Effective Date; prior Incorporation Alberta, Canada the Board, thereto, from August 1993 until the Effective Date, (July 1993) Chief Executive President of the Corporation. Officer & Trustee Samantha Kolias-Gunn(3) Trustee CFO of BPCL since January 2015. Prior thereto, May 15, 2013 Alberta, Canada Controller of BPCL (September 2012 to January 2015) and head of ownership succession plan for BPCL. Prior thereto, Senior Accountant at KPMG LLP (September 2009 - August 2012). Mrs. Kolias-Gunn is a Chartered Professional Accountant and has a Bachelor of Commerce from Queen’s University. Scott Morrison(1) Independent CEO and Chief Investment Officer of Wealhouse May 15, 2018 Alberta, Canada Trustee Capital Management, a firm he co-founded in 2008 that has one ($1) billion in assets under management. Prior thereto, Mr. Morrison held several portfolio management and analyst positions in the financial services industry from 1994 to 2008. Mr. Morrison is an owner of MDC Property Services, an integrated commercial real estate company that manages direct real estate investments in the United States and Canada. Since 2008, Mr. Morrison has been a trustee of the Centre for International Governance Innovation. Mr. Morrison was a Trustee of Timbercreek REIT from 2006 to 2011 and on the Investment Committee of Empire Life Financial (ELF – TSX) from 2003 to 2008. Mr. Morrison became a Chartered Financial Analyst in 2000 and obtained a Bachelor of Commerce in Finance from Concordia University of Montreal in 1993. Brian G. Robinson(2) Independent Director, Vice President, Finance and Chief Financial May 11, 2017 Alberta, Canada Trustee Officer of Tourmaline Oil Corporation, positions he has held since October 27, 2008. Prior thereto, Mr. Robinson was Vice President, Finance and Chief Financial Officer of Duvernay Oil Corp. from 2001 to 2008, and prior to that was Vice President, Finance and Chief Financial Officer of Berkley Petroleum Corp. from 2000 to 2001. Previously, Mr. Robinson held numerous positions in finance and accounting with intermediate and senior oil and gas companies, commencing his career with a large public accounting firm. Mr. Robinson has over 35 years of experience in the oil and gas industry in the disciplines of finance, financial reporting, budgeting, accounting, management, treasury, tax and business development. Mr. Robinson holds a Bachelor of Commerce degree from the University of Calgary and became a Chartered Accountant in 1981. Notes: (1) Member of the Audit and Risk Management Committee. (2) Member of the Compensation, Governance and Nominations Committee. (3) Member of the Corporate Development Committee.
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As of December 31, 2019, the Trustees and senior officers of Boardwalk REIT as a group beneficially own, directly or indirectly, or exercise control or direction over, REIT Units, representing approximately 19.73% of the outstanding REIT Units. BPCL, indirectly wholly-owned by Sam Kolias, Chairman, Chief Executive Officer and a Trustee of Boardwalk REIT, and Van Kolias, Senior Vice President, Quality Control of the General Partner, owns a further 4,475,000 LP Class B Units, which, if exchanged into REIT Units, would give them an additional 8.82% of the outstanding REIT Units.
Conflict of Interest Restrictions & Provisions
The Declaration of Trust contains "conflict of interest" provisions similar to those applicable to corporations under Section 120 of the ABCA, which serves to protect Unitholders without creating undue limitations on Boardwalk REIT. Given that the Trustees and the officers of Boardwalk REIT are engaged in a wide range of real estate and other business activities, the Declaration of Trust requires each Trustee or officer of Boardwalk REIT to disclose to Boardwalk REIT if he or she is a party to a material contract or transaction or proposed material contract or transaction with Boardwalk REIT or its subsidiaries or the fact that such person is a director or officer of or otherwise has a material interest in any person who is a party to a material contract or transaction or proposed material contract or transaction with Boardwalk REIT or its subsidiaries. Such disclosure is required to be made by a Trustee at the first meeting at which a proposed contract or transaction is considered, at the first meeting after a Trustee becomes interested in a proposed or pending contract or transaction or at the first meeting after an interested party becomes a Trustee.
Disclosure is required to be made by an officer of Boardwalk REIT as soon as the officer becomes aware that a contract or transaction or proposed contract or transaction is to be, or has been, considered by the Trustees, as soon as the officer becomes aware of his or her interest in a contract or transaction or, if not currently an officer of Boardwalk REIT, as soon as such person becomes an officer of Boardwalk REIT. In the event that a material contract or transaction or proposed material contract or transaction is one that in the ordinary course would not require approval by the Trustees, a Trustee or officer of Boardwalk REIT is required to disclose in writing to Boardwalk REIT or request to have entered into the minutes of the meeting of the Trustees the nature and extent of his or her interest forthwith after the Trustee or officer of Boardwalk REIT becomes aware of the contract or transaction or proposed contract or transaction. In any case, a Trustee who has made disclosure to the foregoing effect is not entitled to vote on any resolution to approve the contract or transaction unless the contract or transaction is one relating primarily to his or her remuneration as a Trustee, officer, employee or agent of Boardwalk REIT or one for indemnity under the indemnity provisions of the Declaration of Trust or the purchase of liability insurance.
The Declaration of Trust contains provisions to address potential conflicts of interest arising between Boardwalk REIT and any "Related Party" (as such term is defined in Ontario Securities Commission Rule 61-101 - Protection of Minority Security Holders in Special Transactions).
In particular, Boardwalk REIT will obtain a valuation in respect of any real property that the Partnership intends to purchase from or sell to a Related Party prepared by a valuator engaged by, and prepared under the supervision of, a committee of two (2) or more Independent Trustees who have no interest in such transaction. In addition, Boardwalk REIT will not permit the Partnership to effect a transaction with a Related Party unless the transaction is determined to be on commercially reasonable terms by, and is approved by, a majority of Boardwalk REIT's Independent Trustees who have no interest in such transaction.
Independent Trustee Matters
In addition to requiring the approval of a majority of the Trustees, the following matters require the approval of at least a majority of disinterested Independent Trustees to become effective: (a) entering into any agreement or transaction in which any Related Party has a material interest or making a material change to any such agreement or transaction;
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(b) any matter relating to a claim by or against any Related Party; (c) any matter relating to a claim in which the interests of a Related Party differ from the interests of Boardwalk REIT; (d) permitting the Partnership to acquire any real or other property in which a Related Party has an interest or to sell any interest in any real or other property to a Related Party; (e) granting REIT Units under any unit incentive or unit compensation plan approved by the Trustees and, if required, by the Unitholders or awarding any right to acquire or other right or interest in REIT Units or securities convertible into or exchangeable for REIT Units under any plan approved by the Trustees and, if required, by the Unitholders; (f) approving or enforcing any agreement entered into by Boardwalk REIT or its subsidiaries with a Trustee who is not an Independent Trustee or an associate thereof, with a Related Party; (g) recommending to the holders of REIT Units to increase the number of Trustees serving on the board of Trustees or authorizing the Trustees to change the number of Trustees from time to time; and (h) changing the compensation of any officer of Boardwalk REIT. Committees
The Board of Trustees has established three (3) committees: the Audit and Risk Management Committee; the Corporate Development Committee; and the Compensation, Governance and Nominations Committee. Audit and Risk Management Committee
The Trustees have appointed an Audit and Risk Management Committee (the "Audit Committee") consisting of three (3) Trustees, all of whom are Independent Trustees. The Chair of the Audit Committee, Gary Goodman, was selected from the group of Independent Trustees appointed to serve on such Committee. The Audit Committee is required to: (i) review Boardwalk REIT's procedures for internal control with the Auditors and Chief Financial Officer of Boardwalk REIT; (ii) review the engagement and approve the fees of the Auditors and other professional advisors; (iii) review and recommend to the Trustees for their approval annual and quarterly financial statements, as well as management's discussion and analysis of financial condition and results of operation; (iv) assess Boardwalk REIT's financial and accounting personnel; (v) review and approve the public disclosure documents of Boardwalk REIT, including press releases; (vi) review the principal business risks of the REIT on behalf of the Board; and (vii) review any significant transactions outside Boardwalk REIT's ordinary activities and all pending litigation involving Boardwalk REIT.
The Audit Committee meets a minimum of five (5) times per year and with each of the external auditors and management in separate sessions. Each member of the Audit Committee is required to be financially literate, meaning that the member has the ability to read and understand a set of financial statements that present a breadth and level of complexity of the issues that can be expected to be raised by the Trust's financial statements, and at least one (1) member of the committee is required to have accounting
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or related financial experience, meaning that such member has the ability to analyze and interpret a full set of financial statements, including the notes attached thereto, in accordance with Canadian generally accepted accounting principles.
The Audit Committee currently has three (3) members, Gary Goodman, Andrea Goertz and Scott Morrison, none of whom has a direct or indirect material relationship with the Trust and each of whom is financially literate (as defined above). The following is a brief summary of the education and experience of each member of the Audit Committee that is relevant to the performance of his or her responsibilities as a member of the Audit Committee, including any education or experience that has provided the member with an understanding of the accounting principles used by the Trust to prepare its annual and interim financial statements: Name of Audit Committee Member Relevant Education and Experience Andrea Goertz Andrea has extensive experience as an executive and board member. Andrea was Chief Communications and Sustainability Officer at TELUS from 2011 to 2018, stewarding real estate, provincial government relations, corporate communications and marketing, privacy, and corporate social responsibility. She is a 2-time recipient of WXN Canada's Most Powerful Women: Top 100 Awards. In addition to Boardwalk, Andrea serves on the Board of the YYC Airport Authority and is a co-founder of Women on Boards. Andrea holds a Bachelor of Commerce degree in Finance (Distinction) and a Master of Business Administration degree, both from the University of Alberta and is a graduate of the ICD Director’s Education Program. Gary Goodman Mr. Goodman has been a Trustee since May 13, 2009. Formerly, Executive Vic-President of Reichmann International Development Corporation and International Property Corporation, positions held between December 2007 and June 2010. Previously, CFO (December 2001 - November 2006), and President and CEO (December 2006 - December 2007), of IPC US REIT, a TSX listed Real Estate Investment Trust which was sold to Behringer Harvard in December 2007 for an aggregate value of US $1.4 billion. Mr. Goodman has also served as a Director and Senior Vice-President of Olympia & York Developments Limited, a Director of Campeau Corporation, Trilon Financial Corporation, Catellus Corporation, Brightpath Early Learning Inc., Huntingdon Capital Corporation, Gazit America and Brinco Mining. Mr. Goodman is a member of the Advisory Board of Vision Opportunity Fund; a limited partnership which invests in real estate securities. Mr. Goodman became a Chartered Accountant (Gold Medalist) in 1967 and has a Bachelor of Commerce degree from the University of Toronto. Scott Morrison Mr. Morrison is CEO and Chief Investment Officer of Wealhouse Capital Management, a firm he co-founded in 2008 that has one ($1) billion in assets under management. Prior thereto, Mr. Morrison held several portfolio management and analyst positions in the financial services industry from 1994 to 2008. Mr. Morrison is an owner of MDC Property Services, an integrated commercial real estate company that manages direct real estate investments in the United States and Canada. Since 2008, Mr. Morrison has been a trustee of the Centre for International Governance Innovation. Mr. Morrison was a Trustee of Timbercreek REIT from 2006 to 2011 and on the Investment Committee of Empire Life Financial (ELF – TSX) from 2003 to 2008. Mr. Morrison became a Chartered Financial Analyst in 2000 and obtained a Bachelor of Commerce in Finance from Concordia University of Montreal in 1993.
A text of the Audit Committee's charter is attached to this AIF as Schedule "A".
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Auditors' Fees
The table below provides disclosure of the services provided by the Trust's external auditors in fiscal 2019 and fiscal 2018, dividing the services into the categories of work performed.
Type of Work 2019 Fees 2019 2018 Fees 2018 Audit Fees(1) $695,447 87% $730,177 97% Audit of annual financial statements $584,220 73% $624,007 83% Review of interim financial statements and MD&A $111,227 14% $106,170 14% Audit Related Fees $80,813 10% $12,308 2% Internal Controls Review - - - - Specified auditing procedures on Statement of Capital Costs - - - - French Translation $73,028 9% - - CPAB Fee $7,785 1% $12,308 2% $22,891 3% $7,190 1% Tax compliance and consulting services for the Trust & partnerships $22,891 3% $7,190 1% Other(1) - - - - Total(1) $799,151 100% $749,675 100% Note: (1) Includes GST. Compensation, Governance & Nominations Committee
The Trustees have appointed a compensation, governance and nominations committee (the "Compensation Committee") consisting of three (3) Trustees, all of whom are Independent Trustees. The Chair of the Compensation Committee, Mr. Brian Robinson, was selected from the group of Independent Trustees appointed to serve on such Committee. Ms. Andrea Goertz and Mr. Arthur Havener, Jr. are also members of the Compensation Committee. The duties of the Compensation Committee are to review the compensation of the Trustees and the officers of Boardwalk REIT. The Compensation Committee is generally responsible for Boardwalk REIT's human resources, compensation and governance policies and has primary responsibility for: (a) administering Boardwalk REIT's unit incentive plans; (b) assessing the performance of the Chief Executive Officer; (c) reviewing and approving the compensation of senior management and consultants of Boardwalk REIT; (d) reviewing and making recommendations to the Trustees concerning the level and nature of compensation payable to the Trustees; and (e) reviewing the governance policies of Boardwalk REIT, including being responsible for: i) assessing the effectiveness of the Board of Trustees and each of its committees; ii) assessing the performance of the chair and/or lead Trustee of the Board of Trustees; iii) considering questions of management succession; iv) the recruitment and selection of candidates for Trustees; and v) considering and approving proposals by the Trustees to engage outside advisors on behalf of the Board of Trustees as a whole or on behalf of the Independent Trustees. Corporate Development Committee (ad hoc)
The Corporate Development (“CD”) Committee was created by the Board on February 17, 2016 to assist it in assessing and evaluating the implementation of the Trust’s strategic plan.
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The CD Committee is responsible for investigating and considering the nature and quality of the assets owned by the Trust and whether the assets are being utilized to maximize the benefits to the Trust at a particular time or under any given circumstances; to consider and recommend to the Board whether alternative courses of action affecting assets of the Trust ought to be considered or taken in order to maximize value; and generally, to ensure the Board is aware of any matters of concern that may affect the business of the Trust so as to ensure the complete and thorough consideration of the strategic position of the Trust.
The CD Committee consists of three members, two (2) of whom are Trustees, Mr. Brian Robinson and Mrs. Samantha Kolias-Gunn. Mrs. Kolias-Gunn is chair of the CD Committee and Mr. Robinson is independent of Management. The third member of the CD Committee is Mr. Roberto Geremia, President of the Trust, and the member of the management team with primary responsibility for collecting strategic ideas from other executives, Trustees and Unitholders, among others, and updating the Trust’s strategic plan for the Board to consider. All CD Committee members are knowledgeable about the Trust’s asset base, and Mr. Geremia has extensive real estate experience. The Board chose the CD Committee members based on their knowledge and experience, but also because they are all resident in the City of Calgary and can meet regularly and on short notice. Senior Management
The executive officers of Boardwalk REIT consist of Sam Kolias, Chairman and Chief Executive Officer; Roberto A. Geremia, President; William Wong, Chief Financial Officer and Dean Burns, Vice President, General Counsel & Secretary. These individuals also serve as officers of the General Partner. The senior officers have extensive experience in acquiring, refurbishing and profitably managing multi- family residential properties. Additional officers or personnel may be employed by Boardwalk REIT to support management in fulfilling its duties. Boardwalk REIT may also outsource other services necessary to its operations to third parties, subject to approval of the Trustees as necessary. See "Information Concerning the Partnership — Management" for further information on such officers. Boardwalk REIT Administrative Services Agreement Management & General Administrative Services
Boardwalk REIT, the General Partner and the Operating Trust have entered into an administrative services agreement, dated the Effective Date (the "Boardwalk REIT Administrative Services Agreement").
The Boardwalk REIT Administrative Services Agreement sets out the terms and conditions pursuant to which the General Partner or its subsidiaries provide certain management and general administrative services to Boardwalk REIT and the Operating Trust, including: (a) undertaking any matters required to be performed by the Trustees and the Operating Trust not otherwise delegated under the respective declarations of trust or the Boardwalk REIT Administrative Services Agreement; (b) keeping and maintaining books and records; (c) preparing returns, filings and documents and making determinations necessary for the discharge of the obligations of the Trustees of Boardwalk REIT and the Operating Trust; (d) providing Unitholders with annual audited and interim financial statements and relevant tax information; (e) preparing and filing income tax returns and filings; (f) ensuring compliance by Boardwalk REIT with all applicable securities legislation and stock exchange requirements including, without limitation, continuous disclosure obligations;
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(g) preparing and approving on behalf of Boardwalk REIT any circular or other disclosure document required under applicable securities legislation in response to an offer to purchase REIT Units; (h) providing investor relations services to Boardwalk REIT; (i) calling and holding annual and/or special meetings in respect of Boardwalk REIT and the Operating Trust and preparing, approving and arranging for the distribution of meeting materials; (j) preparing and providing to Unitholders information such as monthly and annual reports, notices, financial reports and tax information relating to Boardwalk REIT; (k) attending to administrative and other matters arising in connection with redemptions of REIT Units; (l) ensuring that Boardwalk REIT elects to be a "mutual fund trust" from the date it is established and a "registered investment" within the meaning of the Income Tax Act (Canada) (the "Tax Act"); as well as ensuring that Boardwalk REIT qualifies as a “real estate investment trust”, as defined in subsection 122.1(1) of the Tax Act, if as a consequence of the Trust not so qualifying, the Trust would be subject to tax on its “taxable SIFT trust distributions”, and monitoring Boardwalk REIT's status as such; (m) determining the amount of the Trust’s income, including net realized capital gains and net realized income (“Distributions”) of Boardwalk REIT and the Operating Trust and arranging for Distributions to be paid to Unitholders; (n) promptly notifying Boardwalk REIT and the Operating Trust of any event that might reasonably be expected to have a material adverse effect on their respective affairs; and (o) generally providing all other services as may be necessary or requested by Boardwalk REIT and the Operating Trust.
Administrative & Support Services
Pursuant to the Boardwalk REIT Administrative Services Agreement, the General Partner has also agreed to provide or cause its subsidiaries to provide certain administrative and support services to Boardwalk REIT and the Operating Trust. The administrative and support services provided by the General Partner will include providing office space, office equipment, communications services, computer systems, providing secretarial support personnel, reception, telephone answering services, installing and maintaining signage, promotional materials and providing such other administrative and secretarial support services as may be reasonably required from time to time.
The Boardwalk REIT Administrative Services Agreement provides for the payment to the General Partner or its subsidiaries by the Operating Trust or its subsidiaries of an amount sufficient to reimburse the General Partner or its subsidiaries for the expenses incurred by it in providing services under the Boardwalk REIT Administrative Services Agreement as long as the expenses are identified in the current annual budget for Boardwalk REIT or are otherwise approved in writing by Boardwalk REIT and the Operating Trust prior to being incurred by the General Partner. The General Partner and its subsidiaries are only reimbursed for expenses incurred by them in providing services under the Boardwalk REIT Administrative Services Agreement and are not paid a separate management fee or any other compensation under such agreement. Each of Boardwalk REIT and the Operating Trust will fund its payments to the General Partner or its subsidiaries through their direct or indirect receipt of the "LP Class A Preferred Distribution" on the LP Class A Units owned by the Operating Trust. See "Information Concerning the Partnership — Distributions".
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BUSINESS & PROPERTIES OF BOARDWALK REIT
Boardwalk REIT indirectly owns, through the Partnership, an interest in the Assets. As at December 31, 2019, the Assets consisted of direct and indirect interests in 33,263 residential units in Alberta, Saskatchewan, Ontario and Quebec, representing over 28 million net rentable square feet of revenue producing multi-family residential apartment units. During the year ended December 31, 2019, Boardwalk REIT sold 278 non-core residential units in Saskatchewan and purchased 124 residential units in Edmonton, Alberta.
In Q4 2016, the Trust announced the formation of a joint venture arrangement between RioCan and Boardwalk REIT to develop a mixed-use tower consisting of an at-grade retail podium totaling approximately 10,000 square feet and a 12-storey residential tower with approximately 130,000 square feet of residential space, totaling approximately 162 apartment units at RioCan’s Brentwood Village Shopping Centre in Calgary, AB (the “BRIO Development”). The development will include two (2) levels of underground parking and will provide premium rental housing minutes from downtown Calgary along the Northwest Light Rail Transit Line, while providing close proximity to the University of Calgary, McMahon Stadium and Foothills Hospital. The joint venture involves equal 50% interests in which both RioCan and Boardwalk will provide their retail and residential expertise, respectively, to co-develop the asset. Closing on Boardwalk’s purchase of a 50% interest in the land to be developed occurred on November 23, 2017. Based on the determination of total buildable area, Boardwalk paid RioCan $3.2 million for a 50% interest in the sub-divided land at closing. Construction of the project began in Q4 2017 and is on schedule and on budget. For the year ended December 31, 2019, Boardwalk incurred $16.8 million in development and construction costs for its 50% interest (2018 - $9.9 million). The total construction costs for the project were between $75 million to $80 million ($37.5 million to $40 million per partner).
During the third quarter of 2019, and subject to zoning approvals, the Trust finalized a joint venture mixed-use project with RioCan to build a twenty-five-story tower and a sixteen story tower, consisting of 470 residential units totaling approximately 418,000 buildable square feet and approximately 12,000 square feet of retail space. The project is located on a discrete portion of land at RioCan’s Sandalwood Shopping Centre in Mississauga, Ontario. The project proposes three (3) levels of underground parking and will provide premium rental housing in a transit-oriented location along Hurontario Street near Square One Shopping Centre, and easy access onto the 401, 403 and 407 highways.
In the fourth quarter of 2018, Boardwalk also entered into a 50:50 joint venture partnership agreement to develop a 365-unit multi-residential, purpose-built rental complex, located near downtown Brampton, Ontario, directly adjacent to the Go Transit Station. It is estimated that the total cost for the project will be approximately $200 to $215 million. The proposed project is a rental complex with approximately 10,700 square feet of retail space, above and underground parking, and 380,000 square feet of residential space spread between two (2) concrete high-rise towers. Excavation and shoring commenced in January 2019, was completed in summer 2019 and framing is now underway. For the year ended December 31, 2019, the Trust contributed $15.9 million of capital to this limited partnership (the “Brampton Development”).
The Assets represent a well-balanced portfolio of residential real estate, both from the standpoint of geographic diversification and mix of asset type, which consists of mid-sized suburban and downtown apartment buildings, and regional, mid-sized community and neighbourhood residential centres located in urban markets. The Assets represent a diversified portfolio of multi-family rental properties. For the fiscal year ending December 31, 2019, the Assets had a same-store occupancy rate of approximately 96.50%. Boardwalk REIT has a 100% undivided interest in the Assets, with the exception of the BRIO and Brampton Developments, both of which it has a 50% interest in. All of the residential properties in the portfolio are located in Canada. The residential properties in the portfolio are currently located in Montreal
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and Quebec City, Quebec; London and Kitchener, Ontario; Saskatoon and Regina, Saskatchewan; and Edmonton, Fort McMurray, Grande Prairie, Banff, Red Deer and Calgary, Alberta.
The following tables detail the city and property summaries of Boardwalk REIT's residential portfolio at December 31, 2019. As stated above, attention should be drawn to the fact that the Trust has a 100% undivided interest in all of the noted properties:
By City Number % of Net Rentable % of Square Average Core Cities of Units Units Square Footage Footage Unit Size Calgary, AB 5,717 17.2 4,644,009 16.2 812 Edmonton, AB 12,590 37.7 11,061,069 38.6 879 Spruce Grove, AB 160 0.5 122,640 0.4 767 Fort McMurray, AB 352 1.1 281,954 1.0 801 Grande Prairie, AB 645 1.9 539,052 1.9 836 Red Deer, AB 939 2.8 775,615 2.7 826 Other, AB 519 1.6 469,213 1.6 904 Regina, SK 2,046 6.2 1,793,893 6.3 877 Saskatoon, SK 1,710 5.1 1,460,497 5.1 854 Montreal, QC 4,681 14.1 4,303,414 15.0 919 Quebec City, QC 1,319 4.0 1,092,278 3.8 828 Kitchener, ON 329 1.0 263,020 0.9 799 London, ON 2,256 6.8 1,867,146 6.5 828 Total (as at Dec 31, 2019) 33,263 100.0 28,673,800 100.0 862
Boardwalk Portfolio Net Rentable City/ Building # of Square Average Province Property Name Type Units Footage Unit Size Calgary, AB Auburn Landing Low-rise 238 209,976 882 Beddington Court Walk-up 66 50,919 772 Boardwalk Heights High-rise 202 160,894 797 Boardwalk Retirement Community High-rise 124 82,130 662 Brentview Tower High-rise 115 69,310 603 Broadway Centre High-rise 115 80,424 699 Centre Pointe West High-rise 123 110,611 899 Chateau Apartments High-rise 145 110,545 762 Dorsett Square High-rise 109 98,948 908 Elbow Towers High-rise 158 108,280 685 Flintridge Place High-rise 68 55,023 809 Glamorgan Manor Garden 86 63,510 738 Hillside Estates Garden 76 58,900 775 Lakeside Estates Garden 89 77,732 873 Lakeview Apartments Walk-up 120 107,680 897 McKinnon Court Apartments Garden 48 36,540 761 McKinnon Manor Apartments Garden 60 43,740 729 Northwest Pointe Garden 150 102,750 685 Oakhill Estates Townhouse 240 236,040 984 O'Neil Towers High-rise 187 131,281 702 Patrician Village Garden 392 295,600 754 Pineridge Apartments Garden 76 52,275 688 Prominence Place Apartments Garden 75 55,920 746
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Randal House High-Rise 70 56,600 809 Radisson I Townhouse 124 108,269 873 Radisson II Townhouse 124 108,015 871 Radisson III Townhouse 118 124,379 1,054 Ridgeview Gardens Townhouse 160 151,080 944 Royal Park Plaza High-rise 86 66,137 769 Russet Court Townhouse 206 213,264 1,035 Sarcee Trail Place High-rise/Mid-rise 376 301,720 802 Skygate Tower High-rise 142 113,350 798 Spruce Ridge Estates Garden 284 196,464 692 Spruce Ridge Gardens Garden 109 86,351 792 Travois Apartments Garden 89 61,350 689 Varsity Place Apartments Walk-up 70 47,090 673 Varsity Square Apartments Midrise/Low-rise 297 241,128 812 Village Vale Townhouse 54 66,366 1,229 Vista Gardens Garden 100 121,040 1,210 Westwinds Village Garden 180 137,815 766 Willow Park Gardens Garden 66 44,563 675 5,717 4,644,009 812 Edmonton, AB Alexander Plaza Garden 252 203,740 808 Aspen Court Garden 80 68,680 859 Axxess Low-rise 165 149,565 906 Boardwalk Arms A & B Garden 78 64,340 825 Boardwalk Centre High-rise 597 471,871 790 Boardwalk Village I, II & III Townhouse 255 258,150 1,012 Breton Manor Garden 66 57,760 875 Briarwynd Court Townhouse 172 144,896 842 Brookside Terrace Garden 131 196,779 1,502 Cambrian Place Garden 105 105,008 1,000 Camelot Garden 64 54,625 854 Capital View Tower High-rise 115 71,281 620 Carmen Garden 64 54,625 854 Castle Court Garden 89 93,950 1,056 Castleridge Estates Townhouse 108 124,524 1,153 Cedarville Apartments Garden 144 122,120 848 Christopher Arms Garden 45 29,900 664 Corian Apartments Garden 153 167,400 1,094 Deville Apartments High-rise 66 47,700 723 Ermineskin Place High-rise 226 181,788 804 Fairmont Village Garden 424 362,184 854 Fontana Place High-rise 62 40,820 658 Fort Garry House High-rise 93 70,950 763 Galbraith House High-rise 163 110,400 677 Garden Oaks Garden 56 47,250 844 Granville Square Townhouse 48 53,376 1,112 Greentree Village Garden 192 156,000 813 Habitat Village Townhouse 151 129,256 856 Imperial Tower High-rise 138 112,050 812 Insignia Tower High-rise 124 112,864 910 Kew Place Townhouse 108 105,776 979
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Lansdowne Park High-rise 62 48,473 782 Leewood Village Garden 142 129,375 911 Lord Byron I, II & III High-rise 158 133,994 848 Lord Byron Townhouses Townhouse 147 172,369 1,173 Lorelei House Garden 78 65,870 844 Maple Gardens Garden 181 163,840 905 Marlborough Manor Garden 56 49,582 885 Maureen Manor High-rise 91 64,918 713 Meadowside Estates Garden 148 104,036 703 Meadowview Manor Garden 348 284,490 818 Monterey Pointe Garden 104 83,548 803 Morningside Estates Garden 223 167,064 749 Northridge Estates Garden 180 103,270 574 Oak Tower High-rise 70 51,852 741 Parkside Tower High-rise 179 162,049 905 Parkview Estates Townhouse 104 88,432 850 Pembroke Estates Garden 198 198,360 1,002 Pinetree Village Garden 142 106,740 752 Pointe West Townhouses Townhouse 69 72,810 1,055 Primrose Lane Apartments Garden 153 151,310 989 Prominence Place High-rise 91 73,310 806 Redwood Court Garden 116 107,680 928 Riverview Manor Garden 81 62,092 767 Royal Heights High-rise 74 41,550 561 Sandstone Pointe Garden 81 83,800 1,035 Sir William Place Garden 220 126,940 577 Solano House High-rise 91 79,325 872 Southgate Tower High-rise 170 153,385 902 Summerlea Place Garden 39 43,297 1,110 Suncourt Place Garden 62 55,144 889 Tamarack East & West Townhouse 132 212,486 1,610 Terrace Garden Estates Garden 114 101,980 895 Terrace Tower High-rise 84 66,000 786 The Edge Low-rise 182 163,103 896 The Palisades High-rise 94 77,200 821 The Westmount High-rise 133 124,825 939 Tower Hill High-rise 82 46,360 565 Tower on the Hill High-rise 100 85,008 850 Valley Ridge Tower High-rise 49 30,546 623 Victorian Arms Garden 96 91,524 953 Viking Arms High-rise 240 257,410 1,073 Village Plaza Townhouse 68 65,280 960 Vita Estates Low-rise 162 135,454 836 Warwick Apartments Garden 60 49,092 818 West Edmonton Court Garden 82 73,209 893 West Edmonton Village Various 1,176 1,138,368 968 Westborough Court Garden 60 50,250 838 Westbrook Estates Garden 172 148,616 864 Westmoreland Apartments Garden 56 45,865 819 Westridge Estates B Garden 91 56,950 626 Westridge Estates C Garden 90 56,950 633
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Westridge Manor Townhouse 64 69,038 1,079 Westwinds of Summerlea Garden 48 53,872 1,122 Whitehall Square High-rise/Walk-up 598 545,872 913 Wimbledon High-rise 165 117,216 710 12,590 11,061,069 879 Fort McMurray, AB Birchwood Manor Garden 24 18,120 755 Chanteclair Apartments Garden 79 68,138 863 Edelweiss Terrace Garden 32 27,226 851 Heatherton Apartments Garden 23 16,750 728 Hillside Manor Garden 30 21,248 708 Mallard Arms Garden 36 30,497 847 McMurray Manor Garden 44 30,350 690 The Granada Garden 44 35,775 813 The Valencia Garden 40 33,850 846 352 281,954 801 London, ON Abbey Estates Townhouse 53 59,794 1,128 Castlegrove Estates High-rise 144 126,420 878 Forest City Estates High-rise 272 221,000 813 Heritage Square Garden/High-rise 359 270,828 754 Landmark Towers High-rise 213 173,400 814 Maple Ridge On The Parc High-rise 257 247,166 962 Meadow Crest Apartments Garden 162 110,835 684 Noel Meadows Garden 105 72,600 691 Ridgewood Estates Townhouse 29 31,020 1,070 Sandford Apartments High-rise 96 77,594 808 The Bristol High-rise 138 109,059 790 Topping Lane Terrace High-rise 189 177,880 941 Villages of Hyde Park Townhouse 60 57,850 964 Westmount Ridge High-rise 179 131,700 736 2,256 1,867,146 828 Montreal, QC Domaine d’Iberville Appartements High-rise 720 560,880 779 (Longueuil, QC) Le Bienville (Brossard, QC) Walk-up 168 115,600 688 Les Jardins Viva (Longueuil, QC) Walk-up/Garden 112 91,000 813 High-rise/ Nuns' Island Portfolio 3,100 3,106,110 992 Townhouse Complexe Deguire (St. Laurent, QC) High-rise 322 276,324 858 Residence le Quatre Cent (Laval, QC) High-rise 259 153,500 593 4,681 4,303,414 919 Quebec City, QC Complexe Laudance (Sainte-Foy, QC) Midrise 183 134,480 735 Les Appartements Du Verdier Garden 195 152,645 783 (Sainte-Foy, QC) Les Jardins de Merici High-rise 346 300,000 867 Place Charlesbourg Midrise 108 82,624 765 Place du Parc High-rise 111 81,746 736 Place Samuel de Champlain High-rise 130 104,153 801
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Place Chamonix Townhouse 246 236,630 962 1,319 1,092,278 828 Red Deer, AB Canyon Pointe Apartments Garden 163 114,039 700 Cloverhill Terrace High-rise 120 102,225 852 Inglewood Terrace Apartments Garden 68 42,407 624 Parke Avenue Square Walk-up 88 87,268 992 Riverbend Village Apartments Garden 150 114,750 765 Saratoga Tower High-rise 48 53,762 1,120 Taylor Heights Apartments Garden 140 103,512 739 Watson Tower High-rise 50 43,988 880 Westridge Estates Townhouse 112 113,664 1,015 939 775,615 826 Regina, SK Boardwalk Manor Garden 72 60,360 838 Centennial South Townhouse 170 129,080 759 Centennial West Garden 60 46,032 767 Eastside Estates Townhouse 150 167,550 1,117 Evergreen Estates Garden 150 125,660 838 Grace Manor Townhouse 72 69,120 960 Greenbriar Apts. Garden 72 57,600 800 Lockwood Arms Apartments Garden 96 69,000 719 Pines Edge Garden 79 67,298 852 Pines Edge II Garden 79 67,298 852 Pines Edge III Garden 71 62,818 885 Pines of Normanview Townhouse 133 115,973 872 Qu'appelle Village I & II Garden 154 133,200 865 Qu'appelle Village III Garden 180 144,160 801 Southpointe Plaza High-rise 140 117,560 840 The Meadows Townhouse 52 57,824 1,112 Wascana Park Estates Townhouse 316 303,360 960 2,046 1,793,893 877 Saskatoon, SK Carleton Tower High-rise 158 155,138 982 Dorchester Towers High-rise 52 48,608 935 Heritage Townhomes Townhouse 104 99,840 960 Lawson Village Garden 96 75,441 786 Meadow Park Estates Townhouse 200 192,000 960 Palace Gates Garden 206 142,525 692 Penthouse Apartments High-rise 82 61,550 751 Regal Tower I & II High-rise 161 122,384 760 Reid Park Estates Garden 179 128,700 719 St. Charles Place Garden 156 123,000 788 Stonebridge Apartments Garden 162 131,864 814 Stonebridge Townhomes I & II Townhouse 100 135,486 1,355 Wildwood Ways B Garden 54 43,961 814 1,988 1,460,497 854 Other Tower Lane I & II (Airdrie, AB) Garden 163 130,920 803 Elk Valley Estates (Banff, AB) Garden 76 53,340 702
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Boardwalk Park Estates I Townhouse/ 369 306,850 832 (Grande Prairie, AB) Walk-up Boardwalk Park Estates II Townhouse 32 30,210 944 (Grande Prairie, AB) Prairie Sunrise Portfolio Walk-up/High-rise 244 201,992 828 (Grande Prairie, AB) Kings Tower (Kitchener, ON) High-rise 226 171,100 757 Westheights Place (Kitchener, ON) High-rise 103 91,920 892 Springwood Place Apartments Low-rise 160 122,640 767 (Spruce Grove, AB) Sturgeon Point Villas (St. Albert, AB) Walk-up 280 284,953 1,018 1,653 1,393,925 843 Total - As at December 31, 2019: 33,263 28,673,800 862
None of the residential properties in the Assets' portfolio accounts for 10% or more of the combined reportable revenue of Boardwalk REIT.
STRATEGY FOR GROWTH
In November 2017, Boardwalk announced a long-term strategic plan focused on continuing to create value for all of its stakeholders. In addition to continued investment in its core markets by acquiring newly built rental product, developing new rental units and investing back into its existing portfolio, the Trust will also be geographically diversifying on a strategic basis into new, high growth and economically stable rental markets. Strategic diversification should provide Boardwalk with stability and continued growth during future economic volatility, which will result in NOI growth and capital appreciation for its stakeholders. Alberta and Saskatchewan, Boardwalk’s core markets, have historically outperformed the broader Canadian rental market and, despite the cyclical decline experienced in these markets over the recent past, will continue to provide the Trust with a solid foundation to execute its long-term strategic plan. Strategic diversification is a long-term project the Trust plans to accomplish over the next 10 years.
Boardwalk will continue to undertake a counter-cyclical approach to its business by high-grading its portfolio through repositioning as well as from new development on lands the Trust intends to acquire individually and through strategic partnerships, as well as on its own excess land.
Boardwalk’s long-term strategic goal is to have a portfolio that is approximately 50% in the high growth markets of Alberta and Saskatchewan and 50% in other secularly high growth and undersupplied markets including, but not limited to, the Greater Toronto Area and Vancouver. To accomplish this, the Trust intends to strategically partner, acquire and/or develop 10,000 to 15,000 apartment units in these secularly high growth, undersupplied markets, while also divesting a small portion of its non-core assets in Alberta and Saskatchewan. The Trust’s portfolio growth will primarily focus on value creation in major urban markets.
The funding for this strategic plan will be consistent with the Trust’s balanced approach of using debt and equity. This equity capital can come from a number of sources and may include, as the Trust has in the past, the sale of selective non-core assets at prices near or above reported fair values and deploying this freed-up equity back into the strategic process. In addition to this, as will be discussed later in this section under the subheading “Liquidity”, Boardwalk has an adequate level of liquidity. Although the Trust does pay out its taxable income in monthly Distributions to Unitholders, it is of the opinion that, in the long-term, the continued investment of free cash flow back into its repositioning and expansion plan is the best use of capital for the Trust. Accordingly, Boardwalk only distributes its taxable income.
Boardwalk believes that by implementing strategies consistent with its core principles of integrity, teamwork, pro-active and high-quality customer service, social responsibility, as well as a high performing
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and innovative team of employees (“Associates”), it will produce higher sustainable operating cash flows and a continued appreciation of its property values. The result will be enhanced value for all of the Trust’s stakeholders.
Achieving this goal requires the full integration of the Trust’s core strategies of focused investing, superior property management, and the implementation and effective use of new technologies. Boardwalk REIT can best achieve this goal by strategically:
1. Maximizing tenant/customer satisfaction by providing above-average service and accommodation; 2. Acquiring select multi-family residential properties in strategic locations, providing net asset value (“NAV”) growth and diversification; 3. High grading its portfolio through the sale of properties with lower future growth prospects, and the reinvesting of these funds back into other accretive opportunities; 4. Purchasing Trust Units on the open market; 5. Enhancing property values, operating returns and cash flows through pro-active management, property stabilization and capital improvements; 6. Review and consideration of the development of new selective multi-family projects, if the risk adjusted return warrants it; 7. Managing capital prudently while maintaining a conservative financial structure; 8. Pursue long-term, organic growth by maintaining high occupancy and through brand diversification; 9. Managing revenue as well as lowering turnover and other operating costs to optimize NOI; 10. Pursuing opportunities to form selective partnerships or joint ventures, or an exchange of assets; and 11. Reinvestment of released equity from asset sales back into the Trust's portfolio to create additional value-added opportunities.
To support the Trust's overall operating strategy, it is necessary to: • Ensure ample capital is available at all times for acquisitions and value-added enhancements; • Appropriately allocate available capital to existing project enhancement and on-going new acquisitions; • Utilize appropriate levels of debt leverage; • Determine and utilize sources with the lowest cost of capital; • Maintain a solid balance sheet; • Actively manage the Trust's exposure to interest rate and debt renewal risk; and • Optimize the use of National Housing Act (Canada) ("NHA") insurance, which is administered by CMHC, to access more cost-effective debt capital. Maximizing Tenant/Customer Satisfaction
Boardwalk REIT feels the best way to increase long-term Unitholder value is to provide its tenants (“Resident Members”) with an above average level of service and a high-quality product, and, in return, to receive a competitive market rent. Boardwalk REIT offers its Resident Members 24-hour on call maintenance service as well as on-site managers, in addition to a 24-hour, seven (7) day a week toll-free call centre. Boardwalk REIT's properties are of high quality and, in most cases, recently renovated. During
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the 12 months ended December 31, 2019, Boardwalk REIT spent an aggregate of approximately $169.3 million (during the fiscal year ended December 31, 2018 - $144.8 million) for renovations to its existing building portfolio, development of its joint ventures with RioCan and in Brampton, Ontario, as well as investing in property, plant and equipment across its portfolio. Boardwalk REIT continues to review its existing portfolio and, where appropriate, reviews and budgets the required funds for selective value- added upgrades. Boardwalk REIT has also begun the process of developing strategic partnerships with key vendors to acquire and develop new multi-family residential assets. To that end, in Q4 2016, the Trust announced the formation of a joint venture arrangement between RioCan and Boardwalk REIT to develop a mixed-use tower consisting of an at-grade retail podium totaling approximately 10,000 square feet and a 12-storey residential tower with approximately 130,000 square feet of residential space, totaling approximately 162 apartment units at RioCan’s Brentwood Village Shopping Centre in Calgary, AB. Construction, which began in Q4 2017, was substantially completed, and the occupancy permit was received, at the end of January 2020. The project includes two (2) levels of underground parking, provides premium rental housing units minutes from downtown Calgary along the Northwest Light Rail Transit Line, and is in close proximity to the University of Calgary, McMahon Stadium and Foothills Hospital. Boardwalk views RioCan as a like-minded partner who shares similar values and goals as its own, namely, to maximize the potential of well-located, transit oriented mixed-use developments that can be constructed to create new communities that residents are proud to call home. The joint venture involves equal 50% interests in which both RioCan and Boardwalk will provide its retail and residential expertise, respectively, to co-develop the asset. To maximize the value of the development, RioCan will manage the retail component and Boardwalk will manage the residential component, each on a cost basis. Closing on the purchase of Boardwalk’s 50% interest in the land to be developed occurred on November 23, 2017. Based on the determination of total buildable area, Boardwalk paid RioCan $3.2 million for a 50% interest in the sub-divided land at closing. For the year ended December 31, 2019, Boardwalk incurred $16.8 million for its 50% interest. For the year ended December 31, 2018, Boardwalk incurred $9.9 million for its 50% interest. Total construction costs for the project will be between $75 million to $80 million ($37.5 million to $40 million per partner). The project to date is on schedule and on budget.
In the third quarter of 2019, the Trust entered into a second joint venture arrangement with RioCan. Subject to zoning approvals, the partnership will develop two (2) towers, one (1) twenty-five story and the other a sixteen (16) story, in a mixed-use project consisting of 470 residential units totaling approximately 418,000 buildable square feet and approximately 12,000 square feet of retail space. The project is located on a discrete portion of land at RioCan’s Sandalwood Shopping Centre in Mississauga, Ontario. The project proposes three (3) levels of underground parking and to provide premium rental housing in a transit- oriented location along Hurontario Street near Square One Shopping Centre, and easy access onto the 401, 403 and 407 highways. The joint venture involves an equal 50% interest, in which each partner will provide best-in-class retail and residential expertise to develop and operate the asset. The land was 100% owned by RioCan. Subject to zoning approval and confirmation of total buildable area, the total purchase price has yet to be finalized. To date, the Trust has paid $11.6 million (including transaction costs) for its 50% interest in the land. Zoning approvals are anticipated in early 2020.
In the fourth quarter of 2018, Boardwalk also entered into a 50:50 joint venture partnership agreement to develop a 365-unit multi-residential, purpose-built rental complex, located near downtown Brampton, Ontario, directly adjacent to the Go Transit Station. It is estimated that the total cost for the project will be approximately $200 to $215 million. The proposed project is a rental complex with approximately 10,700 square feet of retail space, above and underground parking, and 380,000 square feet of residential space spread between two (2) concrete high-rise towers. Excavation and shoring commenced in January 2019, was completed in summer 2019 and framing is now underway. For the year ended December 31, 2019, the Trust contributed $15.9 million of capital to this limited partnership.
Boardwalk’s development opportunities include additional projects to be built on the Trust’s excess land density. These developments are in various stages of planning and approval and will further add newly constructed assets to the Trust’s portfolio.
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Acquiring Select Multi-Family Residential Properties
Boardwalk REIT seeks to expand its property portfolio by acquiring multi-family residential properties within Canada. Future real property acquisitions will be subject to specific investment guidelines and the operation of Boardwalk REIT and its subsidiaries is subject to specific operating policies, as described elsewhere in this AIF. The Trustees are responsible for the general control, direction and management of Boardwalk REIT and have determined that, in evaluating a potential acquisition, the Trust’s investment priorities should be based on the following: 1. the target asset must be an Apartment; 2. the overall anticipated return from the target asset must be Risk Adjusted; 3. the target asset must be located in a Major Market; 4. the Apartment must be Well Located; and 5. the Apartment must be of a Better Quality.
To further assist in the interpretation of the above noted investment criteria the following enhanced interpretations are provided.
Apartment - a structure that has a roof and walls that stands permanently in one place;
Risk Adjusted – a focus on investments where anticipated returns are justified given the risk associated with the investment. The Risk Adjusted rate is adjusted internally on an ongoing basis.
Major Centres – Markets that have a solid growth economy and have sufficient apartment stock to develop economies of scale.
Well Located – in areas of Major Centres that command higher than average rents.
Better Quality Assets – The asset has no functional obsolescence, (i.e. a good unit mix, good common areas, strong construction specifications).
In reviewing potential apartment acquisitions, Management always keeps in mind the short and long term accretiveness of the transaction under review. As a benchmark, the Trust will look to the underlying capitalization rate that its Trust Units are being valued at on the Toronto Stock Exchange. On occasion, an apartment building may come up for sale that potentially may transact at a capitalization rate that is lower than the Trust’s implied cap rate. However, further examination may find underlying economics, such as current rental rates are well below market rates and, once these are stabilized, the asset itself will be accretive.
The demand for multi-family investment properties in Canada continues to be strong. As a result, capitalization rates continue to remain low and high prices for multi-family assets continue to be the trend. Recent transactions on existing assets have shown that the appetite for multi-family investment properties continues to be high, and transaction capitalization rates continue to decrease. Private and institutional buyers are taking a longer-term approach to evaluations, using higher stabilized rents, normalized vacancy and lower cap rates, reflecting near record low Government of Canada 10-year treasury yields and the continued difficulty in finding apartment rental assets. There continues to be a significant spread between the implied value of Boardwalk’s apartment assets as represented by the implied value of Boardwalk REIT Trust Units and the evaluation of comparable apartments in Western Canada that have recently sold.
In a competitive acquisition market, like the one the Trust currently finds itself, the focus of Management is on growing the value, quality and service of its existing portfolio through its most valuable asset, its team of employees (“Associates”). The Trust’s most significant returns come from growing the expertise of its Associates. By way of example, Boardwalk’s program over the last 10 plus years to reduce
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the contracting out of repairs and maintenance and to increase the internalization of those functions has led to higher productivity among the Trust’s Associates. While the Trust will actively seek ways to increase the quality of its portfolio through accretive acquisitions and new apartment development, the Trust has and will continue to focus on improving the quality, value and service of its existing portfolio, which, management is confident, will lead to higher revenues and FFO.
2019 Acquisition Summary: # Units Purchased Purchase Cost TOTALS: 124 $36,800,000
The Trust is well positioned to create value when opportunities arise. Boardwalk continues to monitor the market for accretive acquisitions opportunities, including a focus on newly constructed multi- family communities. Sale of Properties
The Trust has an ongoing program of selling non-core properties in its portfolio and re-deploying the released capital to acquiring or developing additional properties, distributing its taxable income (and any capital gain) to its Unitholders, reinvesting in its existing properties to achieve superior returns, developing new multi-family properties, and/or purchasing its Trust Units for cancellation. Taxable proceeds from the sales of these assets must be distributed to unitholders pursuant to the Income Tax Act (Canada). The Trust continues to review all available options that Management believes will provide the optimal return to Unitholders.
Any potential sale of such select non-core properties will be subject to “standard” purchaser’s conditions and may be subject to “non-standard” purchaser’s conditions. “Standard” purchaser’s conditions include such things as satisfactory due diligence and successful financing, which are usually satisfied by a purchaser over the course of an agreed upon amount of time. Any other purchaser’s conditions, other than satisfactory due diligence or successful sources of financing, are usually deemed “non-standard” and include such things as engineering reports, variances from certain zoning requirements or corrections of title defects. “Non-standard” and “non-customary” purchaser’s conditions are not usually satisfied over the course of an agreed upon time, but usually require positives steps by the purchaser and/or vendor and decrease the probability of a successful sale. Accordingly, as of December 31, 2019, none of such select non-core properties were-classified by the Trust as “properties held for resale”. The number and type of property sales will be driven by a number of sale criteria that include but are not limited to:
• The property or a market is determined to be “mature” with continued limited upside as compared to other investment opportunities. • Market forces, in some economic environments, which create an opportunity to sell assets at values in excess of the existing value of the Trust’s overall implied market value. • On a selective basis, the Trust may determine that, rather than the outright sale of a selective property, it may be in its best interest to convert an existing property, subject to the requirements of applicable law, including applicable tax law governing income trusts, to individual condominium units and, subsequently, sell these units on an individual basis. • Joint Venture opportunities where the Trust contributes management services and selected assets in exchange for cash and a reduced ownership. • The Trust will only proceed with the sale of non-core real estate properties if market conditions justify the disposition and Boardwalk has an alternative use for the net proceeds generated.
As part of this strategy, equity released by these sales would be channelled to more accretive opportunities such as, but not limited to, the acquisition of other apartment units, the continued capital upgrade of the remaining property portfolio, the payment of special distributions to Unitholders, or the
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acquisition of the Trust’s REIT Units or other securities trading in the public market. The Trust disposed of 278 non-core apartment units in 2019 for gross proceeds of $41.4 million. Investment Philosophy
Throughout Boardwalk’s history, the Trust has always looked for opportunities to create value for its Unitholders. This is achieved by investing managerial resources and capital in activities that increase funds from operations (“FFO”) per Trust Unit; adjusted funds from operations (“AFFO”) per Trust Unit; and adjusted cash flow from operations (“ACFO”) per Trust Unit on a sustained basis, as well as increasing net asset value (“NAV”) per Trust Unit in the process. Boardwalk includes the development of new apartments on the Trust’s existing land as well as the potential acquisition of new land for future development projects as initiatives to create additional value.
As noted above, the Trust has adopted a long-term strategic plan, which includes expanding its investments outside of Alberta and Saskatchewan and into high-growth markets, including, but not limited to, the Greater Toronto Area and Vancouver, to allow the Trust to geographically diversify its brand of housing into new, undersupplied markets. Built into this strategic plan is Boardwalk’s brand diversification initiative, which includes common area upgrades, building improvements and suite renovations (discussed in more detail below under the subheading “Brand Diversification”), to create the best long-term value for the Trust’s Unitholders.
Notwithstanding the foregoing, Boardwalk continues to take a disciplined approach to acquisitions, dispositions, and development. As a component of this, any acquisition the Trust is considering is put through stringent analysis to ensure that it is accretive under the appropriate conditions. As a result of this analysis, Boardwalk’s portfolio has not seen substantial growth through acquisition in recent years, owing primarily to the fact that the risk adjusted cost of acquisition was not in the best interests of the Trust, relative to the allocation of capital into the Trust’s own portfolio.
As previously noted under the heading “Sale of Properties”, the Trust has an on-going program of selling non-core properties in its portfolio and re-deploying the released capital to acquiring additional properties, development and building of new apartments, distributing its taxable income, including any taxable portions of capital gains, to its Unitholders, and investing it back in its existing properties to achieve superior returns, developing new multi-family properties and/or buying back its Trust Units for cancellation. To that end, in 2019, non-core properties, consisting of 278 apartment units, were disposed of for a total selling price of $41.4 million.
The Trust continues to review all available options that management believes will provide an optimal return to Unitholders and looks at all potential investment opportunities with this guiding principle in mind. Accordingly, in addition to the above noted investment alternatives, the Trust will, on a selective basis, invest its capital in apartment assets at capitalization rates below the implied capitalization rate of the Trust’s existing portfolio if, in the opinion of Management and the Board, such acquisitions are of higher quality than the average quality of the REIT’s apartment portfolio and will create long-term value for Unitholders. Cost of Capital
The Trust’s cost of capital is generally defined as its weighted average cost of raising incremental capital. Investment opportunities are partially evaluated by comparing their internal rates of return against the Trust’s cost of capital. In other words, it can be thought of as the rate of return that the Trust would otherwise be able to earn given the same level of risk. As with most real estate entities, the Trust’s cost of capital calculation is the combination of leverage target, the marginal cost of debt and the marginal cost of equity. As discussed in other sections of this AIF entitled “Managing Capital” and “Liquidity”, the Trust currently has access to a lower cost of debt through its access to the NHA insured market. However, even
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this market has different levels of risk that are mainly priced through the term selected on the related mortgage. That is, the longer the mortgage finance term, the longer the borrower is removing the interest rate risk from the investment. As of February 2020, estimated CMHC-insured five and ten-year mortgage rates were 2.3% and 2.4% respectively. The other major component in the Trust’s cost of capital relates to the marginal cost of equity required for the investment. The determination of this cost has a number of different models and definitions. However, for simplicity purposes, Boardwalk determines its current cost of equity as the amount of AFFO reported compared to its current market capitalization. For 2019, the Trust reported AFFO per Unit of $2.10 on a fully diluted basis. When compared to the Trust Unit's market price of $45.93 as at December 31, 2019, this equates to approximately 4.57% as its cost of equity. Further details of the Trust’s cost of capital can be found in Note 30 to the consolidated financial statements for the year ended December 31, 2019. See “Additional Information”. Liquidity
Liquidity refers to the Trust’s ability to generate, and have available, sufficient cash to fund its ongoing operations and capital commitments as well as its distributions to Unitholders. Generally, distributions are funded from ACFO, a non-GAAP cash flow metric defined above under the heading “PRESENTATION OF FINANCIAL INFORMATION AND NON-GAAP MEASURES – Adjusted Cash Flow From Operations”. However, in common with the majority of real estate entities, Boardwalk relies on lending institutions for a significant portion of capital required to fund mortgage principal payments, capital expenditures, acquisitions, Trust Unit buybacks, and repayment of maturing debt. Over the past number of years, Boardwalk has observed a significant increase in the borrowing standards of many of its key lending partners as a result of heightened sensitivity to possible weaknesses in the economy. These more stringent standards have not materially affected Boardwalk’s borrowing capability.
To mitigate the risk of renewal, the Trust utilizes NHA mortgage insurance, the benefits of which are discussed later in this AIF under the heading “Managing Capital”. Approximately 99% of the Trust’s secured mortgages carry NHA insurance. In volatile times, the ability to access this product has been very beneficial to the Trust as a whole.
The access to liquidity is an important element in the implementation of the Trust’s overall strategy. The continued low interest rate environment has allowed Boardwalk to renew its existing maturing mortgages at favourable interest rates. In addition, Boardwalk has been able to access additional capital from its properties through the continued use of the NHA insurance program, which is being offered at attractive rates. Further interest savings, however, will become more limited as interest rates have started to reverse the declining trends seen over the past several years. Boardwalk defines liquidity to include: cash and cash equivalents on hand; any unused committed revolving credit facility; plus any committed secured financings. The Trust’s current liquidity position remains stable. As of December 31, 2019, the Trust’s cash position was $35.2 million, compared to the $38.1 million reported as of December 31, 2018. As at December 31, 2019, the Trust also had $199.7 million of unused credit facility (December 31, 2018 - $199.7 million) and committed secured up-financing of $22.8 million (December 31, 2018 - $15.3 million), bringing total liquidity to $257.8 million (December 31, 2018 - $253.1 million).
In addition to this, the Trust currently has 1,333 unmortgaged rental apartment units, of which 257 units are pledged against the Trust’s committed revolving credit facility. It is estimated under current CMHC underwriting criteria, that the Trust could obtain an additional $139.3 million of new proceeds from the financing of its current unmortgaged assets.
Approximately 99% of Boardwalk REIT’s secured mortgages carry NHA insurance. Maturing mortgages already have commitments at interest rates lower than their maturing interest rates.
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The reader should also be aware that of the $317.6 million of secured mortgages coming due in 2020, all have NHA insurance, and represent, in aggregate, approximately 41% of current estimated “underwriting” values on those individual secured assets. Interest rates on five (5) and 10-year NHA insured mortgages at year-end were 2.3% and 2.4%, respectively. The reader, however, is cautioned that these rates do fluctuate and, by the time these maturing mortgages are set for renewal, with or without additional financing, interest rates may have changed materially.
Even with the NHA insurance program attached to its secured mortgages, however, the Trust is still susceptible to changes in market interest rates. To mitigate this risk, the Trust has forward locked or renewed $41.1 million, or 13%, of its $317.6 million of 2020 mortgage maturities. The weighted average contracted interest rates on those renewals is 2.35%, for an average term of eight (8) years. Brand Diversification
It is the goal of the Trust to not only diversify geographically, but also to diversify through its brand.
The spectrum of rental housing in Canada has expanded over the last few years with rental demand seen across the price spectrum from affordability to affordable high-end luxury. As a result, the ability to offer a more diverse product offering should attract a larger demographic to the Boardwalk brand.
Boardwalk Living – Affordable Value: Boardwalk Living features classic suites for our Resident Members who appreciate flexibility, reliability, and value that comes with a quality home.
Boardwalk Communities – Enhanced Value: Boardwalk Communities feature modernized suites and choice amenities for those who value flexibility with all the comforts that come with the perfect place to call home.
Boardwalk Lifestyle – Affordable Luxury: Boardwalk Lifestyle features luxury living with modern amenities, designer suites and a contemporary style for those who value life experiences and prefer the freedom to enjoy them.
Boardwalk’s brand diversification, once fully completed, will consist of approximately five percent (5%) Lifestyle, 43% Communities and 52% Living suites.
Starting in 2017, Boardwalk increased its capital allocation to its current building repositioning and rebranding program, creating long-term value while continuing to offer many upgraded affordable communities. Each of the three (3) brands created have different renovation specifications depending on need and anticipated returns. Reported market rents are adjusted upward based on an expected rate of return on the strategic investment. The Trust believes that these renovations will achieve future rent adjustments in excess of market rents as the Western Canadian economy continues to stabilize and recover.
“Boardwalk Lifestyle”, which will exemplify upgraded, luxury suites, will receive the highest level of overall renovations, including significant upgrades to suites and common areas. Additional amenities such as upgraded fitness facilities and wi-fi bars, as well as concierge services, may be added, when appropriate. “Boardwalk Communities”, the Trust’s core brand, will convey enhanced value and will receive major suite upgrades based on need as well as upgrades to existing common areas. Boardwalk’s most affordable brand, “Boardwalk Living”, will receive suite enhancements on an as needed basis, as noted, with the focus being on providing affordable value to this demographic segment. In determining a brand that a particular rental community will carry, the Trust looks at a number of criteria, including the building’s location, proximity to existing amenities, as well as suite size and layout. Once renovations are completed, Boardwalk adjusts the rents on these individual suites with the goal of achieving an eight percent (8%) return on investment.
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The majority of the Trust’s portfolio will remain in its Living category, as affordability remains the largest demographic in the rental market in Canada. Boardwalk’s offering in this category features high value for an affordable price. Boardwalk Communities reaches a demographic that the Trust believes may be underserved by the broader market and features an enhanced level of value for an increasing number of renter’s who are seeking greater features and amenities without sacrificing flexibility. Boardwalk Lifestyle provides luxurious living, rich in features, location and amenities at an affordable price. The Trust believes that while this segment of the market remains the smallest amongst the pricing spectrum, it does present the greatest potential for increased margins for the Trust. Brand diversification provides the Trust with a product and service offering that caters to the needs of a broader range of Resident Members, while also allowing the Trust the ability to high-grade its portfolio organically.
The Trust believes these investments will enhance long-term value; however, it recognizes the short-term effects of this program, namely higher vacancy and incentives in certain communities. Rebranding and repositioning communities will take time and construction causes disruption to existing Resident Members. Depending on the level of investment, rebranding and repositioning may also result in higher turnover. Boardwalk continues to reduce the vacancy loss associated with suites being renovated by reducing both the time and cost to complete them.
Management believes that the Trust’s core Alberta and Saskatchewan portfolio will be well- positioned to outperform in their respective markets through various cycles of growth and can be balanced with diversification in other geographic locations through growth in other major Canadian cities. The growth management envisions is similar to the growth Boardwalk has experienced over the last 34 years: a track-record of delivering NAV creation through quality, service and organic growth, as well as accretive acquisitions and developments. Management believes achievement of these goals are the best way for Boardwalk to continue to provide the best quality homes for our residents. Enhancing Property Values
Boardwalk REIT enhances the value of its properties through effective leasing and property management, sustainable rent increases and renovations to its apartment units, as well as by strictly controlling operating expenses and capital expenditures, all in an effort to optimize net operating income. This combination of factors results in the maximization of effective rental rates as expiring leases are renewed or new leases are signed. Boardwalk REIT's strategic innovations are designed to: (i) maximize cash flow; (ii) include value enhancing capital expenditures; and (iii) include portfolio-wide centralization of purchasing of materials and services to take advantage of economies of scale as well as a retail specialization leasing program. Net Operating Income Optimization
Boardwalk continues to focus on optimizing NOI. This focus requires the Trust to manage not only revenues, but also related operating costs, and take these both into consideration when determining a service and pricing model. Lowering overall turnover and maintaining competitive lease rates, while continuing to focus on a high-quality level of service continues to be the model that to date has delivered the Trust’s most stable and growing income source. This strategy is region specific and these variables are in constant flux. In a more competitive market, the Trust takes a more preventative approach of increasing its offering of suite and community specific rental incentives as well as, where warranted, adjusting reported market rents. The acceleration of these incentives in slow recovering rental markets, like Alberta and Saskatchewan, are an attempt by the Trust to keep overall occupancy levels higher than market occupancy levels. This should well-position the Trust for unwinding incentives and increasing rents when market fundamentals return to balance. It has been management’s experience that this preemptive approach has historically resulted in optimization of NOI.
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In addition, in these competitive markets, the Trust proactively tries to renew leases before term maturity. In select markets, the Trust may also forward-lock future rentals while not collecting revenues for certain months in the immediate future. This means the Trust may decide to rent a suite in December with the Resident Member not moving in until the following year. Although the suite is rented, it will not generate revenue until the Resident Member actually moves in, for example, in January, which corresponds to the next fiscal period. The percentages reported as occupancy levels (see table below under subheading “Portfolio Occupancy Rates”) represent those occupied units generating revenue for the period noted. The Trust closely monitors “apartment availability”, which represents unoccupied units not generating revenue for the period, after taking into account forward-committed leases. Although occupancy rates provide a good indication of current revenue, apartment availability provides the reader a more relevant indication of future potential revenue. As a result of the acquisitions of legacy assets and development of newly built assets, portfolio occupancy reported is on a same-store basis.
The Trust believes that combining the Net Operating Income Optimization strategy with its strategic investment program results in a more diverse product offering for its Resident Members and greater overall value creation for the Trust. The Trust also understands that the implementation and completion of these strategies does have some short-term consequences, including short-term increases in vacancy losses, as the timing of these enhancements and extensive renovations are resulting in longer periods of time that suites are not available to be rented. It is management’s belief, however, that a focus on the longer-term value creation is in the best interest of all stakeholders. As the Trust has in the past, Boardwalk will constantly review its existing programs, measuring them against resident demand, viability and expected return. Where appropriate, the Trust will make any necessary changes to fine-tune them.
One component of Boardwalk’s NOI optimization strategy is its rental revenue strategy, which involves the continuous active management of four (4) key variables: occupancy levels, market rents and turnover, as well as suite and community specific incentives. Despite a slow recovery of the Alberta and Saskatchewan economies relating to the decrease in oil prices since 2014, this strategy has allowed the Trust to report relatively high occupancy levels. In the fourth quarter of 2019, average occupancy for Boardwalk’s portfolio, excluding new acquisitions, was 96.62%, a slight increase compared to the fourth quarter of 2018, the same period last year, though higher than the estimated and reported CMHC market average. Average monthly rents increased to $1,132 in December of 2019 from $1,094 in December of 2018, and average occupied rents for the period also increased to $1,182 versus $1,138 for the same period last year. Average market rents for December of 2019 have increased to $1,248 from $1,171 in December of 2018 and are sequentially higher than the beginning of the year as the Trust has seen an increase in market rents in its Ontario and Quebec portfolios. Additionally, the Trust has increased market rents at its communities where improvements have been made, such as the Trust’s Renovation and Re-Positioning Program. See “Property Re-Positioning Program”. The Trust continues to see its loss to lease turn positive as a result of marginal increases to market rents in certain rental markets. Portfolio Occupancy Rates Annual Comparative (same store)
2020 2019 2018 Jan Total Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Calgary 95.13% 96.77% 97.24% 97.00% 96.78% 96.06% 95.76% 95.38% 96.12% 96.33% 95.23% Edmonton 93.62% 95.25% 95.29% 95.28% 95.74% 94.72% 95.26% 95.55% 95.73% 94.92% 94.84% Fort McMurray 93.73% 92.34% 90.46% 91.97% 93.30% 93.65% 93.13% 95.00% 96.03% 92.73% 88.76% Grande Prairie 94.58% 95.72% 96.18% 96.34% 95.61% 94.74% 95.34% 96.54% 95.92% 94.38% 94.53% Kitchener 98.78% 98.66% 98.38% 98.99% 98.58% 98.68% 98.40% 98.48% 97.97% 98.58% 98.58% London 98.05% 98.37% 98.16% 98.60% 98.45% 98.26% 98.18% 98.32% 98.66% 97.85% 97.91% Montreal 99.18% 98.67% 98.72% 98.34% 98.63% 98.99% 96.51% 96.42% 95.86% 95.92% 97.85%
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2020 2019 2018 Jan Total Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Quebec City 98.49% 97.86% 96.93% 98.21% 97.91% 98.39% 96.33% 95.87% 96.83% 95.97% 96.67% Red Deer 93.70% 95.66% 97.05% 96.49% 95.63% 93.45% 94.63% 93.65% 96.06% 95.24% 93.57% Regina 94.78% 95.32% 96.40% 95.51% 94.02% 95.36% 95.00% 95.04% 96.25% 94.00% 94.70% Saskatoon 96.67% 96.43% 96.36% 95.42% 96.50% 97.43% 95.69% 95.39% 95.42% 96.01% 95.95% Verdun 99.39% 99.60% 99.66% 99.61% 99.48% 99.66% 99.42% 99.43% 99.44% 99.20% 99.61% Total 95.50% 96.50% 96.64% 96.56% 96.62% 96.19% 96.05% 96.08% 96.46% 95.88% 95.77%
In fiscal 2019, the Trust reported a year-over-year increase of 45 basis points in its overall same- store occupancy rate, an increase from 96.05 to 96.50. Improvements in the Trust’s Western Canadian rental markets and strong occupancy levels in Ontario and Quebec contributed to the overall occupancy rate increase. As a strategy, the Trust is constantly adjusting market rents based on property-specific demand and supply. Year over year, Calgary and Edmonton saw occupancy levels increase by 101 and decrease one (1) basis point, respectively, to 96.77% and 95.25%, respectively. Please note that Calgary does not include the 299-unit portfolio acquisition completed in November 2018 and Edmonton does not include the 124-unit acquisition completed in April 2019. Similarly, Regina saw occupancy levels increase to 95.32% in 2019 compared to 95.00% in 2018. Note that Regina’s occupancy for fiscal 2019 does not include the non- stabilized 71-unit, Pines Edge Phase III building, which was substantially completed at the beginning of July 2018. See “New Apartment Development”. Including that development in the current quarter would result in an occupancy rate of 95.25% for Regina. Saskatoon saw occupancy levels increase to 96.43% in 2019 compared to 95.69% in 2018. As markets stabilize, the Trust expects volatility in occupancy as it tries to maintain occupancy levels at approximately 97%.
Boardwalk REIT strives to acquire, develop or retain assets in those markets that demonstrate positive economic prospects. Boardwalk REIT continues to focus on markets that are typified by strong economic outlook and relatively low vacancy rates.
With aggressive leasing efforts and a diversified portfolio, management believes that Boardwalk REIT is well-positioned to continue to expand to other regions in the future. A significant portion of the Trust's rentable portfolio is located in the Province of Alberta, with 63% of its total units as at December 31, 2019. Alberta and Saskatchewan led Canada's economic and job growth between 2010 and 2015. However, with lower resource prices, which some speculate could last for an extended period of time, Alberta’s and Saskatchewan’s economies contracted in 2016. This contributed to weaker employment numbers, a tempering of housing demand and housing starts, and a decline in net migration, which had a corresponding impact on Boardwalk’s rental and occupancy levels. Still unknown is the impact to employment of Alberta’s minimum wage increase to $15 an hour in 2018, the imposition of the federal carbon tax in Alberta, Saskatchewan and Ontario at the rate of $20 per tonne, as well as the various climate change plans of the different levels of government in regions where the Assets are located. Boardwalk continued to experience improvement in its western rental markets, which it has augmented with a continued focus on Resident Member service and proactive lease renewals. Non-oil-producing provinces, like Ontario and Quebec, are expected to continue to see moderate GDP and employment growth as lower crude oil prices, a lower Canadian dollar and lower borrowing costs provide some stimulus to increased consumer spending, as well as manufacturing and exporting activities in the midst of higher U.S. demand.
While the apartment rental market still remains one of the most affordable housing options in Canada, Boardwalk continues to monitor the level of demand for more valued accommodations, such as rental housing, which has been impacted by the low reported oil prices and, consistent with its existing operational strategy, has adjusted suite and community selective incentives to address this and maintain occupancy levels well above current market conditions. Where required, the Trust has also adjusted selective rental market rates as part of its overall strategy of maintaining higher occupancy levels in these more challenging times.
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Boardwalk REIT believes the fundamentals of its asset class, and, in particular, its specific assets, generally remain strong. This strength is mainly due to the affordability of renting versus the cost of owning a home. This fact has kept overall occupancy at reasonable levels and, when combined with the non-exposure to any one or small group of Resident Members, has kept risks low. As a result, Boardwalk is well positioned to take advantage of rental market opportunities in Alberta and Saskatchewan as their economies improve.
Supply Versus Demand & Impact on Reported Occupancy (Same store)
The issue of demand and supply, as with any industry, is an important performance indicator for multi-family real estate. The below chart attempts to show the total move-outs (supply) compared to total move-ins (demand) and the resulting impact on reported occupancy relating to the Trust’s portfolio. The cumulative impact of demand being greater than supply, or vice versa, is the primary driver of reported occupancy rates. In recent years, Boardwalk focused on maintaining high occupancy levels while optimizing turnover costs. The reader is cautioned that adjusting market rental rates is an ongoing process for the Trust and is consistent with its overall strategy of optimizing overall net operating income. Consequently, it will adjust rents upward or downward when it is deemed necessary.
Vacancy Loss and Incentives
Vacancy loss and rental incentives are strong indicators of current and future revenue performance. Depending on specific market conditions, to best manage overall economic rental revenue, the correct balance between rental incentives and vacancy loss is important. On a quarterly basis, the below chart details rental incentives offered (but excludes amortization of past incentives) versus vacancy loss. Select incentives are continuing in some parts of the Trust’s Alberta and Saskatchewan markets to maintain occupancy levels. Boardwalk REIT will continue to manage its overall revenues through three (3) key revenue variables, notably, market rents, occupancy levels, as well as suite and community selective incentives. The Trust continues to focus on maximizing overall revenues through the management of these key revenue variables.
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Given the slower-than-expected recovery of rental markets, particularly in Alberta and, to a lesser extent, in Saskatchewan, and the uncertainty resulting from lower oil prices, Boardwalk's continued focus, in certain regions, is on maintaining and increasing occupancy in the short term by offering various suite and community specific incentives in exchange for longer-term leases.
Occupancy Sensitivity
As with all real estate rental operators, Boardwalk REIT’s financial performance is sensitive to occupancy rates. Based on the current reported market rents, a one percent (1%) annualized change in reported occupancy is estimated to impact overall rental revenue by approximately $4.6 million, or $0.09 per Trust Unit on a diluted basis. New Apartment Development
In the past, the development of multi-family apartment units by the Trust was not a significant part of its overall business strategy. The main reason was due to management’s opinion that the anticipated return on development was far below other available risk adjusted capital allocation alternatives, such as the acquisition of existing apartment units in the Trust’s target markets and/or the buyback of Trust Units for cancellation. Over the last number of years there has been a change in the multi-family apartment environment in Canada. Over this period there has been a significant increase in the market value of rental apartments. This increase has been mainly driven by a significant compression in market capitalization rates, which, in turn, has been the result of a prolonged low interest rate environment in Canada.
With this increase in the market value of apartments, there has been a significant decrease in the expected returns from the above noted allocation alternatives to a level that warrants a measured allocation of capital to the area of new apartment development, particularly on excess land the Trust currently owns. Accordingly, the Trust has recently pursued new apartment development on some of its excess density. To that end, as of November 7, 2013, the Trust completed its first development project, Spruce Ridge Gardens, a 109-unit, wood frame, four-storey, elevatored asset on existing excess land the Trust owns in Southwest Calgary, Alberta. The project was completed on time and on its original budget of approximately $19 million. Boardwalk received an occupancy permit from the City of Calgary, and Boardwalk completed the lease-up phase of this project in 2014. Prior to construction, the Trust applied for a rent subsidy grant from the Province of Alberta’s “Housing Capital Initiatives” to receive a maximum of $7.5 million to assist in the development of this property. As of December 31, 2014, all of the $7.5 million amount was received by the Trust. In return for the grant, the Trust agreed to classify 54 of the 109 units
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as “affordable”, with rental rates set at 10% below average Calgary market rents for 20 years. The remaining $11.5 million required to complete the project came from Boardwalk’s cash on hand. The Trust estimated the stabilized unlevered return of this project to be between 6.5% and 7.0%, including, as estimated, $4.25 million ($39,000 per apartment unit) for the excess land allocated to this project. In accordance with IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance under International Financial Reporting Standards (“IFRS”), this grant will be recognized in profit or loss on a systematic basis over the periods in which the Trust recognizes revenue from the 54 units classified as affordable units, resulting in achievable rents being much closer to market rents. For the year ended December 31, 2019, $378 thousand was recognized in profit under rental revenue for this grant (December 31, 2018 $378 thousand).
The Trust defines “Stabilized Properties” as properties that have been owned by Boardwalk for a 24-month period or greater. As such, Spruce Ridge Gardens is a stabilized property, and any reference to stabilized properties or same store properties in this AIF includes Spruce Ridge Gardens.
At the end of January 2016, the Trust completed the first phase of construction for a 79-unit, wood frame building on excess land at its property known as Pines of Normanview in Regina, Saskatchewan. The Project, “Pines Edge 1”, was completed at a total cost of $13.4 million, below the original budget of $14.1 million. The four-storey building consists of 13 one-bedroom and 66 two-bedroom units, with a single level of underground parking. The development’s stabilized unlevered return is estimated to range from 6.5% to 7.0%, excluding land. The Trust commenced construction of phase two (2) in 2016, a 79-unit replica of phase one (1) with the addition of nine-foot (9’) ceilings, which was substantially completed by the end of June of 2017, both on time and on budget. The stabilized unlevered return is estimated to range from six (6) to seven (7) percent, excluding land. Construction of the 71-unit phase three (3) was completed in July 2018, also on time and on budget, with construction costs of $13.2 million. Once stabilized, it is estimated to provide an unlevered return of 6.00% to 6.50%. The entire Pines Edge development consists of a total of five (5) phases and will add 364 apartment units to Boardwalk’s Regina, Saskatchewan property portfolio when all phases have been completed. Completion of the last two (2) phases will depend on overall market conditions in Regina.
In Q4 2016, the Trust announced the formation of a joint venture arrangement between RioCan REIT and Boardwalk REIT to develop a mixed-use tower consisting of an at-grade retail podium totaling approximately 10,000 square feet and a 12-storey residential tower with approximately 130,000 square feet of residential space, totaling approximately 162 apartment units at RioCan’s Brentwood Village Shopping Centre in Calgary, AB. For more information on this joint venture development between RioCan and the Trust, see “Maximizing Tenant/Customer Satisfaction” above.
In Q4 2018, The Trust completed the formation of a joint venture agreement between Redwood Properties (“Redwood”) to develop two (2) mixed-use towers consisting of an at-grade retail podium totalling approximately 10,700 square feet, as well as 25 and 27 storey residential towers with approximately 380,000 square feet of residential space, totalling approximately 365 apartment units, located near downtown Brampton, Ontario, one (1) block from the Brampton GO station. For more information on the joint venture development between Redwood and the Trust, see “Maximizing Tenant/Customer Satisfaction” above. In the third quarter of 2019, the Trust entered into a second joint venture arrangement with RioCan. Subject to zoning approvals, the partnership will develop two (2) towers, one (1) twenty-five story and the other a sixteen story, in a mixed-use project consisting of 470 residential units totaling approximately 418,000 buildable square feet and approximately 12,000 square feet of retail space. The project is located on a discrete portion of land at RioCan’s Sandalwood Shopping Centre in Mississauga, Ontario. For more information on this joint venture development between RioCan and the Trust, see “Maximizing Tenant/Customer Satisfaction” above.
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The Trust continues to explore other viable development opportunities for multi-family apartment buildings on excess land the Trust currently owns and other potential land opportunities available to the Trust. Continued low interest rates and the potential for labour market volatility in Alberta and Saskatchewan may present an opportunity for the Trust to accelerate its development pipeline to maximize Unitholder value in the near term. The sustained high demand for multi-family investment properties, which has resulted in continued low capitalization rates, presents a unique opportunity for the Trust to continue the development of multi-family rental property in order to improve the Trust’s portfolio and enhance value for Unitholders.
Any future development opportunity will require a separate case by case analysis of the merits of each individual project and, depending on such analysis and general economic conditions, Boardwalk REIT will determine if additional development projects are warranted. Historically, one of the biggest risks to real estate valuations is the building of oversupply in a particular market, which results in significant corrections of property values market wide.
For the year ended December 31, 2019, the Trust expended $30.1 million on total development costs compared to $18.9 million for the prior year. Investing in Boardwalk’s Properties - Value Added Capital Improvements and Property Re-Positioning Programs
The Trust believes the quality of Boardwalk’s communities continues to drive long-term revenue growth and stability. Accordingly, the Trust has a continuous capital improvement program with respect to its investment properties that is designed to extend their useful lives, improve operating efficiency, enhance appeal and earnings capacity (as well as maintaining the latter) and meet Resident Member’s expectations, as well as meet health and safety regulations. The Trust invested $123.2 million during 2019 to maintain and further enhance the curb appeal and quality of the Trust’s assets. In addition, the Trust invested approximately $46.0 million, in its joint ventures with RioCan and Redwood, and to explore other development opportunities on excess land the Trust currently owns. Boardwalk’s vertically integrated structure allows many repair and maintenance functions, including landscaping, painting and, among other areas, suite renovations to be internalized. A continued focus on completing more of these functions in-house has resulted in improved quality, productivity, effectiveness of resources, and overall execution of the Trust’s capital improvement program, leading to sustainable value for our Resident Members and long-term growth for Unitholders. As noted above, Boardwalk’s capital improvement strategy is focused around three (3) brands requiring different levels of renovations and upgrades: “Boardwalk Lifestyle”, “Boardwalk Communities” and “Boardwalk Living” noted above under the subheading “Brand Diversification”.
A select few of the Trust’s communities will be selected for the “Boardwalk Lifestyle” brand; although there are a number of criteria used to select these properties, in general, these communities are located in extremely attractive locations and desirable neighborhoods. Investment here will be holistic in nature and include significant enhancement to the exterior. Common areas may not only be refreshed but may also be modernized to include community areas with Wi-Fi bars, barbeque areas and other in demand amenities. The suites in these buildings will be significantly modernized and may include the removal of existing walls and substantial upgrades including all new appliances, upgraded kitchens and extensive flooring, electrical and plumbing upgrades. These communities will be targeted to the more discriminating renter and commonly referred to as a ‘renter by choice’.
A number of the Trust’s communities will be selected to be repositioned in the “Boardwalk Communities” category. These communities will also be targeted based on location and will be the focus of a modernization program. These communities tend to be located in mature areas near schools, parks, downtown cores, shopping and other desirable amenities. Investment in these communities will enhance
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the already large suite sizes and will significantly upgrade most aspects of the suites, including new upgraded flooring; all new appliances with modernized kitchens; as well as modern electrical, plumbing and hardware fixtures. Modernization of existing common areas such as hallways and lobbies will also be considered and undertaken where warranted.
The majority of Boardwalk’s existing portfolio falls into the “Boardwalk Living” category. Resident Members in this area are looking for value but tend to be more price sensitive. Again, many of these Boardwalk communities are located in established communities with extensive local amenities. Although Boardwalk’s investment in this area will be less significant than in its Lifestyle and Communities buildings, it is value focused and thoughtfully targeted to those items that price-sensitive renters appreciate most, such as upgraded flooring, as well as more modern electrical, plumbing and hardware fixtures.
In 2019, Boardwalk REIT invested approximately $123.2 million (comprised of $117.6 million on its stabilized investment properties and $5.6 million on property, plant and equipment) back into its properties in the form of equipment and project enhancements to upgrade existing suites, common areas, building exteriors and systems, compared to the $125.9 million ($117.9 million on its stabilized investment properties and $8 million on property, plant and equipment) invested in 2018.
Coupled with continuing high levels of customer service, a larger suite size on average and close proximity to established communities near schools and other desirable amenities, Boardwalk believes these newly renovated and upgraded homes will further strengthen Boardwalk’s mission of providing the best value in housing. Customer service, product quality and Boardwalk’s continued focus on building better communities are more important now than ever, and Boardwalk continues to see the benefits resulting from its proactive focus in these areas. Significant upgrades are not only focused on individual suites, but also include material upgrades to common areas and enhanced building amenities. The Trust’s focus has been to reduce incentives in this current economic environment by providing its Resident Members with high quality housing, which includes value added renovation packages on new lease terms. Since 2000, Boardwalk has invested approximately $1.5 billion in its own portfolio in the form of capital improvements and, by focusing on suite renovations to provide Resident Members with additional value and a superior product, the Trust aims to improve the quality of its portfolio while also reducing incentives in this current environment.
The following chart reports the returns obtained based on capital invested during 2019:
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A significant part of Boardwalk's capital improvement program relates to projects that are carried out by Boardwalk's Associates. This internal capital program was initiated in 1996 as a way to create more value for the Trust. The Trust recognizes that there are certain efficiencies and economies of scale available from having Boardwalk Associates perform certain capital projects "in-house". This results in the faster execution and greater control of these projects while at the same time eliminating the profit charged by third-party contractors. The Trust focuses on specific projects where there is the largest opportunity for value creation, like flooring and painting. Over the last few years, the Trust has intensified this focus of performing capital projects "in-house" rather than contracting out such services. Included in capital improvements is approximately $32.5 million of on-site wages and salaries that have been incurred towards these projects for 2019, compared to $28.8 million for 2018. Normal Course Issuer Bid
On a periodic basis, Boardwalk REIT will apply to the TSX for approval of Normal Course Issuer Bids (the “Bids”). Pursuant to regulations of these Bids, Boardwalk REIT will receive approval to purchase and cancel a specified number of Trust Units, representing 10% of the public float of its Trust Units at the time of the TSX approval. The Bids terminate on the earlier of the termination date or at such time as the purchases under the Bids are completed.
For the year ended December 31, 2019, the Trust did not purchase any Trust Units.
Since the Trust began utilizing normal course issuer bids, Boardwalk REIT has purchased and cancelled Trust Units as follows:
Year Ended Cumulate Number of Trust Cumulative Purchase Average Cost per December 31 Units Purchased & Cancelled Cost ($000s) Trust Unit ($) 2007 856,447 38,577 45.04 2008 2,312,000 85,412 36.94 2009 790,000 22,756 28.80 2010 423,400 17,024 40.21 2011 160,900 6,740 41.89 2012 - - 0.00 2013 - - 0.00 2014 472,100 31,634 67.01 2015 740,800 37,115 50.10 2016 666,000 32,646 49.02 2017 - - 0.00 2018 - - 0.00 2019 - - 0.00 Total 6,421,647 $271,904 $42.34
Managing Capital
Boardwalk REIT finances its real properties and activities with a combination of long-term fixed rate debt financing, both secured and unsecured, cash flow generated from continuing operations, and the selective sale of properties and drawings under lines of credit.
Boardwalk REIT's operating strategy must be complemented by a capital strategy designed to maximize return on Unitholder's equity. Boardwalk REIT's objective is to ensure in advance that there are ample capital resources to allow it to exploit opportunities quickly, rather than securing funding for each specific investment on a case-by-case basis. Boardwalk REIT believes that this approach provides it with a competitive advantage in negotiations for acquisitions and developments. Boardwalk REIT's capital strategy is:
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(a) to establish a working capital and acquisition line of capital to ensure liquidity to fund growth; (b) to employ an appropriate degree of leverage; (c) to actively manage its exposure to interest rate volatility through the use of fixed long-term rate debt the majority of which is insured with NHA insurance managed by CMHC; and (d) to the extent that the Trustees determine to seek additional capital, to raise such capital through public offerings of equity or debt.
To facilitate acquisitions, the Corporation arranged a demand facility with a major financial institution in May of 1998. This committed revolving credit facility was in the form of an operating and acquisition line up to a maximum of $100 million. Effective January 26, 2007, Boardwalk REIT completed negotiations to set up a new committed revolving credit facility with the same financial institution on substantially similar terms to the one arranged by the Corporation as described above, with the exception that such facility is an operating and acquisition line for up to a maximum of $200 million. Under such facility, the Trust has pledged assets sufficient to obtain an existing facility of $200 million. Security for this facility consists of first and second charges on a pool of property assets. The facility carries two (2) levels of interest ranging from the lending institution's prime rate of interest ("Prime"), to Prime plus 1.0% and all outstanding operating line amounts will have to be repaid on or within three (3) years of the contractual term maturity date, which repayment date is July 27, 2024.
To assist in the managing of the Trust's exposure to interest rate volatility, Boardwalk REIT's management is constantly reviewing its existing mortgage debt portfolio. The purpose of this review is to ensure that Boardwalk REIT has varying maturity dates for its debts so as to lower the Trust's exposure to the interest rate fluctuations in any particular period. In addition, the Trust is constantly monitoring existing market facilities in order to determine whether existing demand facilities should be converted to longer-term fixed rate mortgages.
Since 2007, the Trust has been successful in taking advantage of the lower interest rate environment. Since August 2007, the subprime crisis in the United States resulted in an extremely volatile borrowing environment, with bond yields and interest rate spreads fluctuating dramatically. For the most part, however, the Trust's cost of borrowing remained accretive during this period when compared to the existing maturing interest rates. Due to the size and diversity of its existing debt portfolio, the Corporation had elected, prior to the Acquisition and the Arrangement, to typically refinance maturing loans for terms of one (1) to five (5) years, however, given the current environment, has chosen to focus on longer term maturities of five (5), seven (7) and ten (10) year terms. These terms balance well with the maturity dates of the other mortgages, and as such lower Boardwalk REIT's overall interest rate risk during any one particular year.
Interest expense on the Trust’s secured mortgages and lease obligations for the year ended December 31, 2019 increased from the same period in the prior year, from $80.6 million to $88.2 million, primarily due to interest being recorded on the Trust’s lease liabilities along with increased mortgage interest as a result of up-financings. At December 31, 2019, the reported weighted average interest rate of 2.74% was up from the weighted average interest rate of 2.65% at December 31, 2018. Boardwalk REIT has continued to take advantage of low interest rates to refinance and renew certain mortgages, resulting in a lower overall weighted average interest rate. The average term to maturity of the Trust’s mortgage portfolio is approximately 4.4 years.
Boardwalk REIT concentrates on multi-family residential real estate. It is therefore eligible to obtain government-backed insurance through the NHA program, administered by CMHC. The benefits of purchasing this insurance are two-fold:
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(1) Boardwalk REIT can normally obtain lower interest rate spreads on its property financing as compared to other financing alternatives in either the residential or any other real estate class, leading to lower overall cost of debt, after including the cost of the NHA insurance; and
(2) CMHC insurance lowers Boardwalk REIT’s overall renewal risk. Once insurance is obtained on the related mortgage, the insurance is transferable and follows the mortgage for the complete amortization period, typically between 25 and 40 years, depending on the type of asset being insured. With the insurance being transferable between approved lenders, it lowers the overall risk of Boardwalk REIT not being able to refinance the asset on maturity.
The importance of this government-backed mortgage insurance program administered by Canada Mortgage and Housing Corporation to Boardwalk cannot be overstated. Despite past volatility in the overall credit markets, the Trust has been able to find a number of mortgage lenders willing to assume or underwrite additional mortgages under this program.
At December 31, 2019, approximately 99% of Boardwalk REIT’s mortgages were backed by this NHA insurance, with a weighted average amortization period of approximately 30 years.
The adoption of IFRS has also had an impact on the amount of financing costs reported on the Trust’s Consolidated Statement of Comprehensive Income. As a result of the Trust’s LP Class B Units being classified as financial liabilities in accordance with IFRS, the corresponding distributions paid to the LP Class B Unitholders are classified as financing costs under IFRS. The Trust believes these distribution payments do not truly represent “financing charges” as these amounts are only payable if the Trust declares distributions, and only for the amount of any distributions declared, both of which are at the discretion of the Board of Trustees as outlined in the Declaration of Trust. The total amount of distributions paid to the LP Class B Unitholders for the year ended December 31, 2019, which have been recorded as financing charges, was $4.5 million ($4.5 million for the year ended December 31, 2018). Based on this rationale, these amounts have been added back in the calculation of FFO. The reader should also note that, under IFRS, financing charges are recorded net of interest income the Trust has earned for the period. The total amount of interest income earned for the year ended December 31, 2019 was $1.3 million, respectively, compared to $2.2 million for the same period in the prior year. Interest income will fluctuate depending on the cash on hand in the period. Further details on the Trust’s investment of cash on hand in term deposits of 90 days or less can be found in NOTE 13 of the consolidated financial statements of the Trust for the year ended December 31, 2019. See “Additional Information”. Boardwalk REIT's Debt Maturity Chart
Boardwalk REIT’s long-term debt consists entirely of low-rate fixed-term secured mortgage financing. The maturity dates on the secured mortgages have been staggered to lower the overall interest rate risk on renewal.
Total mortgages payable (net of unamortized transaction costs) on December 31, 2019 were $2.7 billion (net of unamortized transaction costs), compared to $2.7 billion reported on December 31, 2018.
Boardwalk REIT’s overall weighted average interest rate on its long-term debt has increased from the prior year. The weighted average interest rate on December 31, 2019 was 2.74%, compared to 2.65% on December 31, 2018. To better maintain cost effectiveness and flexibility of capital, Boardwalk REIT continuously monitors short and long-term interest rates. If the environment warrants, the Trust will convert short-term, floating rate debt, if any, to longer-term, fixed-rate mortgages to reduce interest rate renewal risk.
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Principal Weighted Outstanding as Average at Dec 31, 2019 Interest Rate % Year of Term Maturity $ by Maturity of Total 2020 317,649 2.52% 11.2% 2021 377,971 2.41% 13.3% 2022 441,142 2.73% 15.5% 2023 354,885 2.93% 12.5% 2024 260,887 2.89% 9.2% 2025 304,419 2.63% 10.7% 2026 143,852 2.45% 5.1% 2027 347,889 3.18% 12.2% 2028 110,481 3.27% 3.9% 2029 181,601 2.56% 6.4% Total Principal Outstanding $2,840,776 2.74% 100.00% Unamortized Deferred Financing Costs (99,128) Total Per Financial Statements $2,741,648
Construction Loan Payable
During 2019, the Trust entered into a $50 million revolving construction facility loan along with one of its joint venture partners. To date, $29.4 million has been drawn on this loan, of which Boardwalk’s 50% portion is $14.7 million. The facility is interest payable only and has a maturity date of January 31, 2021. The facility bears interest at prime plus 0.05%, a Bankers’ Acceptance interest rate of 1.97%, a Bankers’ Acceptance stamping fee of 1.05% and a standby fee of 0.21%. Pursuing Partnerships or Joint Ventures
As noted elsewhere in this Annual Information Form, as part of its overall growth strategy, in 2016, the Trust entered into its first joint venture with RioCan REIT, at a well-located site in Northwest Calgary. In 2018 the Trust entered into its second joint venture and first with Redwood at a well-located site near Downtown Brampton, Ontario, directly adjacent to the Go Transit Station. The Trust entered into its second joint venture with RioCan, at a well-located site in Mississauga, Ontario, in 2019, and the Trust is reviewing the possibility of forming additional joint venture partnerships with a select group of investors, whereby Boardwalk REIT would manage the assets as well as have an equity interest in any opportunity. See “Maximizing Tenant/Customer Satisfaction” and “New Apartment Development” above. Any joint venture partnerships of Boardwalk REIT are limited by the investment guidelines in the Declaration of Trust. See "Investment Guidelines & Operating Policies of Boardwalk REIT – Investment Guidelines" below.
INVESTMENT GUIDELINES & OPERATING POLICIES OF BOARDWALK REIT Investment Guidelines
Pursuant to the Declaration of Trust, and notwithstanding anything contained in the Declaration of Trust to the contrary, the assets of Boardwalk REIT may be invested only, and Boardwalk REIT shall not permit the assets of any subsidiary to be invested otherwise than in accordance with the following investment guidelines (the "Investment Guidelines"):
(a) Boardwalk REIT will focus its activities primarily on the acquisition, holding, maintaining, improving, leasing or managing of multi-unit residential revenue producing properties, and ancillary real estate ventures, including, but not limited to, condominium conversions and sales of properties in which the Trust has (or will have) an interest, as well as, subject to
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subparagraph (l) below, the development of raw land (including the financing thereof) for the purpose of carrying out the above noted activities ("focus activities"); (b) notwithstanding anything contained in the Declaration of Trust to the contrary, no investment will be made that would result in: (i) REIT Units being disqualified for investment by registered retirement savings plans, registered retirement income funds, registered education savings plans, registered disability savings plans, tax-free savings accounts or deferred profit-sharing plans; (ii) Boardwalk REIT ceasing to qualify as a "mutual fund trust" or a "registered investment" for purposes of the Tax Act; or (iii) the Trust not qualifying as a "real estate investment trust", as defined in subsection 122.1(1) of the Tax Act, if as a consequence of the Trust not so qualifying, the Trust would be subject to tax on its “taxable SIFT trust distributions”;
(c) the Trust may, directly or indirectly, invest in a joint venture arrangement for the purposes of owning interests or investments otherwise permitted to be held by the Trust, provided that such joint venture arrangement contains terms and conditions which, in the opinion of the Trustees, are commercially reasonable, including without limitation such terms and conditions relating to restrictions on transfer and the acquisition and sale of the Trust's and any joint venturer's interest in the joint venture arrangement, provisions to provide liquidity to the Trust, such as buy-sell mechanisms, provisions that limit the liability of the Trust to third parties, and provisions that provide for the participation of the Trust in the management of the joint venture arrangement. For purposes of this provision, a joint venture arrangement is an arrangement between the Trust and one (1) or more other persons ("joint venturers") pursuant to which the Trust, directly or indirectly, conducts an undertaking for one (1) or more of the purposes set out above and in respect of which the Trust may hold its interest jointly or in common or in another manner with others either directly or through the ownership of securities of a corporation or other entity (a "joint venture entity"), including without limitation a general partnership, limited partnership or limited liability company; (d) unless otherwise permitted in the provisions of the Declaration of Trust setting out Boardwalk REIT's Investment Guidelines and except for temporary investments held in cash, deposits with a Canadian or U.S. chartered bank or trust company registered under the laws of a province of Canada, short-term government debt securities or in money market instruments of, or guaranteed by, a Schedule I Canadian chartered bank maturing prior to one (1) year from the date of issue, Boardwalk REIT, directly or indirectly, may not hold securities other than: (i) currency or interest rate futures contracts for hedging purposes to the extent that such hedging activity complies with the Canadian Securities Administrator's National Instrument 81-102 or any successor instrument or rule; (ii) securities of a joint venture entity, or any entity formed and operated solely for the purpose of carrying on ancillary activities to any real estate owned (or to be owned) or developed (or to be developed), directly or indirectly, by Boardwalk REIT, or an entity wholly-owned (or to be wholly-owned), directly or indirectly, by Boardwalk REIT formed and operated solely for the purpose of holding and/or developing a particular real property or real properties; and (iii) securities of another issuer, including, but not limited to, a real estate investment trust, provided either: (A) such securities derive their value, directly or indirectly, principally from real property; or (B) the principal business of the issuer of the securities is the ownership, development or operation, directly or indirectly, of real property, and provided in either case the entity whose securities are being acquired are engaged in a focus activity;
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(e) no investment will be made in a real property located in the United States unless Boardwalk REIT has obtained an opinion from legal counsel to the effect that the making of the investment should not result in interest paid by any U.S. entity in which Boardwalk REIT, directly or indirectly, owns an interest to any affiliate of Boardwalk REIT ceasing to be deductible for U.S. federal income tax purposes or becoming subject to U.S. withholding tax; (f) no investment will be made, directly or indirectly, in operating businesses unless such investment is through a corporation, limited partnership or trust; (g) notwithstanding any other provisions of the Declaration of Trust setting out Boardwalk REIT's Investment Guidelines, the securities of a reporting issuer in Canada may be acquired provided that: (i) the activities of the issuer are focused on focus activities; and (ii) in the case of any proposed investment or acquisition which would result in the beneficial ownership of more than 10% of the outstanding units of the securities issuer (the "acquired issuer"), the investment is made for the purpose of subsequently effecting the merger or combination of the business and assets of Boardwalk REIT and the acquired issuer or for otherwise ensuring that Boardwalk REIT will control the business and operations of the acquired issuer; (h) no investments will be made in rights to or interests in mineral or other natural resources, including oil or gas, except as incidental to an investment in real property; (i) the Trust may not invest in mortgages, mortgage bonds, Notes7 (other than Operating Trust Notes8) or debentures ("Debt Instruments") (including participating or convertible) unless the real property which is security therefore is real property which otherwise meets the Investment Guidelines, including, but not limited to, subparagraph (b) above, provided that, notwithstanding the foregoing, an investment may be made in Debt Instruments if the primary intention is to use such investment as a method of acquiring control of a revenue producing real property which would otherwise be a permitted investment pursuant to the Investment Guidelines, including, but not limited to, subsection subparagraph (b) above; (j) notwithstanding paragraph (i) above, Boardwalk REIT may also invest in mortgages where: (i) the mortgage is a "vendor take-back" mortgage granted to Boardwalk REIT in connection with the sale by it of existing real property and as a means of financing the purchaser's acquisition of such property from Boardwalk REIT; (ii) the mortgage is interest bearing; (iii) the mortgage is registered on title to the real property which is security therefore; (iv) the mortgage has a maturity not exceeding five (5) years; (v) the amount of the mortgage loan is not in excess of 85% of the selling price of the property securing the mortgage; and (vi) the aggregate value of these mortgages (including mortgages and mortgage bonds in which Boardwalk REIT is permitted to invest by virtue of paragraph (i) above, (after giving
7 "Notes" means the promissory notes, bonds, debentures, debt securities or similar evidence of indebtedness issued by a person. 8 ''Operating Trust Notes'' means the Series 1 Notes and the Series 2 Notes. ''Series 1 Notes'' means the Series 1 Notes issued by the Operating Trust exclusively to Boardwalk REIT on May 3, 2004 in the principal amount of $640 million ''Series 2 Notes'' means the Series 2 Notes to be issued by the Operating Trust exclusively as full or partial payment of the Series 1 Notes and Operating Trust Units. Instead of issuing Series 2 Notes on the maturity of the Series 1 Notes, Boardwalk REIT exchanged the Series 1 Notes for an equal value of Operating Trust Units. As a result, there are no Operating Trust Notes outstanding and the trust indenture governing the Operating Trust notes between the Trust and Computershare Trust Company of Canada has been cancelled.
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effect to the proposed investment, will not exceed 15% of Gross Book Value9) calculated at the time of such investment); (k) subject to subparagraph (b) above, the Trust may invest directly in raw land for development provided such investment is through a corporation, limited partnership or trust established for the purpose of: (i) the renovation or expansion of existing facilities that are capital property of the Trust; or (ii) the development of new facilities which will be capital property of the Trust; and (l) notwithstanding any other provisions of the Declaration of Trust, investments may be made which do not comply with the investment policy provisions of the Declaration of Trust provided: (i) the aggregate cost thereof (which, in the case of an amount invested to acquire real property, is the purchase price less the amount of any indebtedness assumed or incurred in connection with the acquisition and secured by a mortgage on such property) does not exceed 15% of the Adjusted Unitholders' Equity10; and (ii) the making of such investment would not contravene subparagraph (b) above.
Pursuant to the Declaration of Trust, the investment guidelines set forth above may only be 2 amended with the approval of at least 66 and /3%of the votes cast at a meeting of Unitholders called for that purpose. Operating Policies
The Declaration of Trust provides that the operations and affairs of Boardwalk REIT will be conducted in accordance with the following policies and that Boardwalk REIT will not permit any subsidiary to conduct its operations and affairs other than in accordance with the following policies:
(a) the construction and/or development of real property (including the financing thereof) may be engaged in order to maintain its real properties in good repair or to enhance the revenue- producing potential of real properties in which it has, or will have, an interest; (b) except for properties encumbered by the Retained Debt, title to each real property shall be held by and registered in the name of the Partnership, the General Partner or a corporation or other entity wholly-owned indirectly by Boardwalk REIT or jointly owned indirectly by Boardwalk REIT with joint venturers; provided, that where land tenure will not provide fee simple title, the Partnership, the General Partner or a corporation or other entity wholly-owned, directly or indirectly by the Partnership or jointly owned, directly or indirectly, by Boardwalk REIT with
9 ''Gross Book Value'' means, at any time, the book value of the assets of Boardwalk REIT and its subsidiaries, shown on its then most recent publicly-issued consolidated balance sheet prepared in accordance with IFRS as of January 1, 2011. ''IFRS'' means the International Financial Reporting Standards issued by the International Accounting Standards Board, and as adopted by the Canadian Institute of Chartered Accountants, as amended from time to time. 10 "Adjusted Unitholder's Equity" of Boardwalk REIT, at any time, means the aggregate of: (i) the amount of Unitholders’ equity of Boardwalk REIT; and (ii) the amount of accumulated depreciation and amortization recorded on the books and records of each of Boardwalk REIT and its subsidiaries in respect of its properties, in each case calculated in accordance with GAAP. “Entity Value” means the amount determined by multiplying the total number of units issued and outstanding (on a fully diluted basis, including, without limitation, Units issuable on the exchange of units of interest in the Partnership designated as “LP Class B Units”) by the 10-day weighted average trading price of the Units on the TSX for the 10 trading days immediately following the effective date of the Acquisition and Arrangement, which was $15.95 per Unit for a total of $149 million. “GAAP” means, as at any date of determination, generally accepted accounting principles in effect in Canada, including, among other things, Recommended Accounting Practices for Real Estate and Development companies issued by the Canadian Institute of Public and Private Real Estate Companies.
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joint venturers shall hold a land lease as appropriate under the land tenure system in the relevant jurisdiction; (c) the Trust will maintain a ratio of Consolidated EBITDA to Consolidated Interest Expense of not less than 1.50 to 1, calculated from time to time in respect of the most recently completed Reference Period11; (d) the Trust may, directly or indirectly, guarantee indebtedness or liabilities of a third party, provided that such guarantee is related to the direct or indirect ownership or acquisition by the Trust of real property that would otherwise comply with the investment restrictions and operating guidelines set out in the Declaration of Trust; (e) except for the Assets acquired pursuant to the Master Asset Contribution Agreement, an engineering survey or physical review by an experienced third-party consultant will be obtained for each real property intended to be acquired with respect to the physical condition thereof; (f) at all times insurance coverage will be obtained and maintained in respect of potential liabilities of Boardwalk REIT and the accidental loss of value of the assets of Boardwalk REIT from risks, in amounts and with such insurers, in each case as the Trustees consider appropriate, taking into account all relevant factors including the practices of owners of comparable properties; (g) except for the Assets acquired pursuant to the Master Asset Contribution Agreement, a Phase I environmental audit shall be conducted for each real property to be acquired and, if the Phase I environmental audit report recommends that further environmental audits be conducted, such further environmental audits shall be conducted, in each case by an independent and experienced environmental consultant; and (h) at least 8.5% of gross consolidated annual rental revenues generated from properties where the associated mortgage financing is insured by CMHC ("insured properties") as determined
11 “Consolidated EBITDA” of the Trust for any period means Consolidated Profit increased by the sum of: (i) Consolidated Interest Expense, excluding interest that has been capitalized on projects that are under development or held for future development for such period; (ii) tax expense of the Trust for such period (including both income tax and large corporations tax other than income taxes, either positive or negative, attributable to extraordinary or non-recurring gains or losses) determined on a consolidated basis in accordance with IFRS; (iii) amortization of income properties (including provisions for diminution of income properties for such period, determined on a consolidated basis in accordance with IFRS; (iv) amortization of deferred expenses of the Trust for such period, determined on a consolidated basis in accordance with IFRS; and (v) other non-cash items reducing Consolidated Profit resulting from a change in accounting principles in determining Consolidated Profit for such period. “Consolidated Interest Expense” of the Trust for any period means the aggregate amount of interest expense of the Trust in respect of indebtedness, capital lease obligations, the original issue discount of any indebtedness issued at a price less than the face amount thereof paid, accrued or scheduled to be paid or accrued by the Trust during such period and, to the extent interest has been capitalized on projects that are under development or held for future development during the period, the amount of interest so capitalized, all as determined on a consolidated basis in accordance with IFRS (provided that, notwithstanding its presentation under IFRS, all interest expense of the Trust in respect of convertible debt indebtedness will be included (without duplication) and all amortized deferred financing charges will be excluded in determining Consolidated Interest Expense). Consolidated Interest Expense shall not include: (a) Distributions or other distributions paid or payable on any LP Partnership Units or other equity securities convertible or exchangeable into Units; or (b) any rent payable by the Trust, any subsidiary or any affiliate of the Trust and/or a subsidiary of the Trust pursuant to any lease under which one or more of them are a lessee. “Consolidated Profit” of the Trust for any period means the net income (loss) of the Trust for such period determined in accordance with IFRS, excluding: (i) any gain or loss (net of any tax impact) attributable to the sale or other disposition of any asset of the Trust, or other than the sale or disposition of income properties specifically acquired and held for resale; (ii) any extraordinary gains and losses of the Trust, determined on a consolidated basis in accordance with IFRS; (iii) any fair value adjustment(s) of any asset(s) of the Trust required by IFRS; and (iv) other non-recurring items. “Distribution” has the meaning set out under the heading “Distribution Policy” below. “Reference Period” means the most recently completed four (4) fiscal quarters preceding the date of a calculation pursuant to subsection (c) above for which consolidated financial statements of the Trust have been publicly released.
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pursuant to GAAP shall be expended annually on sustaining capital expenditures, repairs and maintenance, all determined on a portfolio basis for all insured properties. For this purpose, capital expenditures and repairs and maintenance include all onsite labour costs and other expenses and items associated with such capital expenditures, repairs and maintenance.
Pursuant to the Declaration of Trust, the operating policies set forth above may only be amended with the approval of a majority of the votes cast at a meeting of Unitholders called for that purpose.
DECLARATION OF TRUST & DESCRIPTION OF REIT UNITS
Boardwalk REIT has been established under the Declaration of Trust for an indeterminate term. The following is a summary, which does not purport to be complete, of certain terms of the Declaration of Trust and the REIT Units. A copy of the Declaration of Trust may be accessed on SEDAR (www.sedar.com).
The Declaration of Trust authorizes the issuance of an unlimited number of two (2) classes of units of Boardwalk REIT: REIT Units and Special Voting Units. The Special Voting Units may only be issued to holders of, and are not transferable separately from, the LP Class B Units to which they relate. REIT Units
Each REIT Unit represents an undivided beneficial interest in Boardwalk REIT and in distributions made by Boardwalk REIT, whether of net income, net realized capital gains or other amounts and, in the event of liquidation, winding-up or other termination of Boardwalk REIT, in the net assets of Boardwalk REIT remaining after the satisfaction of all liabilities. No REIT Unit has preference or priority over any other.
The REIT Units are issued as fully paid and non-assessable and are freely transferable, subject to applicable securities regulatory requirements. Each REIT Unit entitles the holder thereof to one (1) vote for each whole REIT Unit held at all meetings of Unitholders.
Except as set out under the sub-headings "Issuance of REIT Units" and "REIT Unit Redemption Right" below, the REIT Units have no conversion, retraction, redemption or pre-emptive rights. Issued and outstanding REIT Units may be subdivided or consolidated from time to time by the Trustees with the approval of a majority of the Unitholders. Unitholder approval will not be required for an automatic consolidation as described in the section entitled "Distribution Policy" below.
No certificates will be issued for fractional REIT Units and fractional REIT Units will not entitle the holders thereof to vote at, receive notice of or attend meetings of Unitholders, except to the extent such fractional REIT Units represent in the aggregate one (1) or more whole REIT Units. The REIT Units are not "deposits" within the meaning of the Deposit Insurance Corporation Act (Canada) and are not insured under the provisions of such Act or any other legislation. Furthermore, Boardwalk REIT is not a trust company and, accordingly, is not registered under any trust and loan company legislation as it does not carry on nor intend to carry on the business of a trust company.
Special Voting Units12
The Declaration of Trust provides for the issuance of an unlimited number of Special Voting Units that will be used to provide voting rights with respect to Boardwalk REIT to persons holding LP Class B Units or other securities that are, directly or indirectly, exchangeable for REIT Units. BEI Subco is currently
12 ''Special Voting Unit'' means a unit of interest in Boardwalk REIT to be issued to the holders of LP Class B Units providing rights to vote as a Unitholder.
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the owner, through its direct ownership of all of the issued and outstanding LP Class B Units, of all of the issued and outstanding Special Voting Units.
The Special Voting Units are not transferable separately from the LP Class B Units to which they relate.
The Special Voting Units will automatically be transferred upon a transfer of the corresponding LP Class B Units. In addition, as LP Class B Units are surrendered for REIT Units and are no longer outstanding, the corresponding Special Voting Units will be automatically redeemed by Boardwalk REIT for $0.0000001 per each Special Voting Unit cancelled and shall no longer be outstanding.
Each Special Voting Unit entitles the registered holder thereof to the number of votes at any meeting of Unitholders or in respect of any written resolution of Unitholders which is equal to the number of REIT Units which may be obtained upon the surrender of the LP Class B Unit to which the Special Voting Unit relates. The Special Voting Units do not entitle or give any rights to the holders thereof to receive distributions or any amount upon liquidation, dissolution or winding-up of Boardwalk REIT. Holders of Special Voting Units are not entitled to receive a certificate or other written instrument evidencing ownership of such units. Issuance of REIT Units
The Trustees may allot and issue REIT Units at such time or times and in such manner (including pursuant to any distribution reinvestment plan of Boardwalk REIT) and to such person, persons or class of persons as the Trustees in their sole discretion shall determine. The price or the value of the consideration for which REIT Units may be issued and the terms and conditions of issuance of the REIT Units shall be determined by the Trustees in their sole discretion, generally (but not necessarily) in consultation with investment dealers or brokers who may act as underwriters in connection with offerings of REIT Units. In the event that REIT Units are issued in whole or in part for a consideration other than money, the resolution of the Trustees allotting and issuing such REIT Units shall express the fair equivalent in money of the other consideration received.
Boardwalk REIT may create and issue rights, warrants or options to subscribe for fully paid REIT Units which rights, warrants or options may be exercisable at such subscription price or prices and at such time or times as the Trustees may determine. The rights, warrants or options so created may be issued for such consideration or for no consideration, all as the Trustees may determine. A right, warrant or option shall not be a REIT Unit and a holder thereof shall not be a Unitholder. Purchase of REIT Units
Boardwalk REIT may at any time or from time to time purchase for cancellation all or part of the outstanding REIT Units at a price per REIT Unit and on a basis determined by the Trustees in accordance with applicable securities legislation and the applicable rules of the stock exchange(s) on which the REIT Units are listed. REIT Unit Redemption Right
REIT Units are redeemable at any time, in whole or in part, on demand by the holders thereof by sending a notice to Boardwalk REIT at its head office in a form approved by the Trustees and completed and executed in a manner satisfactory to the Trustees, who may require supporting documentation as to identity, capacity or authority. A Unitholder not otherwise holding a fully registered REIT Unit certificate who wishes to exercise the redemption right will be required to obtain a redemption notice from his or her investment dealer or other intermediary who will be required to deliver the completed redemption form to Boardwalk REIT. Upon receipt by Boardwalk REIT of a written redemption notice and other documents that may be required, all in a manner satisfactory to the Trustees, a holder of REIT Units shall cease to have
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any rights with respect to the tendered REIT Units (other than to receive the redemption payment therefor), including any right to receive any distributions thereon which are declared payable to the Unitholders of record on a date which is subsequent to the day of receipt of the redemption notice by Boardwalk REIT and the holder thereof shall be entitled to receive a price per REIT Unit (the "Redemption Price") equal to the lesser of:
(a) 90% of the "market price" of the REIT Units on the principal market on which the REIT Units are quoted for trading on the trading day prior to the day on which the REIT Units were surrendered to Boardwalk REIT for redemption (the "Redemption Date"); and (b) 100% of the "closing market price" of the REIT Units on the principal market on which the REIT Units are quoted for trading on the Redemption Date.
For the purposes of this calculation, "market price" in respect of REIT Units will be an amount equal to the 20-day daily volume weighted average of the closing price of the REIT Units for each of the trading days on which there was a closing price; provided that if the applicable exchange or market does not provide a closing price, but only provides the highest and lowest prices of the REIT Units traded on a particular day, the "market price" shall be an amount equal to the average of the highest and lowest prices for each of the trading days on which there was a trade; and provided further that if there was trading on the applicable exchange or market for fewer than five (5) of the 20 trading days, the "market price" shall be the average of the following prices established for each of the 20 trading days:
(i) the average of the last bid and last asking prices of the REIT Units for each day on which there was no trading; (ii) the closing price of the REIT Units for each day on which there was trading if the exchange or market provides a closing price; and (iii) the average of the highest and lowest prices of the REIT Units for each day that there was trading if the exchange or market does not provide a closing price but provides only the highest and lowest prices of the REIT Units traded on a particular day.
The "closing market price" in respect of REIT Units shall be:
(i) an amount equal to the closing price of the REIT Units if there was a trade on the date and the exchange or market provides a closing price; (ii) an amount equal to the average of the highest and lowest prices of the REIT Units if there was trading and the exchange or other market does not provide a closing price but provides only the highest and lowest trading prices of the REIT Units traded on a particular day; or (iii) the average of the last bid and last asking prices of the REIT Units if there was no trading on that date.
If a Unitholder is not entitled to receive cash upon redemption of REIT Units as a result of the limitations in sub-paragraphs (b) and (c) below, the Redemption Price will be equal to the fair market value of the REIT Units as determined by the Trustees.
The aggregate Redemption Price payable by Boardwalk REIT in respect of any REIT Units tendered for redemption during any calendar month shall be satisfied by way of a cheque drawn on a Canadian chartered bank or a trust company in Canadian funds, payable no later than the last day of the calendar month following the month in which the REIT Units were tendered for redemption, provided that the entitlement of Unitholders to receive cash upon the redemption of their REIT Units is subject to the limitations that:
(a) the total amount payable by Boardwalk REIT in respect of such REIT Units and all other REIT Units tendered for redemption in the same calendar month shall not exceed $50,000, provided
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that the Trustees may, in their sole discretion, waive such limitation in respect of all REIT Units tendered for redemption in any particular calendar month; (b) at the time such REIT Units are tendered for redemption, the outstanding REIT Units shall be listed for trading or quoted on a stock exchange or market which the Trustees consider, in their sole discretion, provides representative fair market value prices for the REIT Units; and (c) the normal trading of outstanding REIT Units is not suspended or halted on any stock exchange on which the REIT Units are listed for trading or, if not so listed, on any market on which the REIT Units are quoted for trading, on the Redemption Date for the REIT Units or for more than five (5) trading days during the ten (10) day trading period commencing immediately after the Redemption Date for the REIT Units.
If a Unitholder is not entitled to receive cash upon the redemption of REIT Units as a result of the foregoing limitations in sub-paragraphs (b) and (c) above, then each REIT Unit tendered for redemption shall, subject to obtaining all applicable regulatory approvals, be redeemed by way of a distribution in specie of Series 2 Notes.
The aggregate principal amount of such Series 2 Notes would be equal to the product of:
(i) the Redemption Price per unit of the REIT Units tendered for redemption; and (ii) the number of REIT Units tendered by such Unitholder for redemption. No Series 2 Notes in a principal amount of less than $100 will be transferred and, where the principal amount of Series 2 Notes to be received by the former Unitholder upon redemption, in specie, would otherwise include a principal amount of less than a multiple of $100, such principal amount will be rounded down to the next lowest multiple of $100 and the excess shall be paid in cash. The term of such notes will be 10 years, less a day, subject to earlier repayment at the option of Boardwalk REIT, and they would bear interest at a market rate determined by the trustees of the Operating Trust at the time of issuance thereof, payable on the 30th day of each calendar month that such Series 2 Notes are outstanding. In such circumstances, Operating Trust Units will be redeemed. The Series 2 Notes issued by the Operating Trust will then be distributed in satisfaction of the Redemption Price of REIT Units.
If a Unitholder is not entitled to receive cash upon the redemption of REIT Units as a result of the limitation in sub-paragraph (a) above, the holder will receive a combination of cash and subject to obtaining all applicable regulatory approvals, Series 2 Notes, determined in accordance with the Declaration of Trust.
It is anticipated that the redemption right described above will not be the primary mechanism for holders of REIT Units to dispose of their REIT Units. Operating Trust Notes which may be distributed to Unitholders in specie in connection with a redemption will not be listed on any stock exchange, no market is expected to develop and such securities may be subject to an indefinite "hold period" or other resale restrictions under applicable securities laws. The Operating Trust Notes so distributed may not be qualified investments for registered retirement savings plans ("RRSPs"), registered retirement income funds ("RRIFs"), registered education savings plans ("RESPs"), deferred profit sharing plans ("DPSPs"), registered disability savings plans (“RDSPs”) or tax-free savings accounts (“TFSAs”) depending upon the circumstances at the time.
Special Voting Units will be cancelled for nominal consideration in the event of the surrender, exchange or sale to Boardwalk REIT of the related LP Class B Units. Meetings of Unitholders
The Declaration of Trust provides that annual meetings of Unitholders shall be called and held at any place in Canada determined by the Trustees for the election of Trustees (other than the BPCL appointee), the appointment or changing of the auditors of Boardwalk REIT, the Operating Trust and the
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Partnership, and transacting such other business as the Trustees may determine or as may properly be brought before the meeting.
The Trustees shall call and hold special meetings for the approval of amendments to the Declaration of Trust (except as described below under "Declaration of Trust & Description of REIT Units — Amendments to the Declaration of Trust & other Documents"), the sale of the assets of Boardwalk REIT as an entirety or substantially as an entirety (other than as part of an internal reorganization of the assets of Boardwalk REIT as approved by the Trustees) or the termination of Boardwalk REIT. The Trustees may submit to a vote of Unitholders any matter which they deem appropriate. Except with respect to the above- noted matters, or a vote to terminate Boardwalk REIT or such other matters submitted to a vote of Unitholders by the Trustees, no vote of the Unitholders will bind Boardwalk REIT or the Trustees in any way. Meetings of Unitholders will be called and held annually within 180 days after the end of the fiscal year of Boardwalk REIT for the election of the Trustees (except for the BPCL appointee) and appointment of auditors of Boardwalk REIT, the Operating Trust and the Partnership. The first annual meeting of Unitholders was held on May 10, 2005. The last annual meeting of Unitholders was on May 15, 2019.
The Trustees have the power at any time to call special meetings of Unitholders at such time and place in Canada as the Trustees determine. Unitholders holding in the aggregate not less than five percent (5%) of the votes attaching to all outstanding REIT Units (on a fully diluted basis) may requisition the Trustees in writing to call a special meeting of Unitholders and the Trustees shall, subject to certain limitations, call a meeting of Unitholders for the purposes stated in the Unitholder requisition. A requisition must state in reasonable detail the business proposed to be transacted at the meeting. Unitholders have the right to obtain a list of Unitholders to the same extent and upon the same conditions as those which apply to shareholders of a corporation governed by the ABCA.
Unitholders may attend and vote at all meetings of the Unitholders either in person or by proxy and a proxy holder need not be a Unitholder. Two (2) persons present in person or represented by proxy and representing in the aggregate at least 10% of the votes attaching to all outstanding REIT Units (on a fully diluted basis) shall constitute a quorum for the transaction of business at all such meetings, provided that if Boardwalk REIT has only one (1) Unitholder, such Unitholder present in person or by proxy constitutes a meeting and a quorum for such meeting. If no quorum is present at any meeting of Unitholders within 30 minutes after the time fixed for holding the meeting, the meeting, if convened on the requisition of Unitholders, will be dissolved and otherwise will be adjourned for not less than ten (10) days, and at the adjourned meeting, the Unitholders then present in person or represented by proxy will form the necessary quorum.
The Declaration of Trust contains provisions as to the notice required and other procedures with respect to the calling and holding of meetings of Unitholders. Limitation on Non-Resident Ownership
In order for Boardwalk REIT to maintain its status as a mutual fund trust under the Tax Act, Boardwalk REIT must not be established or maintained primarily for the benefit of non-residents of Canada within the meaning of the Tax Act ("Non-Residents"). Accordingly, the Declaration of Trust provides that, notwithstanding any provision of the Declaration of Trust to the contrary, at no time may Non-Residents be the beneficial owners of more than 49% of the REIT Units or the Special Voting Units then outstanding. The Trustees may require declarations as to the jurisdictions in which beneficial owners of REIT Units are resident or declarations from Unitholders or holders of Special Voting Units as to whether such REIT Units or Special Voting Units, as the case may be, are held for the benefit of Non-Residents.
If the Trustees become aware that the beneficial owners of more than 49% of the REIT Units or the Special Voting Units then outstanding are, or may be, Non-Residents or that such a situation is imminent, the Trustees may make a public announcement thereof and shall not accept a subscription for REIT Units or Special Voting Units, as the case may be, from or issue or register a transfer of REIT Units or Special
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Voting Units, as the case may be, to a person unless the person provides a declaration that he or she is not a Non-Resident and does not hold his or her REIT Units or Special Voting Units, as the case may be, for the benefit of a Non-Resident. If, notwithstanding the foregoing, the Trustees determine that more than 49% of the REIT Units or Special Voting Units then outstanding are beneficially owned by Non-Residents, the Trustees may send a notice to Non-Resident registered and beneficial holders of REIT Units or Special Voting Units, as the case may be, chosen in inverse order to the order of acquisition or registration or in such other manner as the Trustees may consider equitable and practicable, requiring them to sell or redeem their REIT Units or Special Voting Units, as the case may be, or a portion thereof within a specified period of not more than 60 days (unless the Canada Revenue Agency (the "CRA") has confirmed in writing that a longer period is acceptable). If the holders of REIT Units or Special Voting Units, as the case may be, receiving such notice have not sold or redeemed the specified number of REIT Units or Special Voting Units, as the case may be, or provided the Trustees with satisfactory evidence that they are not Non- Residents and do not hold their REIT Units or Special Voting Units, as the case may be, for the benefit of a Non-Resident within such period, the Trustees may sell or redeem such REIT Units or Special Voting Units, as the case may be, on behalf of such Non-Resident holder of REIT Units or Special Voting Units, as the case may be, (and the Trustees shall have the power of attorney of such holders to do so) and, in the interim, the voting and distribution rights, if any, attached to such REIT Units or Special Voting Units, if any, as the case may be shall be suspended. Upon such sale, the affected holders shall cease to be holders of the REIT Units or Special Voting Units, as the case may be, and their rights shall be limited to receiving the net proceeds of sale upon surrender of such REIT Units or Special Voting Units, as the case may be. Amendments to the Declaration of Trust & Other Documents
The Declaration of Trust may be amended or altered from time to time. Certain amendments (including the termination of Boardwalk REIT; an exchange, reclassification or cancellation of all or part of the REIT Units or Special Voting Units; and the creation of new rights or privileges attaching to the REIT 2 Units and Special Voting Units) require approval by at least 66 and /3% of the votes cast at a meeting of Unitholders called for such purpose.
Other amendments to the Declaration of Trust require approval by a majority of the votes cast at a meeting of the Unitholders called for such purpose.
2 The following amendments require the approval of at least 66 and /3% of the votes cast by all Unitholders entitled to vote thereon at a meeting called for that purpose:
(a) an exchange, reclassification or cancellation of all or part of the REIT Units; (b) the addition, change or removal of the rights, privileges, restrictions or conditions attached to the REIT Units, including, without limiting the generality of the foregoing; (i) the removal or change of rights to distributions; or (ii) the addition or removal of or change to conversion privileges, redemption privileges, voting, transfer or pre-emptive rights; (c) the creation of new rights or privileges attaching to certain of the REIT Units and Special Voting Units; and (d) any change to the existing constraints on the issue, transfer or ownership of the REIT Units and Special Voting Units.
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In addition, the Declaration of Trust provides that Boardwalk REIT will not agree to or approve any material change to the Limited Partnership Agreement, the Operating Trust Declaration of Trust13or 2 the Exchange and Support Agreement without the approval of at least 66 and /3% of the votes cast at a meeting of Unitholders called for such purpose. However, no Unitholder approval is required to approve any change to the Limited Partnership Agreement for the purposes of providing a distribution reinvestment entitlement to holders of LP Class B Units that is substantially equivalent to that provided by the distribution reinvestment plan that Boardwalk REIT has adopted (but suspended) pursuant to which holders of REIT Units will be entitled to elect to have cash Distributions in respect of such units automatically reinvested in additional REIT Units (the "Distribution Reinvestment Plan" or "DRIP") to holders of REIT Units. For more information on the DRIP, including, but not limited to, its suspension, please see the information under the sub-heading “Distribution Policy – Distribution Reinvestment Plan”.
Furthermore, Boardwalk REIT may not agree to or approve any change to the provisions of the Declaration of Trust governing distributions on the REIT Units or Special Voting Units, or the rights and attributes of the LP Class A Units, LP Class B Units or LP Class C Units without the approval of at least 66 2 and /3% of the votes cast at any meeting of holders of REIT Units or Special Voting Units, as the case may be, called for that purpose.
A majority of all Trustees, including a majority of the Independent Trustees, may, without the approval of the Unitholders, make certain amendments to the Declaration of Trust, including amendments:
(a) for the purpose of ensuring continuing compliance with applicable laws (including the Tax Act), regulations, requirements or policies of any governmental authority having jurisdiction over: (i) the Trustees or Boardwalk REIT; (ii) the status of Boardwalk REIT as a "mutual fund trust", "registered investment" and a “real estate investment trust” under the Tax Act; or (iii) the distribution of REIT Units; (b) which, in the opinion of the Trustees, acting reasonably, are necessary to maintain the rights of the Unitholders set out in the Declaration of Trust; (c) to remove any conflicts or inconsistencies in the Declaration of Trust or to make minor corrections which are, in the opinion of the Trustees, necessary or desirable and not prejudicial to the Unitholders; (d) which, in the opinion of the Trustees, are necessary or desirable as a result of changes in taxation or other laws, or accounting standards (including the implementation of IFRS) from time to time which may affect Boardwalk REIT or its beneficiaries to ensure that the REIT Units qualify as equity for the purposes of IFRS, or the administration or enforcement thereof; (e) for any purpose (except one in respect of which a Unitholder vote is specifically otherwise required) which, in the opinion of the Trustees, is not prejudicial to Unitholders and is necessary or desirable; (f) deemed necessary or desirable to ensure that Boardwalk REIT has not been established nor maintained primarily for the benefit of persons who are not resident Canadians; and (g) to implement a distribution reinvestment plan or any amendments to such plan.
In no event may the Trustees amend the Declaration of Trust if such amendment would: (i) amend the provisions of the Declaration of Trust governing amendments to same;
13 ''Operating Trust Declaration of Trust'' means the declaration of trust dated January 9, 2004, as amended and restated on May 3, 2004, establishing the Operating Trust.
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(ii) amend the Unitholders' voting rights; or (iii) cause Boardwalk REIT to fail or cease to qualify as a "mutual fund trust", “real estate investment trust” or "registered investment" under the Tax Act. Stock Exchange Listings, Price Range & Trading Volume of REIT Units
As at December 31, 2019 there were REIT Units outstanding and 4,475,000 LP Class B Units issued and outstanding for a fully diluted REIT Unit capital of 46,274,615 REIT Units.
The principal market for the REIT Units is the TSX. The REIT Units are listed on the TSX under the symbol "BEI.UN." The REIT Units are not listed on the NYSE or elsewhere in the United States and are not registered under the United States Securities Exchange Act of 1934, as amended.
The market price range and trading volume of the REIT Units on the TSX for the periods indicated are set forth in the following table: TSX Price Per REIT Unit Year ending December 31, 2019 High ($) Low ($) Volume (000’s) January 36.47 40.75 3,075 February 44.09 39.61 2,649 March 42.00 40.30 2,486 April 40.93 38.09 1,990 May 43.60 38.39 2,742 June 41.88 38.75 1,951 July 42.24 39.86 1,743 August 45.86 40.40 2,450 September 45.59 43.17 2,099 October 46.60 43.31 2,850 November 48.89 42.86 3,609 December 49.14 45.47 3,207 Year ending December 31, 2020 January 48.90 44.75 3,799 February (through February 26) 51.84 47.09 2,326
The closing price of the REIT Units on the TSX on February 26, 2020 was Cdn. $49.57.
CHALLENGES & RISKS
This section includes an analysis of Boardwalk REIT's financial liquidity and identifies the risk factors and the management of such risks relating to Boardwalk REIT and its business. There are other risk factors to an investment in REIT Units not associated with investments in Common Shares that include, but are not limited to the following:
Boardwalk REIT, like most real estate rental entities, is exposed to a variety of risk areas. These areas are categorized between general and specific risks. General risks are the risks associated with general conditions in the real estate sector, and consist mainly of commonly exposed risks that affect the real estate industry. Specific risks focus more on risks uniquely identified with the Trust, such as credit, market, liquidity and operational risks. The following will address each of these risks. In addition, this section should be read in conjunction with the Trust's management discussion and analysis of financial condition and results of operations for the year ended December 31, 2019. See "Additional Information".
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Risks Due to Investment in Real Estate
Real property investments are generally subject to varying degrees of risk depending on the nature of the property. These risks include changes in general economic conditions (such as the availability and cost of mortgage funds), local conditions (such as an oversupply of space or a reduction in demand for real estate in the area), government regulations (such as new or revised residential tenancy legislation), the attractiveness of the properties to tenants, competition from others with available space and the ability of the owner to provide adequate maintenance at an economic cost. Because real estate, like many other types of long-term investment, experiences significant fluctuations and cycles in value, specific market conditions may result in occasional or permanent reductions in the value of Boardwalk REIT’s portfolio. Furthermore, the Trust may buy and/or sell properties at less than optimal times. As interest rates fluctuate in the lending market, in general, so do capitalization rates, which affect the underlying value of real estate. As such, when interest rates rise, generally capitalization rates should be expected to rise. Over the period of investment, capital gains and losses at the time of disposition can occur due to the increase or decrease of these capitalization rates.
The yields available from investments in real estate depend upon the amount of revenue generated and expenses incurred. If properties do not generate revenues sufficient to meet operating expenses, including debt service and capital expenditures, Boardwalk REIT's results from operations and ability to make distributions to its Unitholders will be adversely affected. The performance of the economy in each of the areas in which the properties are located affects occupancy, market rental rates and expenses. These factors consequently can have an impact on revenues from the properties and their underlying values. The financial results and labour decisions of major local employers may also have an impact on the revenues from and value of certain properties.
Other factors may further adversely affect revenues from and values of Boardwalk’s properties. These factors include the general economic climate, local conditions in the areas in which properties are located, such as an oversupply of apartment units or a reduction in the demand for apartment units, the attractiveness of the properties to residents, competition from other multifamily communities and its ability to provide adequate facilities maintenance, services and amenities. Boardwalk’s revenues would also be adversely affected if residents were unable to pay rent or it were unable to rent apartments on favourable terms. If Boardwalk were unable to promptly re-let or renew the leases for a significant number of apartment units, or if the rental rates upon renewal or re-letting were significantly lower than expected rates, then its funds from operations would, and its ability to make expected distributions to its Unitholders and to pay amounts due on its debt may, be adversely affected. There is also a risk that as leases on the properties expire, residents will vacate or enter into new leases on terms that are less favourable to us. Operating costs, including real estate taxes, insurance and maintenance costs, and mortgage payments, if any, do not, in general, decline when circumstances cause a reduction in income from a property. Boardwalk could sustain a loss as a result of foreclosure on the property, if a property is mortgaged to secure payment of indebtedness and it were unable to meet its mortgage payments. In addition, applicable laws, including tax laws, interest rate levels and the availability of financing also affect revenues from properties and real estate values.
Currently, Boardwalk operates in Canada, in the provinces of Alberta, Saskatchewan, Ontario and Quebec. Neither of Alberta nor Saskatchewan is subject to rent control legislation; however, under Alberta legislation a landlord is only entitled to increase rents once every year. See "Challenges & Risks – Rent Control Risks".
Boardwalk REIT is not widely diversified either by asset class or geographic location. By focusing on the multi-residential sector and having a majority of its apartment units concentrated in Western Canada, Boardwalk is exposed to adverse effects on that segment of the real estate market and/or for that geographic region, and does not benefit from a diversification of its portfolio by property type and/or geographic location. Boardwalk seeks to mitigate this risk through its long-term strategic plan to diversify
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geographically and by asset type. See “Strategy for Growth” which describes that plan and the Trust’ pursuit of diversification opportunities. The marketability and value of the Trust’s portfolio as well as the REIT’s revenues will depend on many factors beyond the control of Boardwalk REIT.
Certain significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges, must be made regardless of whether or not a property is producing sufficient income to service these expenses.
The Trust's properties are subject to mortgages, which require significant debt service payments. If the Trust were unable or unwilling to meet mortgage payments on any property, losses could be sustained as a result of the mortgagee's exercise of its rights of foreclosure or of sale. In addition, financial difficulties of other property owners resulting in distressed sales may depress real estate values in the markets in which the Trust operates.
Historically, one of the biggest risks to real estate evaluations is the building of oversupply in a particular market, which results in significant corrections of property values market wide. The Trust currently mitigates this risk by avoiding excessive leverage and using cash on hand for new development and undertaking development as a small part of Boardwalk’s overall strategy.
Illiquidity of Real Estate & Reinvestment Risk May Reduce Economic Returns to Investors.
Real estate investments are relatively illiquid and, therefore, tend to limit Boardwalk’s ability to adjust its portfolio in response to changes in economic or other investment conditions. To affect the Trust’s current operating strategy, Boardwalk has in the past raised, and will seek to continue to raise additional funds, both through outside financing and through the orderly disposition of assets that no longer meet the Trust’s investment criteria. Depending upon interest rates, current development and acquisition opportunities and other factors, generally Boardwalk will reinvest the proceeds in additional multifamily properties, although such funds may be employed in other uses. In the markets Boardwalk has targeted for future acquisition of multifamily properties, there is considerable buying competition from other real estate companies, some of which may have greater resources, experience or expertise than we. In many cases, this competition for acquisition properties has resulted in an increase in property prices and a decrease in property yields.
Adverse Changes in Laws May Affect Boardwalk’s Potential Liability Relating to its Properties & its Operations.
Increases in real estate taxes and income, service and transfer taxes, or introductions of new taxes such as Alberta’s recently enacted carbon tax, cannot always be passed through to residents or users in the form of higher rents, and may adversely affect Boardwalk’s cash available for distribution and its ability to make distributions to its Unitholders and to pay amounts due on its debt. Similarly, changes or interpretations of existing laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions, as well as changes in laws affecting development, construction and safety requirements, may result in significant unanticipated expenditures, which could have a material adverse effect on the Trust and its ability to make distributions to its shareholders and pay amounts due on its debt. In addition, future enactment of rent control or rent stabilization laws or other laws regulating multifamily housing may reduce rental revenues or increase operating costs. Multi-Family Residential Sector Risk
Income producing properties generate income through rent payments made by tenants of the properties. Upon the expiry of any lease, there can be no assurance that the lease will be renewed, or the tenant replaced. The terms of any subsequent lease may be less favourable to the Trust than the existing lease. To mitigate this risk, the Trust does not have any one or small group of significant tenants. The
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majority of operating leases are signed for a period of 12 months or less. The Trust is dependent on leasing markets to ensure vacant residential space is leased, expiring leases are renewed and new Resident Members are found to fill vacancies. While it is not expected that markets will significantly change in the near future, the current disruption in the economy could have a significant impact on how much space tenants will lease, and the rental rates paid by tenants. This would affect the income produced by the Trust's properties as a result of downward pressure on rents. Specifically, the dramatic decline in resource prices and speculation that lower oil prices will continue over an extended period of time, have resulted in a significant slowing of Alberta’s and Saskatchewan’s economic growth, and have a corresponding longer-term impact on rental and vacancy rates. Economic disruptions have significant impacts on how much space Resident Members lease and rental rates. This affects the income produced by the Trust’s properties as a result of downward pressure on rents. This slowing of Western Canada’s economic growth rate has filtered through to weaker employment prospects, a tempering of housing demand and a decline in net migration and has had a corresponding impact on Boardwalk’s rental and occupancy levels. Still unknown is the economic impact of the increase to Alberta’s minimum wage to $15 an hour in 2018; the recent 50% increase in the federal carbon tax in Alberta, Saskatchewan and Ontario at a rate of $20 per tonne, which is scheduled to increase to $30 per tonne on April 1, 2020, especially in light of the recent Alberta Court of Appeal decision declaring the carbon tax unconstitutional; and the other climate change plans of the federal and provincial governments in the provinces in which the Trust operates. In 2019, Boardwalk experienced improvement in its western rental markets, augmented with a continued focus on Resident Member service, improving the Trust’s portfolio with value-enhancing capital expenditures and proactive lease renewals. See “Strategy for Growth – Investing in Boardwalk’s Properties-Value Added Capital Improvements and Property Re-Positioning Programs”. By way of illustration, in Q4 2019, occupancy levels in Calgary and Edmonton were relatively stable at 96.77% and 95.25%, respectively, compared to 95.76% and 95.31% for the same period last year. Please note that Calgary does not include the 299-unit portfolio acquisitions completed in November 2018, and Edmonton does not include the 124-unit acquisition completed in April 2019. Regina saw occupancy levels increase to 95.32% in 2019 from 95.00% in 2018. Regina’s totals do not include the 71-unit, Phase 3 building at its Pines Edge site, which was substantially completed at the end of June 2018, and commenced lease-up in July 2018. See “Strategy for Growth – New Apartment Development”. Including those new developments would result in an occupancy rate of 95.25% for Regina at December 31, 2019. Saskatoon’s occupancy levels also increased to 96.43% in 2019 compared to 95.69% in 2018. In contrast, non-oil- consuming provinces, like Ontario and Quebec, have seen an increase to GDP growth as lower crude oil prices and a lower Canadian dollar provide a lift to manufacturing activity. This, coupled with rising U.S. demand, should continue to provide a lift to economic growth in Ontario and Quebec, which should complement the recovery in the Trust’s Western Canadian markets.
While the apartment rental market still remains one of the most affordable housing options in Canada, Boardwalk continues to monitor the level of demand for more valued accommodations, such as rental housing, which has been impacted by low reported oil prices. Consistent with its existing operational strategy, Boardwalk has adjusted suite and community selective incentives to address this and maintain occupancy levels above current market conditions. Where required, the Trust has also adjusted selective rental market rates, once again, as part of its overall strategy of maintaining higher occupancy levels in these challenging times. Long-term Government of Canada benchmark yields remain low and stable, and interest rates continued to remain low throughout much of 2019. The Trust was able to renew approximately $520 million in mortgage maturities, as well as obtain $111 million of additional mortgage funds with an average term of eight (8) years at a weighted average interest rate of 3.00%, an increase in the maturing rates on these mortgages.
As of February 2020, CMHC-insured five and ten-year mortgage rates were estimated to be 2.30% and 2.40%, respectively. In 2020, the Trust has a total of $317.6 million of mortgages maturing. To date,
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the Trust has renewed or forward locked the interest rate on $41.1 million, or 13% of these mortgage maturities at a weighted average interest rate of 2.35%, while extending the term of these mortgages by an average of eight (8) years. However, uncertainty remains regarding how interest rates will play out in the foreseeable future. The Trust does, however, take a balanced approach with its mortgage program with a priority to first stagger its maturities to limit future interest rate risk, second capitalize on the current low rate environment by renewing maturities at attractive interest rates, and third, ensure sufficient liquidity for the Trust’s strategic initiatives.
The Bank of Canada, in its January 2020 Monetary Policy Report, increased Canada’s real Gross Domestic Product (“GDP”) growth to 1.6% for 2019, from 1.5% previously reported in its October Report, as a result of revisions to business and government investment. Its report highlighted that trade conflicts are weakening the world economy. The Bank of Canada estimates that growth in the fourth quarter of 2019 slowed but is forecast to rebound in the first quarter of 2020 at the moderate level of 1.3%. The bank still sees challenges in the oil and gas sector and the difficult global environment continues to weigh on business investment and exports; however, there are early indications that the level of investment in the Canadian oil and gas sector is stabilizing. The Bank of Canada sentiment is that the overall labour market continues to improve and job gains were strong through 2019. The Bank anticipates that economic growth will improve in 2020 and 2021 and has estimated GDP growth in those years of 1.6% and 2.0%, respectively.
Royal Bank of Canada, in its December 2019 provincial outlook report, projected all provincial economies to grow in 2020, something that has not happened since 2010-2011. Royal Bank believes that most provinces will see modest gains, with Western Canada recording some of the stronger advances. The Royal Bank expects Alberta’s 2019 GDP growth to be 0.6%; however, it is forecasting 1.7% for 2020 and up to 2.3% for 2021. The Royal Bank believes there are good reasons to feel cautiously optimistic about Alberta growth prospects in 2020, including the gradual lifting of mandated oil production cuts, which will set the stage for significant energy outputs, gains in existing pipeline efficiency, the entry into operation of the Canadian section of Enbridge’s Line 3 Pipeline, and increasing crude-by-rail capacity. Additionally, corporate tax cuts by the provincial government will also create a more favourable investment environment in the province. The Royal Bank expects employment growth to nearly double to 1.1% in 2020 (from 0.6% in 2019). For Saskatchewan, the Royal Bank predicted GDP growth of 0.6% for 2019, but this is expected to increase to 1.2% in 2020 and 1.9% in 2021. Royal Bank expects eastern provinces to see a moderation in growth in 2020, as both Ontario and Quebec are in the mature (or maturing) stages of their business cycle. Fiscal 2019 was another challenging year for Boardwalk. Market forces such as low oil prices, lower migration, high unemployment, excess supply of newly constructed rental units and further cutbacks in oil and gas capital spending created headwinds as the Trust strived to maintain occupancy levels and optimize NOI, particularly in the Alberta and Saskatchewan rental markets. The bright spot was the continued low interest rate environment. Low interest rates also helped support buyers’ continued interest in acquiring properties in the multi-family real estate asset class, keeping capitalization rates low and property values high.
During 2019, Boardwalk continued to offer short-term incentives to its new and existing Resident Members in certain communities in an attempt to increase overall occupancy. Maintaining higher occupancy levels by offering select incentives and focusing on excellence in customer service remains Boardwalk’s key performance strategy. Boardwalk is taking a measured approach to reducing incentives on a property-by-property basis, subject to occupancy levels and availability. CMHC is currently projecting vacancy levels for Calgary and Edmonton to decline and rental rates to rise as the demand for affordable housing continues to increase as a result of new stringent national mortgage qualification rules, continued positive net migration into Alberta and measured delivery of new rental housing supply. In 2019, the Government of Canada introduced the First Time Homebuyer Incentive which commenced November 1, 2019. This incentive reduces the monthly mortgage payments for first time homebuyers and, as it is in its infancy, it is too early to determine the impact of this program on the Canadian residential rental market.
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Boardwalk continues to implement the strategic initiatives it announced in November 2017 and is well-positioned to take advantage of new value-added opportunities as they arise. Environmental Risks
As an owner and manager of real property, the Trust is subject to various Canadian federal, provincial, and municipal laws relating to environmental matters.
These laws could encumber the Trust with liability for the costs of removal and remediation of certain hazardous substances or wastes released or deposited on or in its properties or disposed of at other locations. The failure to remove or remediate such substances, if any, could adversely affect the Trust's ability to sell its real estate, or to borrow using real estate as collateral, and could potentially also result in claims or other proceedings against the Trust. Although the Trust is not aware of any material non- compliance with environmental laws at any of its properties, nor is it aware of any pending or threatened investigations or actions by environmental regulatory authorities in connection with any of its properties or any material pending or threatened claims relating to environmental conditions at its properties, no assurance can be given that environmental laws will not result in significant liability to the Trust in the future or otherwise adversely affect the Trust's business, financial condition or results of operations.
The Trust has formal policies and procedures to review and monitor environmental exposure. The Trust has made, and will continue to make, the necessary capital expenditures for compliance with environmental laws and regulations.
Environmental laws and regulations can change rapidly and may become more stringent in the future. Compliance with more stringent environmental laws and regulations could have a material adverse effect on the Trust's business, financial condition or results of operation. Climate-Related Risk
As outlined by the Task Force on Climate-related Financial Disclosures (“TCFD”), climate related risks can be divided into two major categories: (1) risks related to the transition to a lower-carbon economy and (2) risks related to the physical impacts of climate change. As it relates to the Trust and transition risks, the Trusts focuses on implementing policies which promote the adaptation to climate-change and includes elements such as implementing ways to reduce greenhouse gas emissions, adopting energy efficient solutions, encouraging greater water efficiency, etc.; however, each of these policies have a financial impact. As it relates to physical risks resulting from climate change it can be event driven (acute) or longer-term shifts (chronic) in climate patterns. Physical risks may have financial implications such as direct damage to assets or indirect impacts. The Trust is aware of these risks and working towards safeguarding its assets from these risks. Ground Lease Risk
Five (5) of the Trust's properties located in Calgary (1), Banff (1), Edmonton (1) and Montreal (2) are subject to long-term ground (or land) leases and similar arrangements in which the underlying land is owned by a third party and leased to the Trust. Under the terms of a typical ground lease, the lessee must pay rent for the use of the land and is generally responsible for all costs and expenses associated with the building and improvements, including taxes, utilities, insurance, maintenance, repairs and replacements. Unless the lease term is extended, the land together with all improvements made will revert to the owner of the land upon the expiration of the lease term. These leases are set to expire between 2024 and 2096. Approximately 10% of the Trust’s FFO derives from the properties in its portfolio which are held as long- term ground leases. The Trust is and will actively seek to either renew the terms of such leases or purchase the freehold interest in the lands forming the subject matter of such leases prior to the expiry of their terms. However, if the Trust cannot or chooses not to renew such leases, or buy the land of which they form the
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subject matter, as the case may be, the net operating income and cash flow associated with such properties would no longer contribute to Boardwalk’s results of operations and could adversely impact its ability to make distributions to Unitholders.
The ground lease for the Trust’s largest Montreal property, known as the Nun's Island portfolio, is also subject to a rent revision clause, which commenced on December 1, 2008 (with a valuation date of March 16, 2008). It was phased in on a property-by-property basis through to 2019 and is based on 75% of the land value in its current use. Since that revision, the land rent will remain constant thereafter through to 2064.
An event of default by the Trust under the terms of a ground lease could also result in a loss of the property subject to such ground lease should the default not be rectified in a reasonable period of time. The Trust is not aware of any default under the terms of any of its ground leases. Competition Risk
Each segment of the real estate business is competitive. Numerous other residential developers and apartment owners compete in seeking tenants. Although the Trust's strategy is to own multi-family properties in premier locations in each market in which it operates, some of the apartments of the Trust's competitors may be newer, better located or better capitalized. The existence of alternative housing could have a material adverse effect on the Trust's ability to lease space in its properties and on the rents charged, or concessions granted, and could adversely affect the Trust's revenues and its ability to meet its obligations. General Uninsured Losses
The Trust carries comprehensive general liability, fire, flood, extended coverage and rental loss insurance with policy specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of risks (generally of a catastrophic nature such as war or environmental contamination), which are either uninsurable or not economically insurable.
The Trust currently has insurance for earthquake risks, subject to certain policy limits, deductibles and self-insurance arrangements, and will continue to carry such insurance if it is economical to do so. Should an uninsured or underinsured loss occur, the Trust could lose its investment in, and anticipated profits and cash flows from, one (1) or more of its properties, and would continue to be obligated to repay any recourse mortgage indebtedness on such properties. Credit Risk
Credit risk is the risk of loss due to failure of a contracted tenant/customer to fulfill the obligation of required payments. One of the key credit risks to the Trust is the possibility that its Resident Members will be unable or unwilling to fulfill their lease term commitments. Due to the very nature of the business of renting multi – family residential apartment units, credit risk is not deemed to be very high. The Trust currently has 33,263 rental apartment units. Accordingly, the Trust is not reliant on any one (1) Resident Member or lease. To further mitigate this risk, the Trust has and continues to diversify its portfolio in various major centers across Canada. Further, each of the Trust's rental units has its own individual lease agreement, thus the Trust has no material financial exposure to any particular Resident Member or group of Resident Members.
The Trust continues to utilize extensive screening processes for all potential Resident Members including, but not limited to, detailed credit checks.
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Market Risk
Market Risk is the risk that the Trust could be adversely affected due to market changes in product supply, interest rates and regional rent controls. The Trust's principal exposures to market risk are in the areas of new multi-family housing supply, changes to rent controls, utility price increases, property tax increases, higher interest rates and mortgage renewal risk. Supply Risk
Supply Risk is the risk that the Trust would be negatively affected by the new supply of, and demand for, multi-family residential units in its major market areas. Key drivers of demand include employment levels, population growth, demographic trends and consumer confidence. Any significant amount of new construction will typically result in an imbalance in supply and cause downward price pressure on rents.
In recent years, there has been a change in the multi-family apartment environment in Canada. During this period, a significant increase in the market value of rental apartments has occurred. This increase has been mainly driven by a significant compression in market capitalization rates, which in turn has been the result of a prolonged low interest rate environment in Canada. With this increase in the market value of apartments, there has been a significant decrease in the expected returns from the acquisition of existing multi-family rental properties to a level that warrants a measured allocation of capital to the area of new apartment development, particularly on excess land Boardwalk REIT currently owns, and/or to improving the Trust’s portfolio through value-added capital upgrades and its property re-positioning program. See “Strategy for Growth – New Apartment Development”, “Investing in Boardwalk’s Properties – Value Added Capital and Property Re-Positioning Programs” and “Pursuing Partnerships or Joint Ventures”. Accordingly, the Trust has pursued new apartment development on some of its excess density and, in partnership with other landowners and/or developers, at well located sites on main transit lines in Calgary, Edmonton, Regina and the Greater Toronto Area. Risk Management for Supply
The Trust’s performance will always be affected by the supply and demand for multi-family rental real estate in Canada. The potential for reduced rental revenue exists in the event that Boardwalk REIT is not able to maintain its properties at a high level of occupancy, or in the event of a downturn in the economy, which could result in lower rents or higher vacancy rates. Boardwalk REIT has minimized these risks by:
▪ Increasing Resident Members’ satisfaction; ▪ Diversifying its portfolio across Canada, thus lowering its exposure to regional economic swings; ▪ Acquiring properties only in desirable locations, where vacancy rates for properties are higher than city-wide averages but can be reduced by repositioning the properties through better management and selective upgrades; ▪ Holding a balanced portfolio which includes a variety of multi-family building types including high-rise, townhouse, garden and walk-ups, each with its own market niche; ▪ Maintaining a wide variety of suite mix, including bachelor suites, one (1), two (2), three (3) and four (4) bedroom units; ▪ Building a broad and varied Resident Member base, thereby avoiding economic dependence on larger-scale tenants; ▪ Focusing on affordable multi-family housing, which is considered a stable commodity;
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▪ Developing a specific rental program characterized by rental adjustments that are the result of enhanced service and superior product; ▪ Developing regional management teams with significant experience in the local marketplace, and combining this experience with the Trust’s existing operations and management expertise; ▪ Constantly adjusting market rents and incentives based on property and suite-specific supply and demand; ▪ Improving portfolio by investing in suite renovations and upgrades; and ▪ Undertaking new apartment development as a small part of overall business strategy. Refinancing Risk
Refinancing risk is the combined risk that the Trust would experience a loss as a result of its exposure to a higher interest rate environment (“interest rate risk”) and the possibility that at the term end of a mortgage, the Trust would be unable to renew the maturing debt with either the existing or an additional lender (“renewal risk”).
Boardwalk did not see any increase in exposure to interest rate risk in 2019. However, there is a heightened risk that not only will existing maturing mortgages be subject to increased interest rate charges, but the possibility always exists that maturing mortgages will themselves not be able to be renewed or, if they are, at lower loan to value ratios.
The Trust continues to manage its refinancing risk by maintaining a balanced maturing portfolio with no significant amount coming due in any one particular period. In addition, the majority of the Trust's debt is insured with NHA insurance. This insurance allows the Trust to increase the overall credit quality of the mortgage and, as such, enable the Trust to obtain preferential interest rates as well as facilitating easier renewal on its due date.
The use of NHA insurance also assists the Trust in managing its renewal risk. Given the increased credit quality of such debt, the probability of the Trust being unable to renew the maturing debt or transfer this debt to another accredited lending institution is significantly reduced. However, there can be no assurance that the renewal of debt will be on as favourable terms as the Trust's existing debt.
Boardwalk entered into a large borrower agreement, dated September 13, 2002, which was amended and restated on January 19, 2005 and April 25, 2006 (the "LBA") with CMHC. Pursuant to the LBA, the Trust agreed to provide certain financial information to CMHC and be subject to certain restrictive covenants, including limitations on additional debt, payment of Distributions in the event of default, and maintenance of certain financial ratios. In the event of a default under the agreement, the Trust’s total financial liability under this Agreement is limited to a one-time penalty payment of $250,000 under a Letter of Credit issued in favor of CMHC. If the Trust is non-compliant and not able to remedy, there would be no impact on the renewal of existing insured mortgages through the full amortization of the financing. However, such non-compliance may impact the Trust from obtaining future insured loans under this program.
To date, the Trust continues to obtain mortgage renewals on maturing mortgages and, in addition, where requested, additional funds continue to be available to the Trust on its investment properties. Although the Trust continues to see fluctuations in the quoted credit spread over the corresponding bench mark bonds, the all in quoted rates, due to a general decline in interest rates, continue to be at levels well below the term maturing rate and, as such, are accretive to the Trust as a whole.
In 2013, the Government of Canada capped the total amount of NHA insurance that CMHC can provide at an aggregate limit of $600 billion. This decision has primarily affected the amount of portfolio or bulk insurance CMHC offers to banks and, in Management’s assessment, has had, to date, minimal impact on the renewal of Boardwalk's mortgages or the cost of secured debt capital. However, there is no
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assurance that the decision to cap the amount of CMHC insurance will not affect mortgages for multi- family residential properties in future periods.
The Trust continues to monitor this situation and, depending on the changes, if any, the Government of Canada places on the NHA insurance product, the impact on the Trust could vary. It is Management’s current understanding that this cap would not affect any pre-existing insurance agreements. Over 99% of Boardwalk's secured debt has NHA insurance on it with an average of 30 years of amortization remaining. The larger risk may be to the ability to issue new secured debt under this program at the corresponding lower cost associated with the use of NHA insurance, the proceeds of which the Trust uses to assist in the execution of its overall business strategy.
The Trust continues to monitor this situation on a daily basis and may adjust its strategy given the market and political conditions.
The Trust also manages its interest rate risk by, on a selective basis, forward contracting with a major financial institution to hedge the Trust's exposure to Canadian bond yield fluctuations. When the Trust finances its secured mortgage portfolio, the new interest rate is based on the market yield of the corresponding Government of Canada Bond plus what is referred to as a "spread". Although the market spread on these transactions will vary, the one constant is the specific bond that the Trust will be using as the underlying basis.
In addition, the Trust also maintains a reasonable level of liquidity to assist in the implementation of its strategy, as well as to provide a contingency for any unforeseen circumstances. At December 31, 2019 the Trust’s liquidity position, defined as “Cash Available”, coupled with any unused revolving credit facilities and committed secured up-financing, totaled over $257.8 million. Boardwalk defines liquidity to include cash and cash equivalents on hand; any unused committed revolving credit facility; plus any committed secured financings. The Trust’s current liquidity position remains stable. As of December 31, 2019, the Trust’s cash position was $35.2 million, compared to the $38.1 million reported as of December 31, 2018. As at December 31, 2019, the Trust also had $199.7 million of unused credit facility (December 31, 2018 - $99.7 million) and committed secured up-financing of approximately $23.0 million. See “Strategy for Growth – Liquidity”. Development Risk
As previously noted under the heading "Strategy for Growth", the Trust is reviewing and considering development of new selective multi-family or condominium projects on its excess density. Although this review and consideration is in a very preliminary stage, any development commitments made by the Trust will be subject to those risks usually attributable to development projects, which include: (i) construction or other unforeseeable delays; (ii) cost overruns; (iii) poor market for leasing; and/or; (iv) the failure of Resident Members to occupy and pay rent.
These risks can result in an uneconomic return from the leasing of such space. Such risks are minimized through the provisions of the Declaration of Trust, which have the effect of limiting direct and indirect investments (net of related mortgage debt) in non-income producing properties to no more than 15% of the Adjusted Unitholders' Equity. Such developments will also likely be undertaken with established developers either on a co-ownership basis or, less likely, by providing them with mezzanine financing, as well as with knowledgeable third-party consultants. With some exceptions, from time to time, especially in high growth markets, generally Boardwalk will not acquire or fund significant expenditures for undeveloped land unless it is zoned and an acceptable level of space has been pre-sold. An advantage of new format multi-family or condominiums is that they lend themselves to
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phased construction keyed to vacancy rates and/or sales levels, respectively, which avoids the creation of meaningful amounts of vacant space. One of the biggest development risks is the building of oversupply in a particular market, which results in significant corrections of property values market wide. The Trust currently mitigates this risk by avoiding excessive leverage, using cash on hand for new development and undertaking development as a small part of Boardwalk’s overall business strategy. Structural Subordination
Liabilities of a parent entity with assets held by various subsidiaries may result in the structural subordination of the lenders of the parent entity. The parent entity is entitled only to the residual equity of its subsidiaries after all debt obligations of its subsidiaries are discharged. In the event of a bankruptcy, liquidation or reorganization of the Trust, holders of indebtedness of the Trust may become subordinate to lenders to the subsidiaries of the Trust.
Certain of the subsidiaries of the Trust will provide a form of guarantee pursuant to which the lender will be entitled to seek redress from such subsidiaries for the guaranteed indebtedness. These guarantees are intended to eliminate structural subordination, which arises as a consequence of the Trust’s assets being held in various subsidiaries. Although all subsidiaries, which own material assets, will provide a guarantee, not all subsidiaries of the Trust will provide such a guarantee. In addition, there can be no assurance that a lender will, or will be able to, effectively enforce the guarantee. Rent Control Risk
Rent Control Risk is the risk of the implementation or amendment of new or existing legislative rent controls in the markets the Trust operates, which may have an adverse impact on the Trust's operations. Ontario and Quebec, both of which currently have rent control legislation, are two (2) markets in which the Trust operates.
Under Ontario's rent control legislation, commonly known as "rent de-control", a landlord is entitled to increase the rent for existing Resident Members once every 12 months by no more than the "guideline amount" established by regulation. For the calendar year 2020, the guideline amount has been established at 2.2% (1.8% for 2019). Further details on Ontario’s annual rent increase guidelines can be found at http://www.ontario.ca/page/rent-increase-guideline#section-0. This adjustment is meant to take into account the income of the building, the municipal and school taxes, the insurance bills, the energy costs, maintenance and service costs. Landlords may apply to the Ontario Rental Housing Tribunal for an increase above the guideline amounts if annual costs for heat, hydro, water or municipal taxes have increased significantly, or if building security costs have increased. When a unit is vacated, however, the landlord is entitled to lease the unit to a new tenant at any rental amount, after which annual increases are limited to the applicable guideline amount. The landlord may also be entitled to a greater increase in rent for a unit under certain circumstances, including, for example, where extra expenses have been incurred as a result of a renovation of that unit. In November of 2018, Ontario removed rent control on new residential units that were not previously occupied prior to November 18, 2018.
In April 2017, the Ontario Government introduced legislation that would expand rent control to all rental units. Previously, rent control in Ontario applied only to rental units constructed before November 1, 1991. The new legislation will not have a material impact on Boardwalk, as all of its Ontario properties were built prior to November 1, 1991. In November 2018, Ontario amended this legislation to remove rent control on new apartments that had previously been unoccupied in order to increase the supply of affordable housing. This new legislation should provide a boost to Boardwalk’s strategy to develop new multi-family residential communities in the GTA with strategic partners similar to its joint venture with Redwood in Brampton. For more information on the Trust’s joint venture in Brampton with Redwood, please see the information under the heading “Strategy for Growth – New Apartment Development”.
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Under Quebec's rent control legislation, a landlord is entitled to increase the rent for existing tenants once a year for the rent period starting after April 1st of the current year but before April 1st of the following year. There is no fixed rate increase specified by regulation. Rent increases also take into account a return on capital expenditures (for 2020 this return is 3.1%; 2.7% for 2019), if such expenditures were incurred, and an indexing of the net income of the building. Average rent increase estimates for the period starting after April 2, 2019 and before April 1, 2020, before any consideration for increases to municipal and school taxes and capital expenditures, are: -1.3% for electricity heated dwellings, -2.5% for gas heated dwellings, and -2.8% for oil heated dwellings, plus 2.1% to cover the cost of maintenance service (2.9%) and management contracts (1.9%). Tools to calculate allowable rent increases in Quebec can be found at “www.rdl.gov.qc.ca/en/news/calculation-of-the2020-rent-increase”.
To manage this risk, prior to entering a market where rent controls are in place, an extensive amount of time is spent researching the existing rules and, where possible, the Trust will ensure it employs people who are experienced in working in these controlled environments. In addition, the Trust adjusts forecast assumptions on new acquisitions to ensure they are reasonable given the rent control environment.
While the Province of Alberta does not have and, to Management’s knowledge, does not intend to implement rent control legislation, effective April 24, 2007, the Government of Alberta amended its residential tenancies legislation. The most significant changes to the legislation focused on two (2) key areas, the first being the number of rental increases that an owner could issue to a renter on an annual basis and the second being the notice period required if an owner is contemplating a significant renovation or condominium conversion.
Rental increases limited to once per year – the legislation stipulates that an owner may increase existing tenant rents not more than one (1) time per year; previously, owners were able to increase rents once every six (6) months, or twice per year. It should be noted that in this legislation, there is no limitation placed on the amount rents can increase. Notice for extensive renovations or condominium conversion - the legislation introduced limitations on an owner that wishes to convert an existing rental property to a condominium. Under the legislation, an owner is required to give the existing tenants a notice of one (1) year and, during that one-year notice period, the owner will not be able to increase rents at any time. Previous legislation required only a notice period of six (6) months and there was no limitation on the number of rental increases other than the twice (2x) per year limit referred to in the immediately preceding paragraph.
It should be emphasized that there have been no changes or limitations as to the market rents charged in Alberta. Accordingly, there are no new limitations placed on the amount which can be charged to new renters by Boardwalk REIT.
Impact on Boardwalk REIT - Boardwalk REIT currently has approximately 63% of its rental portfolio in Alberta and, as such, any change to existing legislation needs to be reviewed, and any potential impact needs to be considered, carefully. It is currently Boardwalk REIT's internal policy to limit increases to the rents of existing Resident Members over a one-year period; as noted above, the same limitation does not apply to new Resident Members, who will be charged market rents. The Trust's previous policy was to split the annual maximum into two (2) equal instalments every six (6) months. The legislation now limits Boardwalk REIT to one (1) increase per year and, accordingly, the Trust has amended its previous practice by increasing the in-place rents by a maximum amount once per year. The Trust also now offers existing Resident Members a fixed 12- month lease with the maximum rental increase in place.
Presently, rent control legislation does not exist in, and, to the best of Management’s knowledge, is not planned for Saskatchewan.
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Utility & Tax Risk
Utility and tax risk relates to the potential loss the Trust may experience as a result of higher resource prices as well as its exposure to significant increases in property taxes. Over the past few years, property taxes have increased as a result of re-valuations of municipal properties and their adherent tax rates. For the Trust, these re-valuations have resulted in significant increases in some property assessments due to enhancements, which are not represented on the Trust's balance sheet (as such representations are contrary to existing IFRS reporting standards). To address this risk, Boardwalk REIT has compiled a specialized team of property reviewers who, with the assistance of outside authorities, constantly review property tax assessments and, where warranted, appeal them. It is not uncommon for the Trust to receive property tax refunds and/or adjustments; however, due to the uncertainty of the timing and the amount of the refunds or adjustments, these amounts are only reported when they are received.
Utility expenses, mainly consisting of natural gas and electricity service charges, have been subject to considerable price fluctuations over the past several years. In recent years, water and sewer costs have increased significantly, as another form of “taxes” imposed by various municipalities. In addition, the carbon tax imposed by the Government of Alberta has increased the cost of natural gas usage. Pursuant to this tax, effective January 1, 2018, an additional $1.65 per gigajoule (“GJ”) consumed was charged. The newly elected Alberta Government eliminated the tax in 2019. Further, the imposition of the federal carbon tax in Alberta, Saskatchewan and Ontario in 2020 at a rate of $20 per tonne will increase the cost of natural gas usage at the Trust’s buildings in these provinces at a rate of $1.05 per GJ. Any significant increase in these resource costs that the Trust cannot pass on to the tenant/customer may have a negative material impact on the Trust. To mitigate this risk, the Trust has played a more active role in controlling the fluctuation and predictability of it. Through the combined use of financial instruments and resource contracts with varying maturity dates, exposure to these fluctuations has been reduced. In addition, the Trust has implemented the following steps:
(a) where possible, economical electrical sub-metering devices have been installed, passing on the responsibility for electricity charges to the end tenant/customer; (b) in other cases, rents have been, or will be, adjusted upward to cover these increased costs; and (c) where possible, it enters into long-term supply contracts at a fixed price. Risks Due to Real Estate Financing
We anticipate that future acquisitions will be financed, in whole or in part, under various lines of credit, and other forms of secured or unsecured financing or through the issuance of additional debt or equity by us. Boardwalk expects periodically to review its financing options regarding the appropriate mix of debt and equity financing. Equity, rather than debt, financing of future developments or acquisitions could have a dilutive effect on the interests of its existing Unitholders. Similarly, there are certain risks involved with financing future developments and acquisitions with debt, including those described below. In addition, if new developments are financed through construction loans, there is a risk that, upon completion of construction, permanent financing for such properties may not be available or may be available only on disadvantageous terms, or that the cash flow from new properties will be insufficient to cover debt service. If a newly developed or acquired property is unsuccessful, Boardwalk’s losses may exceed its investment in the property. Any of the foregoing could have a material adverse effect on the Trust and its ability to make distributions to its Unitholders and to pay amounts due on its debt.
The Trust may be Unable to Renew, Repay or Refinance its Outstanding Debt.
The Trust is subject to the normal risks associated with debt financing, including the risk that its cash flow will be insufficient to meet required payments of principal and interest, the risk that indebtedness on its properties, or unsecured indebtedness, will not be able to be renewed, repaid or refinanced when
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due or that the terms of any renewal or refinancing will not be as favourable as the existing terms of such indebtedness. If the Trust were unable to refinance its indebtedness on acceptable terms, or at all, it might be forced to dispose of one (1) or more of the properties on disadvantageous terms, which might result in losses to the Trust. Such losses could have a material adverse effect on the Trust and its ability to make distributions to its Unitholders and pay amounts due on its debt. Furthermore, if a property is mortgaged to secure payment of indebtedness and Boardwalk was unable to meet mortgage payments, the mortgagee could foreclose upon the property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of the Trust’s revenues and asset value. Foreclosures could also create taxable income without accompanying cash proceeds, thereby hindering the Trust’s ability to meet the REIT distribution requirements of applicable tax legislation.
The Trust’s Degree of Leverage Could Limit its Ability to Obtain Additional Financing
Trust’s Consolidated EBITDA to Consolidated Interest Expense was 2.76 to 1 as of December 31, 2019. The Trust’s degree of leverage could have important consequences to Unitholders. For example, the degree of leverage could affect its ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, development or other general corporate purposes, making it more vulnerable to a downturn in business or the economy in general. Under the Trust’s current Declaration of Trust, the Trust must maintain a Consolidated EBITDA to Consolidated Interest Expense of 1.50 to 1. For more information, please see the disclosure under the heading “Internal Guidelines & Operating Policies of Boardwalk REIT – Operating Policies”. Insurance Policy Deductibles & Exclusions
In order to partially mitigate the substantial increase in insurance costs in recent years, management has determined to gradually increase deductible and self-insured retention amounts. As of December 31, 2019, the Trust's property insurance policy provides for a per occurrence deductible of $100,000 and an annual aggregate deductible of $2 million, with any excess losses being covered by insurance. As a result of the terrorist attacks of September 11, 2001, property insurance carriers have created exclusions for losses from terrorism from the Trust’s "all risk" property insurance policies. While separate terrorism insurance coverage is available in certain instances, premiums for such coverage are generally very expensive and deductibles are very high and, in many cases, unavailable. Additionally, the terrorism insurance coverage that is available typically excludes coverage for losses from nuclear, biological and chemical attacks. At the present time, the Trust has determined that it is not economically prudent to obtain property terrorism insurance for its entire portfolio to the extent otherwise available, especially given the significant risks that are not covered by such insurance. As of December 31, 2019, the Trust carried a total liability insurance policy of $90 million per occurrence. Outstanding Indebtedness
The ability of Boardwalk REIT to make cash distributions to Unitholders or to make other payments are subject to applicable law and contractual restrictions contained in instruments governing Boardwalk REIT's indebtedness. Although Boardwalk REIT is not currently in default under any existing loan agreements or guarantee agreements, any future default could have significant consequences for Unitholders. Further, the amount of Boardwalk REIT's indebtedness could have significant consequences to holders of Units, including that the ability of Boardwalk REIT to obtain additional financing for working capital, capital expenditures or future acquisitions may be limited; and that a significant portion of Boardwalk REIT's cash flow from operations may be dedicated to the payment of principal and interest on its indebtedness, thereby reducing funds available for future operations and distributions. Additionally, some of Boardwalk REIT's debt may be at variable rates of interest or may be renewed at higher rates of interest, which may affect cash flow from operations available for distributions. Also, in the event of a significant economic downturn, there can be no assurance that Boardwalk REIT will generate sufficient cash flow from operations to meet required interest and principal payments. Boardwalk REIT is subject to
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the risk that it may not be able to refinance existing indebtedness upon maturity or that the terms of such refinancing may be onerous. These factors may adversely affect Boardwalk REIT's cash distributions.
In addition to mortgages associated with the majority of the properties owned by Boardwalk REIT, Boardwalk REIT, through the Partnership, has an outstanding credit facility of $200 million (the "Facility"). See "Strategy for Growth – Managing Capital". Certain properties have a first or second charge registered against them as security for the Facility. The interest rate charged under the Facility varies depending on the charged properties but will be a blend of the prime rate established by the lender for Canadian dollar loans made in Canada (the "Prime Rate") and Prime Rate plus one percent (1%). The Facility also has various other fees including an arrangement fee, a commitment fee, an administration fee and a renewal fee which in the aggregate are not material to Boardwalk REIT.
In addition to the charge on specific properties (the "Secured Properties"), the Facility provides for an assignment of rents, an assignment of insurance proceeds in the event of loss of any of the Secured Properties and guarantees from various subsidiary entities.
The Partnership and other entities which have guaranteed the Facility are prohibited from paying distributions in the event that any mortgage on real property owned by or for the benefit of the REIT is in default in payment, unless a specific reserve in respect of such mortgage is retained.
In the event that Boardwalk REIT defaults in payment of any mortgage and is unable or unwilling to establish an appropriate reserve, distributions to Unitholders would be prohibited.
In addition, the Facility has certain operational covenants, including that the debt service coverage ratio is to be maintained at not less than 1.20:1, the debt service coverage ratio specific to the Secured Properties is to be maintained at not less than 115% and the total indebtedness of Boardwalk REIT will not exceed 75% of the Gross Book Value of the properties owned by Boardwalk REIT calculated in accordance with the Declaration of Trust.
CMHC, under a program generally available to Canadian homeowners, guarantees mortgage debt. Over 99% of Boardwalk REIT's mortgage debt is insured by CMHC and, in accordance with CMHC's normal practice for large borrowers, Boardwalk REIT was required to enter into the LBA. CMHC is not a lender to Boardwalk REIT but, under the LBA, Boardwalk REIT is required to provide periodic operating and performance information to CMHC. The LBA also contains various financial performance covenants. If Boardwalk REIT fails to meet such performance covenants for four (4) consecutive fiscal quarters and is unable or unwilling to pay into a reserve account an amount sufficient to remedy such performance covenants or to pay out the offending mortgages, then CMHC can prohibit Boardwalk REIT from making cash distributions on the Units. Acquisition Performance Risk
Boardwalk REIT's strategy includes, in part, the ability of the Trust to acquire additional rental properties. The acquisitions of these properties are based on predetermined financial operational and financing strategies that, once fully implemented, will result in an acceptable return for the Trust as a whole. It is possible that the actual performance of these acquisitions may be materially different from the assumptions made in purchasing same, resulting in a negative outcome for the Trust as a whole.
A risk associated with a real property acquisition is that there may be an undisclosed or unknown liability concerning the acquired properties, and Boardwalk may not be indemnified for some or all of these liabilities. Following an acquisition, Boardwalk may discover that it has acquired undisclosed liabilities, which may be material.
Boardwalk conducts what it believes to be an appropriate level of investigation in connection with its acquisition of properties and seeks through contract to ensure that risks lie with the appropriate party.
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Operational Risk
Operational Risk is the risk that a direct or indirect loss may result from an inadequate or failed technology, from a human process or from external events. The impact of this loss may be financial loss, loss of reputation or legal and regulatory proceedings. The Trust endeavours to minimize losses in this area by ensuring that effective infrastructure and controls exist. These controls are constantly reviewed and improvements are implemented, if deemed necessary. Dependence on the Operating Trust & the Partnership
Boardwalk REIT is entirely dependent on the business of the Partnership through the Trust’s ownership of the Operating Trust and, indirectly, LP Class A Units. The cash distributions to Unitholders are dependent on the ability of the Operating Trust to pay distributions in respect of the Operating Trust Units and interest on the Operating Trust Notes and the ability of the Partnership to pay distributions on the LP Class A Units, LP Class B Units and LP Class C Units. The ability of the Partnership to pay distributions or make other payments or advances to the Operating Trust may be subject to contractual restrictions contained in any instruments governing the indebtedness of the Partnership. The ability of the Partnership to pay distributions or make other payments or advances will also be dependent on the ability of the Partnership's subsidiaries to pay distributions or make other payments or advances to the Partnership. Fluctuations of Cash Distributions
Although Boardwalk REIT intends to continue making Distributions, the actual amount of Trust income distributed in respect of the REIT Units will depend upon numerous factors, including, but not limited to, the amount of principal repayments, tenant allowances, leasing commissions, capital expenditures, REIT Unit redemptions and other factors that may be beyond the control of Boardwalk REIT.
The distribution policy of Boardwalk REIT is established by the Trustees and is subject to change at the discretion of the Trustees. The recourse of Unitholders who disagree with any change in policy is limited and could require such Unitholders to seek to replace the Trustees.
Distributions may exceed actual cash available to Boardwalk REIT from time to time because of items such as principal repayments, tenant allowances, leasing commissions, capital expenditures and redemption of REIT Units, if any. Boardwalk REIT may be required to use part of its debt capacity or to reduce Distributions in order to accommodate such items. Boardwalk REIT may temporarily fund such items, if necessary, through its operating line of credit in expectation of refinancing long-term debt on its maturity. See “Strategy for Growth – Managing Capital.” Workforce Availability
Boardwalk's ability to provide services to its existing tenants/customers is somewhat dependent on the availability of well-trained employees and contractors to service its tenants/customers as well as to complete required maintenance and capital upgrades on the Trust’s buildings. The Trust must also balance requirements to maintain adequate staffing levels while balancing the overall cost to the Trust.
Within Boardwalk, its most experienced Associates are employed full-time while supplementing these with additional part time employees as well as contracting out necessary, specific services. The Trust is constantly reviewing existing overall market factors to ensure that its existing compensation program is in-line with existing levels of responsibility and, if warranted, adjusting the program accordingly. The Trust also encourages Associate feedback in these areas to ensure the existing programs are meeting their personal needs.
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Market Price of REIT Units
One of the factors that may influence the market price of the REIT Units is the annual yield thereon.
Accordingly, an increase in market interest rates may lead purchasers of REIT Units to expect a higher annual yield which could adversely affect the market price of the REIT Units. In addition, the market price for the REIT Units may be affected by changes in general market conditions, fluctuations in the markets for equity securities, short-term supply and demand factors for real estate investment trusts and numerous other factors beyond the control of Boardwalk REIT.
The Trust has no obligation to distribute to Unitholders any fixed amount, and reductions in, or suspensions of, cash distributions may occur that would reduce yield based on the offering price. Legal Rights Normally Associated with the Ownership of Shares of a Corporation
As holders of REIT Units, Unitholders do not have all of the statutory rights normally associated with ownership of shares of a company. However, since amending the Declaration of Trust on May 12, 2016, Unitholders have the right to bring "oppression" and "derivative" actions against Boardwalk REIT.
For more information on said amendments to the Declaration of Trust, please see pages 83 to and including 88 of the Trust’s Management Information and Proxy Circular dated March 31, 2016, mailed to Unitholders in connection with the Annual Meeting of the Trust held on May 12, 2016. The REIT Units are not "deposits" within the meaning of the Canada Deposit Insurance Corporation Act (Canada) and are not insured under the provisions of that Act or any other legislation.
Furthermore, Boardwalk REIT is not a trust company and, accordingly, is not registered under any trust and loan company legislation as it does not carry on or intend to carry on the business of a trust company. Unitholder Liability
There is a risk that REIT Unitholders could become subject to liability. The Declaration of Trust provides that no Unitholder or annuitant under a plan of which a Unitholder acts as trustee or carrier will be held to have any personal liability as such, and that no resort shall be had to the private property of any Unitholder or annuitant for satisfaction of any obligation or claim arising out of or in connection with any contract or obligation of Boardwalk. Only Boardwalk’s assets are intended to be subject to levy or execution. The Declaration of Trust further provides that, whenever possible, certain written instruments signed by Boardwalk must contain a provision to the effect that such obligation will not be binding upon Unitholders personally or upon any annuitant under a plan of which a Unitholder acts as trustee or carrier. In conducting its affairs, Boardwalk has acquired and may acquire real property investments subject to existing contractual obligations, including obligations under mortgages and other contractual obligations that do not include such provisions. Boardwalk will use its best efforts to ensure that provisions disclaiming personal liability are included in contractual obligations related to properties acquired in the future.
Certain provinces have legislation relating to unitholder liability protection, including British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Quebec. To Boardwalk’s knowledge, certain of these statutes have not yet been judicially considered and it is possible that reliance on such statute by a Unitholder could be successfully challenged on jurisdictional or other grounds.
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Ability of Unitholders to Redeem REIT Units
It is anticipated that the redemption right attached to the REIT Units will not be the primary mechanism by which holders of such REIT Units liquidate their investments. The entitlement of holders of REIT Units to receive cash upon the redemption of their REIT Units is subject to the limitations that: (i) the total amount payable by Boardwalk REIT in respect of such REIT Units and all other REIT Units, other than Special Voting Units, tendered for redemption in the same calendar month shall not exceed $50,000 (provided that such limitation may be waived at the discretion of the Trustees); (ii) at the time such REIT Units are tendered for redemption, the outstanding REIT Units shall be listed for trading on a stock exchange or traded or quoted on another market which the Trustees consider, in their sole discretion, provides representative fair market value prices for such REIT Units; and (iii) the normal trading of the REIT Units is not suspended or halted on any stock exchange on which such REIT Units are listed (or, if not listed on a stock exchange, on any market on which such REIT Units are quoted for trading) on the redemption date or for more than five (5) trading days during the 20-day trading period commencing immediately after the redemption date. Regulatory Approvals May be Required in Connection with a Distribution of Securities on a Redemption of REIT Units or the Termination of Boardwalk REIT
Upon redemption of REIT Units or termination of Boardwalk REIT, the Trustees may distribute securities directly to the Unitholders, subject to obtaining any required regulatory approvals. No established market may exist for the securities so distributed at the time of the distribution and no market may ever develop.
In addition, the securities so distributed may not be qualified investments for RRSPs, RRIFs, DPSPs or RESPs, depending upon the circumstances at the time. An Investment in REIT Units is Subject to Certain Tax Risks
There can be no assurance that Canadian federal income tax laws respecting the treatment of mutual fund trusts and real estate investment trusts will not be changed in a manner which adversely affects the holders of REIT Units.
Boardwalk REIT currently qualifies as a "mutual fund trust" for income tax purposes. Boardwalk REIT also qualifies as a “real estate investment trust”, which is exempted from income taxes imposed on specified investment flow-through entities as discussed below. It is Boardwalk REIT’s intention to annually distribute all of its taxable income to REIT Unitholders and thus generally not be subject to tax on such amount, unless the Board of Trustees in its absolute discretion determines another amount. In order to maintain its current mutual fund trust status, Boardwalk REIT is required to comply with specific restrictions regarding its activities and the investments held by it. If Boardwalk REIT were to cease to qualify as a mutual fund trust or real estate investment trust, the consequences could be adverse.
If Boardwalk REIT were to cease to qualify as a "mutual fund trust" and as a "registered investment" under the Tax Act and the REIT Units were to cease to be listed on a “designated stock exchange” (which includes the TSX), the REIT Units would cease to be qualified investments for trusts governed by registered retirement savings plans, registered retirement income funds, registered education savings plans, deferred profit sharing plans and registered disability savings plans, and for tax-free savings accounts (collectively, "Plans"). The Tax Act imposes penalties for the acquisition or holding by Plans of non-qualified investments. Boardwalk REIT will endeavour to ensure that the REIT Units continue to be qualified investments for Plans; however, there can be no assurance that this will be so. Other consequences of Boardwalk REIT ceasing to be a mutual fund trust would be as follows:
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(a) REIT Units held by non-resident Unitholders would immediately become taxable Canadian property. Non-resident Unitholders would be subject to Canadian income tax and reporting requirements on any gains realized on a disposition of REIT Units held by them; (b) Boardwalk REIT would, aside from the SIFT Rules (as defined below), be taxed on certain types of income distributed to Unitholders. Payment of this tax may have adverse consequences for some Unitholders, particularly Unitholders that are not residents of Canada and residents of Canada that are otherwise exempt from Canadian income tax; (c) Boardwalk REIT would cease to be eligible for the capital gains refund mechanism available under Canadian tax laws to mutual fund trusts; and (d) Boardwalk REIT would no longer be exempt from the application of the alternative minimum tax provisions of the Tax Act.
The Tax Act contains rules (hereinafter the “SIFT Rules”) relating to the federal income taxation of certain publicly traded trusts and partnerships, and their unitholders. Under the SIFT Rules, a trust that is a "SIFT trust" is subject to tax at the prevailing federal corporate income tax rate, plus an additional provincial tax factor, on certain income that is distributed to its unitholders, and such distributions are treated as taxable dividends paid by a taxable Canadian corporation.
The definition of a "SIFT trust" specifically excludes a trust that is a "real estate investment trust" for the taxation year, which is currently defined under the SIFT Rules as a trust that is resident in Canada and that satisfies all of the following criteria:
(a) at each time in the taxation year, the total fair market value at that time of all non-portfolio properties that are qualified REIT properties held by the trust is at least 90% of the total fair market value at that time of all non-portfolio properties held by the trust; (b) not less than 90% of the trust's gross REIT revenue for the taxation year is from one (1) or more of the following: (i) rent from real or immovable properties; (ii) interest; (iii) dispositions of real or immovable properties that are capital properties; (iv) dividends; (v) royalties; and (vi) dispositions of eligible resale properties; (c) not less than 75% of the trust's gross REIT revenue for the taxation year is from one (1) or more of the following: (i) rent from real or immovable properties; (ii) interest from mortgages, or hypothecs, on real or immovable properties; and (iii) dispositions of real or immovable properties that are capital properties; (d) at each time in the taxation year an amount, that is equal to 75% or more of the equity value of the trust at that time, is the amount that is the total fair market value of all properties held by the trust, each of which is a real or immovable property that is capital property, an eligible resale property, an indebtedness of a Canadian corporation represented by a bankers’ acceptance, a deposit with a credit union, money, bank deposits, and debt of or guaranteed by the Government of Canada or a province or other political subdivision; and (e) investments in the trust are, at any time in the taxation year, listed or traded on a stock exchange or other public market.
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For this purpose:
“Qualified REIT property” of the Trust includes: (a) real or immovable property that is capital property, an eligible resale property, an indebtedness of a Canadian corporation represented by a banker’s acceptance, a deposit with a credit union, money, bank deposits, and debt of or guaranteed by the Government of Canada or a province or other political subdivision; (b) a security of another entity (corporation, trust or partnership) resident in Canada if: (i) all or substantially all of that other entity’s gross REIT revenue is from maintaining, improving, leasing or managing real or immovable properties that are capital properties of the Trust or of an entity of which the Trust holds a share or an interest (including real or immovable properties that the Trust or any other entity of which the Trust holds a share or an interest holds together with one (1) or more other persons or partnerships); or (ii) that other entity holds no property other than: (A) legal title to real or immovable property of the Trust or of another entity all of the securities of which are held by the Trust (including real or immovable properties that the Trust or such other entity holds together with one (1) or more other persons or partnerships); or (B) property ancillary to the earning by the Trust of rent from real or immovable properties or amounts from dispositions of real or immovable properties that are capital properties; and (C) property that is ancillary to the earning by the Trust of rent from real or immovable properties or amounts from dispositions of real or immovable properties that are capital properties, other than an equity of an entity or a mortgage, hypothecary claim, mezzanine loan or similar obligation.
“Real or immovable property” includes: (i) a security of any trust, corporation or partnership that itself satisfies the criteria to be a “real estate investment trust” (or that would satisfy them if it were a trust); or (ii) an interest in real property or a real right in immovables, but does not include any depreciable property other than property included in Classes 1, 3 or 31 (or property ancillary thereto) or a lease in, a leasehold interest in respect of, land or property included in Classes 1, 3 or 31.
“Rent from real or immovable property” includes payments for services ancillary to, and customarily provided in connection with, the rental of real or immovable properties, but does not include: (i) payment for services supplied or rendered, other than those specifically included, to the tenant of such properties; (ii) fees for managing or operating such properties; (iii) payment for the occupation of, use of, or right to use a room in a hotel or other similar lodging facility; or (iv) rent based on profits.
“Eligible resale property” of an entity (corporation, trust or partnership) means real or immovable property (other than capital property) of an entity that is contiguous to a particular real or immovable property that is capital property or eligible resale property held by the entity or an affiliated entity and the holding of which is ancillary to the holding of the particular property.
If Boardwalk REIT, or any other trust, does not qualify under these rules as a real estate investment trust, it will no longer be able to deduct for tax purposes its taxable distributions and, as such, will be required to pay tax on this amount prior to distribution. Any amount distributed that is determined to be a return of capital would not be subject to this tax.
The Declaration of Trust of Boardwalk REIT provides that a sufficient amount of Boardwalk REIT's net income and net realized capital gains will be distributed each year to Unitholders, in cash or otherwise, in order to eliminate Boardwalk REIT's liability for tax under Part I of the Tax Act. Where such amount of net income and net realized capital gains of Boardwalk REIT in a taxation year exceeds the cash available for distribution in the year, such excess net income and net realized capital gains will be distributed to Unitholders in the form of additional REIT Units. Unitholders will generally be required to include an amount equal to the fair market value of those REIT Units in their taxable income, in circumstances where they do not directly receive a cash distribution.
Although Boardwalk REIT is of the view that all expenses to be claimed by Boardwalk REIT, the Operating Trust and the Partnership will be reasonable and deductible, that the cost amount and capital cost allowance claims of entities indirectly owned by Boardwalk REIT will have been correctly determined
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and that the allocation of the Partnership's income for purposes of the Tax Act among its partners is reasonable, there can be no assurance that the Tax Act or the interpretation of the Tax Act will not change, or that the CRA will agree. If the CRA successfully challenges the deductibility of such expenses or the allocation of such income, the Partnership's allocation of income to the Operating Trust, and indirectly the taxable income of Boardwalk REIT and the Unitholders, may be adversely affected. The extent to which distributions will be tax-deferred in the future will depend in part on the extent to which entities indirectly owned by Boardwalk REIT are able to deduct capital cost allowance relating to the Assets held by them.
Since the Partnership acquired the relevant properties on a tax-deferred basis, its tax cost in certain properties may be less than their fair market value. Accordingly, if one (1) or more properties are disposed of, the gain recognized by the Partnership may be in excess of that which it would have realized if it had acquired the properties at their fair market values.
Immediately prior to the Plan of Arrangement becoming effective, the Corporation transferred the Assets to the Partnership and received, as partial consideration therefor, a credit to the capital accounts in respect of the LP Class C Units, all of which were owned at that time by the Corporation. See “Overview of the Acquisition & the Arrangement Replacing the Corporation as a Public Entity with Boardwalk REIT — Pre- Arrangement Reorganization”. The Corporation, based on the advice of legal counsel, is of the view that there is no income tax payable by the Corporation in connection with the transfer and contribution of the Assets to the Partnership. In the event that CRA takes a contrary view; however, the Corporation has been advised by counsel that the CRA would not be successful. If, contrary to this, the CRA successfully challenges the tax consequences to the Corporation of the transfer and contribution of the Assets to the Partnership, income tax may be payable by the Corporation in connection therewith at the applicable tax rate. The Partnership has agreed to indemnify the Corporation for all liabilities incurred by it in connection with the Acquisition and the Arrangement, including the transfer and contribution of the Assets to the Partnership and any associated tax that might be payable by the Corporation in respect thereof. See "Overview of the Acquisition & the Arrangement replacing the Corporation as a Public Entity with Boardwalk REIT — Ancillary Agreements in Connection with the Arrangement". The amount of such indemnification would be significant and have a material adverse effect on the amount of distributable cash of the Partnership and, consequently, on the distributable income of Boardwalk REIT. Risks Associated with Disclosure Controls & Procedures on Internal Control over Financial Reporting
The Trust’s business could be adversely impacted if it has deficiencies in its disclosure controls and procedures or internal control over financial reporting.
The design and effectiveness of the Trust’s disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management continues to review the design and effectiveness of the Trust’s disclosure controls and procedures and internal control over financial reporting, the Trust provides no assurance that its disclosure controls and procedures or internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, particularly material weaknesses, in internal control over financial reporting which may occur in the future could result in misstatements of the Trust’s results of operations, restatements of its financial statements, a decline in the Trust Unit price, or otherwise materially adversely affect the Trust’s business, reputation, results of operation, financial condition or liquidity.
The design of the Trust’s disclosure controls and procedures and internal control over financial reporting has been limited to exclude controls, policies and procedures of: (i) a proportionately consolidated entity in which the Trust has an interest; (ii) a variable interest entity in which the Trust has an interest; or (iii) a business that the Trust has acquired not more than 365 days before its financial year end.
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Liquidity Risk
An investment in real estate is relatively illiquid, with the degree of liquidity generally fluctuating in relation to demand for and the perceived desirability of such investments. Such illiquidity will tend to limit Boardwalk’s ability to vary its portfolio of properties promptly in response to changing economic, investment or other conditions. If Boardwalk was required to quickly liquidate its real property investments, the proceeds to the Trust might be significantly less than the aggregate carrying or net asset value of its properties or less than what would be expected to be received under normal circumstances, which could have an adverse effect on Boardwalk’s financial condition and financial performance and decrease the amount of cash available for distribution. Illiquidity may result from the absence of an established market for real property investments, as well as from legal or contractual restrictions on their resale. In addition, in recessionary times, it may be difficult to dispose of certain types of real estate. The costs of holding real estate are considerable and, during an economic recession, Boardwalk REIT may be faced with ongoing expenditures with a declining prospect of incoming receipts. In such circumstances, it may be necessary for Boardwalk REIT to dispose of properties at lower prices in order to generate sufficient cash for operations and making distributions. There can be no assurance that the fair market value of any properties held by the REIT will not decrease in the future. Access to Capital Risk
The real estate industry is highly capital intensive. Boardwalk REIT will require access to capital to maintain its properties, as well as to fund its growth strategy and certain capital expenditures from time to time. There can be no assurances that Boardwalk REIT will have access to sufficient capital or access to capital on terms favourable to the Trust for future property acquisitions, financing or refinancing of properties, funding operating expenses or other purposes. Furthermore, in certain circumstances, Boardwalk REIT may not be able to borrow funds due to the limitations set forth in its Declaration of Trust and/or other loan agreements. Market conditions and unexpected volatility or illiquidity in financial markets may inhibit Boardwalk REIT’s access to long-term financing in the capital markets. As a result, it is possible that financing, which the Trust may require in order to grow and expand its operations, upon the expiry of the term of financing, upon refinancing any particular property owned by Boardwalk REIT or otherwise, may not be available or, if it is available, may not be available on favourable terms to the Trust. Failure by Boardwalk to access required capital could have a material adverse effect on the Trust’s business, cash flows, financial condition and financial performance and ability to make distributions to Unitholders. Cybersecurity Risk
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of Boardwalk REIT's information resources. More specifically, a cyber-incident is an intentional attack or an unintentional event that can include gaining unauthorized access to information systems to disrupt operations, corrupt data or steal confidential information. As Boardwalk REIT's reliance on technology has increased, so have the risks posed to its systems. Boardwalk REIT's primary risks that could directly result from the occurrence of a cyber-incident include operational interruption, damage to its reputation, damage to Boardwalk's business relationships with its Resident Members and disclosure of confidential information regarding its Resident Members and Associates. Boardwalk REIT has implemented processes, procedures and controls to help mitigate these risks, but these measures, as well as its increased awareness of a risk of a cyber-incident, do not guarantee that its financial results will not be negatively impacted by such an incident.
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Joint Ventures and Co-Ownerships
Boardwalk is participating in three (3) joint ventures and it is part of its business strategy to participate in more such arrangements that may involve risks and uncertainties not present absent third- party involvement, including, but not limited to, Boardwalk's dependency on partners, co-tenants or co- venturers that are not under its control and that might compete with Boardwalk for opportunities, become bankrupt or otherwise fail to fund their share of required capital contributions, or suffer reputational damage that could have an adverse impact on the Trust. Additionally, Boardwalk’s partners might at any time have economic or other business interests or goals that are different than or inconsistent with those of the Trust, and Boardwalk may be required to take actions that are in the interest of the partners collectively, but not in Boardwalk's sole best interests. Accordingly, Boardwalk may not be able to favourably resolve issues with respect to such decisions, or the Trust could become engaged in a dispute with any of them that might affect its ability to operate the business or assets in question. Property Redevelopment, Re-positioning and Renovations
Property redevelopment, re-positioning or major renovation work are subject to a number of risks, including: (i) the potential that Boardwalk REIT may fail to recover expenses already incurred if it abandons redevelopment/re-positioning/renovation opportunities after commencing exploratory work on them; (ii) the potential that Boardwalk REIT may expend funds on, and devote management time to, projects which it does not complete; (iii) construction or redevelopment costs of a project may exceed original estimates, possibly making the project less profitable than originally estimated, or unprofitable; (iv) the time required to complete the construction, redevelopment or renovation of a project, or to lease up the completed project may be greater than originally anticipated, thereby adversely affecting Boardwalk REIT’s cash flow and liquidity; (v) the cost and timely completion of construction or renovations (including risks beyond Boardwalk REIT’s control, such as weather, labour conditions or material shortages); (vi) contractor and subcontractor disputes, strikes, labour disputes or supply disruptions; (vii) the failure to achieve expected occupancy and/or rent levels within the projected time frame, if at all; (viii) delays with respect to obtaining, or the inability to obtain, necessary zoning, occupancy, land use and other governmental permits, and changes in zoning and land use laws; (ix) occupancy rates and rents of a completed project or renovation may not be sufficient to make the project or initiative profitable; (x) Boardwalk REIT’s ability to dispose of properties redeveloped or renovated with the intent to sell could be impacted by the ability of prospective buyers to obtain financing given the current state of the credit markets; and (xi) the availability and cost of financing to fund Boardwalk REIT’s development or renovation activities on favourable terms or at all. The above risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent the initiation or completion of redevelopment or renovation activities. In addition, redevelopment and renovation projects entail risks that investments may not perform in accordance with expectations and can carry an increased risk of litigation (and its attendant risks) with contractors, subcontractors, suppliers, partners and others. Any of these risks could have an adverse effect on Boardwalk REIT’s financial condition, financial performance, cash flow, the market price of its Trust Units, distributions to Unitholders and the ability to satisfy Boardwalk’s REIT’s principal and interest obligations. Also, it is anticipated that the Trust and its subsidiary entities will be required to execute a guarantee in connection with construction financing for redevelopments, which would subject Boardwalk REIT and those subsidiaries to recourse for construction completion risks and repayment of any construction indebtedness. Key Personnel
Boardwalk's executive and other senior officers have a significant role in our success and oversee the execution of Boardwalk's strategy. Our ability to retain our management team or attract suitable replacements should any members of the management group leave is dependent on, among other things, the competitive nature of the employment market. Boardwalk has experienced departures of key
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professionals in the past and may do so in the future, and we cannot predict the impact that any such departures will have on its ability to achieve its objectives. The loss of services from key members of the management team or a limitation in their availability could adversely impact our financial condition and cash flow.
We rely on the services of key personnel on our executive team and the loss of their services could have an adverse effect on Boardwalk. We mitigate key personnel risk through succession planning, but do not maintain key person insurance. Regulation and Changes in Applicable Laws
Boardwalk REIT is subject to laws and regulations governing the ownership and leasing of real property, zoning, building standards, landlord/tenant relationships, employment standards, environmental matters, taxes and other matters. It is possible that future changes in applicable federal, provincial, municipal or common laws or regulations or changes in their enforcement or regulatory interpretation could result in changes in the legal requirements affecting Boardwalk (including with retroactive effect). Any changes in the laws to which Boardwalk REIT is subject could materially and/or adversely affect the Trust’s rights and title to its assets. It is not possible to predict whether there will be any further changes in the regulatory regimes to which Boardwalk REIT is subject or the effect of any such changes on its investments. Lower revenue growth or significant unanticipated expenditures may result from Boardwalk’s need to comply with changes in applicable laws or the enactment of new laws, including: (i) laws imposing environmental remedial requirements and the potential liability for environmental conditions existing on properties or the restrictions on discharges or other conditions; (ii) rent control or rent stabilization laws or other residential landlord/tenant laws; or (iii) other governmental rules and regulations or enforcement policies affecting the development, use and operation of the REIT’s properties, including changes to building codes and fire and life-safety codes. Further, residential landlord/tenant laws in certain provinces may provide tenants with the right to bring certain claims to the applicable judicial or administrative body seeking an order to, among other things, compel landlords to comply with health, safety, housing and maintenance standards. As a result, Boardwalk may, in the future, incur capital expenditures, which may not be fully recoverable from tenants. Disease Outbreaks May Negatively Impact the Performance of the Trust and its Subsidiaries
A local, regional, national or international outbreak of a contagious disease, including the COVID- 19 coronavirus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, H1N1 influenza virus, avian flu, or any other similar illness could result in: a general or acute decline in economic activity in the regions the Trust and its Subsidiaries hold assets, a decrease in the willingness of the general population to travel, staff shortages, reduced tenant traffic, mobility restrictions and other quarantine measures, supply shortages, increased government regulation, and the quarantine or contamination of one or more of the Trust’s apartment units. Contagion in a Boardwalk building or market in which the Trust operates could negatively impact the Trust’s occupancy, its reputation or attractiveness of that market. All of these occurrences may have a material adverse effect on the business, financial condition and results of operations of the Trust, its Subsidiaries and/or their Joint Venture Partners.
DISTRIBUTION POLICY
The following outlines the distribution policy of Boardwalk REIT as contained in the Declaration of Trust. The distribution policy may be amended only with the approval of a majority of the votes cast at a meeting of Unitholders.
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General
Boardwalk REIT may distribute to holders of REIT Units on or about each Distribution Date14 respectively such percentage of the income of the Trust for the calendar month then ended as the Trustees determine in their discretion (each a “Distribution”), but, in no event, will Distributions for the year be less than Boardwalk REIT's taxable income, unless the Trustees, in their absolute discretion, determine otherwise.
The Board of Trustees reviews Distributions on a quarterly basis, and takes into consideration Distribution sustainability and whether there are more attractive alternatives to the Trust’s current capital allocation strategy, such as its value-added renovation program, brand diversification initiative or new construction of multi-family communities in supply-constrained markets. For more information on these alternatives, please see the information above under the heading “Strategy for Growth – Brand Diversification”, “ – New Apartment Development”, and “ – Investing in Boardwalk’s Properties – Value Added Capital Improvements and Property Re-Positioning Programs”.
Holders of LP Class B Units may surrender such units in exchange for REIT Units in accordance with the Limited Partnership Agreement. Prior to such surrender, holders of LP Class B Units will be entitled to receive Distributions from the Partnership pro rata with Distributions made by Boardwalk REIT on REIT Units.
Boardwalk REIT cannot pay Distributions on REIT Units unless an equivalent Distribution per REIT Unit is paid on the LP Class B Units. Distributions in respect of a month will be paid on or about each Distribution Date to such Unitholders of record as at the close of business on each Distribution Record Date15. In addition, the Trustees may declare to be payable and make Distributions, from time to time, out of income of Boardwalk REIT, net realized capital gains of Boardwalk REIT, the net recapture income of Boardwalk REIT, the capital of Boardwalk REIT or otherwise, in any year, in such amount or amounts, and on such dates on or before the last business day of that year as the Trustees may determine, to the extent such income, capital gains and capital has not already been paid, allocated or distributed to the holders of REIT Units that are Unitholders at the record date for such Distribution payable and make Distributions, from time to time, out of income of Boardwalk REIT. The payment of such amounts shall be made on or before the following January 15th. There will be no Distributions in respect of the Special Voting Units.
Where the Trustees determine that Boardwalk REIT does not have available cash in an amount sufficient to make payment of the full amount of any Distribution which has been declared to be payable pursuant to the provisions of the Declaration of Trust on the due date for such payment, the payment may, at the option of the Trustees, include the issuance of additional REIT Units, or fractions of such REIT Units, if necessary, having a fair market value as determined by the Trustees equal to the difference between the amount of such Distribution and the amount of cash which has been determined by the Trustees to be available for the payment of such Distribution in the case of REIT Units.
Unless the Trustees determine otherwise, immediately after any pro rata Distribution of additional REIT Units to all holders of REIT Units in the circumstances described in the immediately preceding paragraph, the number of the outstanding REIT Units will automatically be consolidated such that each of such holders will hold after the consolidation the same number of REIT Units as such holder held before the Distribution of additional REIT Units. In this case, each REIT Unit certificate representing the number
14 ''Distribution Date'' means with respect to a distribution by Boardwalk REIT, a business day determined by the Trustees for any calendar month to be on or about the 15th day of the following month. 15 ''Distribution Record Date'' means, until otherwise determined by the Trustees, the last business day of each month of each year, except for the month of December where the Distribution Record Date shall be December 31.
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of units prior to the Distribution of additional REIT Units will be deemed to represent the same number of REIT Units after the non-cash Distribution of additional REIT Units and the consolidation.
Notwithstanding the foregoing, where tax is required to be withheld from a Unitholder's share of the Distribution, the consolidation will result in such Unitholder holding that number of REIT Units equal to: (i) the number of REIT Units held by such Unitholder prior to the Distribution plus the number of REIT Units received by such Unitholder in connection with the Distribution (net of the number of whole and part REIT Units withheld on account of withholding taxes) multiplied by; and (ii) the fraction obtained by dividing the aggregate number of REIT Units outstanding prior to the Distribution by the aggregate number of REIT Units that would be outstanding following the Distribution and before the consolidation if no withholding were required in respect of any part of the Distribution payable to any Unitholder. Such Unitholder will be required to surrender the REIT Unit certificates, if any, representing such Unitholder's original REIT Units, in exchange for a unit certificate representing such Unitholder's post-consolidation Units.
Boardwalk REIT commenced monthly Distributions on June 15, 2004 to holders of REIT Units on May 31, 2004. The amount of the Distribution on that date was $0.103 for each REIT Unit and LP Class B Unit held, or $1.24 per REIT Unit and LP Class B Unit on an annualized basis. Since May 31, 2004, Boardwalk REIT has changed its monthly distributions per REIT Unit as follows:
Amount Date $0.1050 December 2004 $0.1233 November 2006 $0.1333 June 2007 $0.1500 December 2007 $0.1550 February 2012 $0.1600 August 2012 $0.1650 February 2013 $0.1700 February 2014 $0.1875 February 2016 $0.0834 January 2018
In addition, on September 15, 2010, Boardwalk REIT paid a special Distribution of $0.50 per REIT Unit to Unitholders of record on August 31, 2010. This special Distribution was in addition to the regular monthly Distribution of $0.15 per REIT Unit paid on September 15, 2010 to Unitholders of record on August 31, 2010. Similarly, on January 15, 2016, Boardwalk REIT paid a special distribution of $1.00 per REIT Unit to Unitholders of Record on December 31, 2016, and a special distribution of $1.40 per REIT Unit on January 31, 2015 to Unitholders of Record on December 31, 2014, in order to distribute all of the Trust’s taxable income in those years resulting from the sale of non-core assets in Windsor (2015) and British Columbia (2014).
Since the year ended December 31, 2018, Boardwalk REIT has paid the following monthly distributions on its REIT Units:
Amount Record Date Payment Date $0.0834 January 31, 2019 February 15,2019 $0.0834 February 28, 2019 March 15, 2019 $0.0834 March 29, 2019 April 15, 2019 $0.0834 April 30, 2019 May 15, 2019 $0.0834 May 31, 2019 June 17, 2019 $0.0834 June 28, 2019 July 15, 2019
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Amount Record Date Payment Date $0.0834 July 31, 2019 August 15, 2019 $0.0834 August 31, 2019 September 16, 2019 $0.0834 September 30, 2019 October 15, 2019 $0.0834 October 31, 2019 November 15, 2019 $0.0834 November 29, 2019 December 16, 2019 $0.0834 December 31, 2019 January 15, 2020 $0.0834 January 31, 2020 February 17,2020
LP Class B Units are entitled to an equivalent distribution as REIT Units.
Boardwalk’s Board of Trustees reviews the Trust’s allocation of capital, including its monthly regular distributions, on a quarterly basis. Despite the improving fundamentals in the Trust’s core markets of Alberta and Saskatchewan, the Trust’s Management and Board of Trustees are confident that the Trust’s capital allocation opportunities, which include the current suite renovation/re-positioning program along with growth opportunities consistent with Boardwalk’s long-term strategic plan to focus on Net Asset Value (“NAV”) growth and creation, provides an opportunity for the Trust to utilize its cashflow to maximize value for all Unitholders. The use of cashflow towards these initiatives will accelerate the Trust’s FFO recovery in the near term, while providing an additional source of capital to fund its growth initiatives. Beginning in 2018, the Trust’s distribution policy was made consistent with the Trust’s long-term focus of NAV growth and comprises an annual distribution, paid monthly, at least equal to the taxable portion of the Trust’s income. This formal policy will allow the Trust to retain a significant portion of cashflow to re- invest in capital growth opportunities. The Board of Trustees will review the taxable portion of the Trust’s income on a quarterly basis and may announce an increase or a special distribution from time to time to ensure that all taxable income is distributed to Unitholders. Distribution Reinvestment Plan (“DRIP”) Suspension of Distribution Reinvestment Plan
The Trust suspended its DRIP effective February 29, 2008. Notification to that effect was mailed to DRIP participants on February 22, 2008.
The DRIP provided efficient and cost-effective equity to support the Trust's financing strategy. However, with its current liquidity and Normal Course Issuer Bid, the Trust no longer requires this source of funding. The Trust may reinstate the DRIP in the future if required to fund new investing activities. For more information on the Normal Course Issuer Bid, please see the information under the heading "Strategy for Growth-Normal Course Issuer Bid".
The suspension of the DRIP does not affect regular Distributions and Unitholders will continue to receive the regular Distribution as declared. (A copy of the DRIP can be found on the Trust's website at http://www.bwalk.com/Content/Investors/BREIT-DRIP.pdf).
The Partnership has adopted a similar plan such that holders of LP Class B Units are entitled to elect to have all cash Distributions on the LP Class B Units automatically reinvested in additional LP Class B Units on the same basis as a Unitholder pursuant to the Distribution Reinvestment Plan.
Canadian Federal Tax considerations for DRIP participants Electing distribution reinvestment option
Unitholders must consider the tax consequences of their past participation in the DRIP. Generally, where Participants elected to accumulate additional Units under the distribution reinvestment plan, the
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Participants reinvested their Distributions in additional Units at approximately 97% of the Average Market Price.
The Canada Revenue Agency (the "CRA") generally takes the position that under a DRIP where the fair market value of the Units acquired exceeds the purchase price, the difference is a benefit and must be included in the Participant's income for tax purposes. The cost of the Units acquired under the DRIP is the amount reinvested plus the amount of the benefit. The cost of the Units acquired under the DRIP must be averaged with the cost of all other Units the Participant holds for the purpose of determining the adjusted cost base of each of the Participant's Units. Capital gains or losses arising on a disposition of the Participant's Units will be measured by reference to the adjusted cost base of the Participant's Units that are disposed of, which will be calculated using this averaging method. (A copy of the Unit cost of the DRIP can be found on the Trust’s website at http://boardwalkreit.com/DRIP/.)
INFORMATION CONCERNING THE OPERATING TRUST
The Operating Trust has been established under the Operating Trust Declaration of Trust for an indeterminate term. The following is a summary, which does not purport to be complete, of certain terms of the Operating Trust Declaration of Trust. General
The Operating Trust is an unincorporated open-ended trust established under the laws of the Province of British Columbia pursuant to the Operating Trust Declaration of Trust. The Operating Trust qualifies as a "unit trust" pursuant to the Tax Act on the basis that its units are redeemable on demand by the holder thereof.
The Operating Trust is a limited purpose trust and its activities are restricted to, among other things: (i) investing in units and notes or other indebtedness of Boardwalk REIT and/or the Partnership and shares of the General Partner, amounts receivable in respect of such units, notes and other indebtedness and shares and in cash and similar deposits in a Canadian chartered bank or trust company; (ii) issuing Operating Trust Units; (iii) issuing debt securities, including the Series 1 Notes and Series 2 Notes; (iv) redeeming Operating Trust Units; (v) guaranteeing the obligations of any of its subsidiaries (for greater certainty the Operating Trust will not guarantee the obligations of Boardwalk REIT) pursuant to any good faith debt for borrowed money incurred by such subsidiary and pledging securities held by the Operating Trust as security for such guarantee; (vi) satisfying the obligations, liabilities or other indebtedness of the Operating Trust; and (vii) fulfilling its obligations under the Exchange and Support Agreement. The Operating Trust may also carry on such other activities as may be reasonably incidental to the foregoing or necessary in connection with the performance by the trustees of the Operating Trust of their obligations under any agreement to which they are or may become a party for such purposes or in connection with such activities. It is the intention of the foregoing that the Operating Trust carry on its business and activities only indirectly through the Partnership. The Operating Trust cannot engage, directly or indirectly, in any activity other than those described above.
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The Operating Trust Declaration of Trust provides that there shall be no fewer than one (1) and no more than seven (7) trustees of the Operating Trust. The Operating Trust has two (2) trustees, Sam Kolias and Roberto Geremia. A vacancy occurring among the trustees of the Operating Trust shall be filled by appointment by the unitholder of the Operating Trust, Boardwalk REIT.
The registered office of the Operating Trust is located at 1600, 421 – 7th Avenue SW, Calgary, Alberta T2P 4K9, and the principal office and center of administration of the Operating Trust is at Suite 200, 1501 – 1st Street S.W., Calgary, Alberta T2R 0W1. Trustees & Officers
The trustees of the Operating Trust shall hold term until such time as removed by the unitholder of the Operating Trust, Boardwalk REIT, or a trustee of the Operating Trust resigns in accordance with the Operating Trust Declaration of Trust. Operating Trust Units
The Operating Trust may issue an unlimited number of Operating Trust Units. The issued and outstanding units of the Operating Trust may be subdivided or consolidated from time to time by the trustees of the Operating Trust without unitholder approval. Boardwalk REIT is and will be the sole unitholder of the Operating Trust at all times.
Each Operating Trust Unit represents an equal undivided beneficial interest in the Operating Trust and in any distributions by the Operating Trust, whether of net income, net realized capital gains or other amounts, and, in the event of termination or winding up of the Operating Trust, in the net assets of the Operating Trust remaining after satisfaction of all liabilities, and no Operating Trust Unit shall have preference or priority over any other.
Each Operating Trust Unit entitles the holder of record thereof to one (1) vote at all meetings of unitholders of the Operating Trust or in respect of any written resolution of unitholders of the Operating Trust. Amendments to Operating Trust Declaration of Trust
Pursuant to the Operating Trust Declaration of Trust, the trustees of the Operating Trust may, from time to time, amend or alter the provisions of the Operating Trust Declaration of Trust as follows:
(a) to the extent deemed by the trustees of the Operating Trust in good faith to be necessary to remove any conflicts or other inconsistencies which may exist between any of the terms of the Operating Trust Declaration of Trust and the provisions of any applicable law; (b) to the extent deemed by the trustees of the Operating Trust in good faith to be necessary to make any change or correction in the Operating Trust Declaration of Trust which is a typographical change or correction or which the trustees of the Operating Trust have been advised by legal counsel is required for the purpose of curing any ambiguity or defect or inconsistent provision or clerical omission or mistake or manifest error contained in the Operating Trust Declaration of Trust; (c) to ensure continuing compliance with applicable laws (including the Tax Act), regulations, requirements or policies of any governmental authority having jurisdiction over: (i) the trustees of the Operating Trust or the Operating Trust itself; or (ii) the distribution of Operating Trust Units; (d) to ensure that the Operating Trust continues to qualify as a "unit trust" pursuant to paragraph 108(2)(a) of the Tax Act;
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(e) which, in the opinion of the trustees of the Operating Trust, are necessary or desirable as a result of changes, in taxation or other laws or the administration or enforcement thereof; and (f) as otherwise deemed by the trustees of the Operating Trust in good faith to be necessary or desirable.
Other than as set forth above, the trustees of the Operating Trust may not amend the Operating 2 Trust Declaration of Trust without the approval of at least 66 and /3% of the unitholders of the Operating Trust. Redemption Right
The Operating Trust Declaration of Trust provides that the Operating Trust Units are redeemable, in whole or in part, at any time on demand by the holder thereof upon delivery to Operating Trust of a duly completed and properly executed notice requiring the Operating Trust to redeem the Operating Trust Units, in form, manner of completion or execution reasonably acceptable to the trustees of the Operating Trust, together with the certificates representing the Operating Trust Units to be redeemed and written instructions as to the number of Operating Trust Units to be redeemed, as well as any further evidence the trustees of the Operating Trust may reasonably require with respect to the identity, capacity or authority of the Person giving such notice.
Upon tender of the Operating Trust Units by a holder thereof for redemption, the holder of the Operating Trust Units tendered for redemption will no longer have any rights with respect to such tendered Operating Trust Units (other than the right to receive the redemption price for such Operating Trust Units) including the right to receive distributions thereon which are declared payable to unitholders of record on a date which is subsequent to the day of receipt by the Operating Trust of the redemption notice. The redemption price for each of the Operating Trust Units tendered for redemption will be equal to:
(A x B) – C D Where: A = the redemption price per REIT Unit calculated as of the close of business on the date the Operating Trust Units were so tendered for redemption by the holder thereof; B = the aggregate number of REIT Units outstanding as of the close of business on the date the Operating Trust Units were so tendered for redemption by the holder thereof; C = (i) the aggregate unpaid principal amount and accrued interest thereon of the Operating Trust Notes held by or owed to Boardwalk REIT and the fair market value of any other assets or investments held by Boardwalk REIT (other than Operating Trust Units) as of the close of business on the date the Operating Trust Units were so tendered for redemption by a holder thereof minus; (ii) the aggregate unpaid principal of any indebtedness and any accrued liabilities owed by Boardwalk REIT; and D = the aggregate number of Operating Trust Units outstanding held by Boardwalk REIT as of the close of business on the date the Operating Trust Units were so tendered for redemption by the holder thereof.
The trustees of the Operating Trust are also entitled to call for redemption, at any time, all or part of the outstanding Operating Trust Units registered in the name of Boardwalk REIT or any other holder of Operating Trust Units at the same redemption price as described above for each Operating Trust Unit called for redemption, calculated with reference to the date the trustees of the Operating Trust approved the redemption of the Operating Trust Units.
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Subject to certain exemptions contained in the Operating Trust Declaration of Trust, the aggregate redemption price payable by the Operating Trust in respect of any Operating Trust Units tendered for redemption by the holders thereof during any month will be satisfied, at the option of the trustees of the Operating Trust, in immediately available funds by cheque or by such other manner of payment approved by the trustees of the Operating Trust from time to time.
In certain circumstances, the Operating Trust may satisfy the redemption price in respect of the Operating Trust Units by issuing Series 2 Notes with an aggregate value equal (as determined by the trustees of the Operating Trust) to the aggregate redemption price of Operating Trust Units to be redeemed. Cash Distributions
The Operating Trust will distribute to Boardwalk REIT, to the extent possible, and Boardwalk REIT will have the right to receive, all of the distributable income of the Operating Trust. Such distributions will be made on or about the tenth (10th) business day following each calendar month end and are intended to be received by Boardwalk REIT prior to its related cash distribution to Unitholders. If the trustees of the Operating Trust determine that it would be in the best interests of the Operating Trust, they may reduce for any period the percentage of distributable income to be distributed to Boardwalk REIT and may choose to repay principal on the Series 1 Notes in lieu of making distributions. In addition, on December 31 of each year, the Operating Trust will make payable to its unitholder, and its unitholder will have an enforceable right to payment on such date of, a distribution of sufficient net realized capital gains, net income, and net recapture income for the taxation year ending on that date, net of any capital losses or non- capital losses recognized on or before the end of such year such that the Operating Trust will not be liable for ordinary income taxes for such year, net of tax refunds. The payment of such amounts shall be made on or before the following January 10th.
Notwithstanding the foregoing, if the trustees of the Operating Trust determine that the Operating Trust does not have cash in an amount sufficient to make payment of the full amount of any distribution, the payment may include the issuance of additional Operating Trust Units and/or Series 1 Notes if necessary, having a value equal to the difference between the amount of such distribution and the amount of cash which has been determined by the trustees of the Operating Trust to be available for the payment of such distribution. The value of each Operating Trust Unit so issued will be the redemption price thereof such that the issuance will not result in Boardwalk REIT being liable under the Tax Act to pay a tax imposed under Part XI of the Tax Act.
Any Operating Trust Units transferred to Unitholders pursuant to a distribution in specie may be subject to resale and transfer restrictions under applicable securities laws. Registration & Transfers of Operating Trust Units
As the Operating Trust Units are not likely to be issued to or held by any person other than Boardwalk REIT, registration of interests in, and transfers of, the Operating Trust Units will not be made through the book entry only system administered by Canadian Depository for Securities Limited. Rather, holders of the Operating Trust Units will be entitled to receive certificates therefor.
INFORMATION CONCERNING THE PARTNERSHIP General
The Partnership is a limited partnership formed under the laws of the Province of British Columbia.
As a result of the Acquisition and the Arrangement, the Partnership holds all of the direct and indirect interests in the Assets.
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The registered office of the Partnership is located at Suite 2300, Bentall 5, 550 Burrard Street, Vancouver, British Columbia V6C 2B5 and the principal place of business of the Partnership is located at Suite 200, 1501 - First Street S.W., Calgary, Alberta T2R 0W1. The General Partner
Boardwalk Real Estate Management Ltd. (the "General Partner") is the general partner of the Partnership. The General Partner is a wholly owned subsidiary of Boardwalk REIT. LP Units
The Partnership is authorized to issue an unlimited number of LP Class A Units, an unlimited number of LP Class B Units and an unlimited number of LP Class C Units (collectively, "LP Units"), and, subject to certain restrictions, such other classes of partnership interests as the General Partner may decide from time to time. All of the LP Class A Units are held by the Operating Trust, the LP Class C Units are held by the Corporation and the LP Class B Units are held by BEI Subco.
The LP Class B Units, together with the accompanying Special Voting Units, except as otherwise noted, have economic and voting rights equivalent in all material respects to the REIT Units. In particular, subject to certain limitations contained in the Limited Partnership Agreement and the Exchange and Support Agreement, each LP Class B Unit entitles the holder thereof to receive and, subject to applicable law, the Partnership will declare, a Distribution on each LP Class B Unit equal to the amount of a Distribution declared by Boardwalk REIT on each REIT Unit on the date of such Distribution's declaration. Additional principal terms of the LP Class B Units are as follows: (i) the LP Class B Units may be surrendered, on a one-for-one basis (subject to customary anti-dilution provisions) for REIT Units at the option of the holder, at any time unless this would jeopardize Boardwalk REIT's status as a "unit trust", "mutual fund trust" or "registered investment" under the Tax Act; (ii) each LP Class B Unit is accompanied by a Special Voting Unit which will entitle the holder thereof to receive notice of, to attend and to vote at all meetings of Unitholders (except in respect of LP Class B Units previously surrendered); and (iii) except as required by law and in certain specified circumstances where the rights of a holder of LP Class B Units are affected, holders of the LP Class B Units are not entitled to vote at any meeting of the limited partners of the Partnership.
The Partnership, the Operating Trust, Boardwalk REIT, the Corporation, BEI Subco and the holders of LP Class B Units have and will enter into any agreements necessary to give effect to the foregoing terms of the LP Class B Units, including the Exchange and Support Agreement.
Pursuant to a letter agreement, dated effective January 6, 2005, Messrs. Sam and Van Kolias, the sole owners, indirectly through their 100 % ownership interest in the Corporation (following the Effective Date) and its wholly-owned subsidiary, BEI Subco, of all of the issued and outstanding LP Class B Units, have agreed that, as long as they control BEI Subco, they will ensure that the LP Class B Units are not sold to a third party without the consent of Boardwalk REIT. Such agreement does not limit the right of the Koliases or any related or controlled entity to use the LP Class B Units as collateral for any liability or obligation, corporate or otherwise. The agreement also allows the Koliases the freedom to deal with the LP Class B Units in response to a business combination proposal involving Boardwalk REIT without the consent of the Trust, whether in connection with a lock-up agreement, voting agreement or commitment to tender, to sell or any other obligation. In addition, the agreement provides that the Koliases are able, at any time during the course of the agreement, to exchange all or a portion of the LP Class B Units for REIT Units, as well as sell any and/or all of the issued and outstanding securities of the Corporation and/or BEI Subco, without restriction.
Pursuant to the Declaration of Trust and the Exchange and Support Agreement, if an offer, issuer bid (other than an exempt issuer bid), take-over bid (other than an exempt take-over bid) or similar
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transaction with respect to the REIT Units is proposed by Boardwalk REIT or is proposed to Boardwalk REIT or holders of REIT Units, and is recommended by the Board of Trustees, or is otherwise effected or to be effected with or without the consent or approval of the Trustees, and the LP Class B Units are not withdrawn in accordance with their terms or surrendered for REIT Units in accordance with the Exchange and Support Agreement, Boardwalk REIT will, to the extent possible in the circumstances, expeditiously and in good faith, take all such actions and do all such things as are necessary or desirable to enable and permit holders of those LP Class B Units to participate in such offer to the same extent and on an economically equivalent basis as the holders of REIT Units, without discrimination. Without limiting the generality of the foregoing, Boardwalk REIT will, to the extent possible in the circumstances, expeditiously and in good faith, use commercially reasonable efforts to ensure that holders of LP Class B Units may participate in all such offers without being required to surrender such units for withdrawal or exercise their right to exchange such units (or, if so required, to ensure that any such surrender or exchange will be effective only upon, and will be conditional upon, the successful closing of the offer and only to the extent necessary to tender to or deposit under the offer). In the event of the liquidation, dissolution or winding- up of the Partnership or any other distribution of the assets of the Partnership among the holders of the units of the Partnership for the purpose of winding up its affairs, a holder of LP Class B Units will be entitled, subject to applicable law, to receive in respect of each LP Class B Unit held by such holder on the effective date of such liquidation, dissolution or winding-up, one (1) REIT Unit for each LP Class B Unit.
As long as any of the LP Class B Units are outstanding, the Partnership will not at any time without, but may at any time with, the approval of the holders of the LP Class B Units: (a) pay any distribution on the LP Class A Units unless Distributions payable on the LP Class B Units have been paid; (b) offer to redeem or purchase or make any capital distribution in respect of the LP Class A Units, unless the Partnership makes a contemporaneous offer to redeem or purchase a proportionate number of LP Class B Units on the same terms and conditions and for identical consideration per unit of the Partnership or makes an equivalent capital distribution per unit of the Partnership in respect of the LP Class B Units; or (c) issue any additional LP Class A Units unless Boardwalk REIT has issued the same number of REIT Units.
The LP Class B Units may be issued in respect of other transactions involving the Partnership from time to time.
The LP Class A Units, all of which are owned by the Operating Trust, have terms similar to those attached to the LP Class B Units, except that the holders of LP Class A Units: (i) are not entitled to receive REIT Units in the event of a full or partial surrender of the LP Class A Units or upon the liquidation, dissolution or winding up of the Partnership; (ii) are entitled to receive a distribution on the LP Class A Units in an amount sufficient to allow Boardwalk REIT and the Operating Trust to pay their expenses but will not be entitled to receive a distribution equal to the Distribution on REIT Units; and (iii) are entitled to receive notice of, to attend and vote at all meetings of the partners of the Partnership, but will not be entitled to receive notice of, to attend or vote at meetings of the Unitholders.
The LP Class C Units are entitled to preferred partnership distributions in amounts at least sufficient to permit the Corporation, as the holder of such units, to meets its obligations to make all payments due and payable by the Corporation on the Retained Debt. See "Information Concerning the Partnership — Distributions".
As long as any of the LP Class C Units are outstanding, the Partnership will not at any time without, but may at any time with, the approval of the holders of the LP Class C Units: (a) pay any distribution on the LP Class A Units or LP Class B Units unless distributions payable on the LP Class C Units have been paid; (b) offer to accept the withdrawal of the LP Class A Units or LP Class B Units; or (c) issue any additional LP Class C Units.
In the event of the liquidation, dissolution or winding-up of the Partnership or any other distribution of the assets of the Partnership among the holders of the LP Units for the purpose of winding up its affairs, a holder of LP Class C Units will be entitled, subject to applicable law, and in priority to any
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distribution to the holders of LP Class A Units or LP Class B Units, to receive in respect of each LP Class C Unit held by such holder on the effective date of such liquidation, dissolution or winding-up, an amount equal to the LP Class C Preferred Liquidation Entitlement (defined below) divided by the outstanding LP Class C Units. For purposes hereof, the "LP Class C Preferred Liquidation Entitlement" means the aggregate of each amount that is:
(i) the principal amount of the Retained Debt that is outstanding on the liquidation date, all accrued and unpaid interest on such principal amount up to and including the liquidation date and any other amount outstanding in respect of the Retained Debt on the liquidation date; (ii) an amount of either tax that is due and payable under Part I.3 of the Tax Act or capital tax that is due and payable under any relevant provincial or territorial legislation that is reasonably attributable to the Retained Debt, and any interest or penalties thereon; and (iii) in respect of the amount of tax that is due and payable under the Tax Act or any similar provincial or territorial statute that is reasonably attributable to the foregoing distributions and any disposition whether by redemption or otherwise of any LP Class C Unit, and any interest or penalties thereon, and for greater certainty each amount under (i), (ii) and (iii) above shall be determined without duplication.
The holders of LP Class C Units are entitled to receive notice of, to attend and to vote (on the basis of one (1) vote for every 1,000 LP Class C Units held) at all meetings of holders of LP Units. Investment Guidelines & Operating Policies
The operations and affairs of the Partnership are and will be conducted in accordance with the investment guidelines and operating policies contained in the Declaration of Trust. See "Investment Guidelines & Operating Policies of Boardwalk REIT." Amendments to Limited Partnership Agreement
Pursuant to the Limited Partnership Agreement, the General Partner may amend the Limited Partnership Agreement without notice to or consent of any other partners, to reflect the admission, resignation or withdrawal of any partner, or the assignment by any partner of the whole or any part of such partner's interest in accordance with the Limited Partnership Agreement. The General Partner will also be entitled to make any reasonable decisions, designations or determinations not inconsistent with law or with the Limited Partnership Agreement which it may determine are necessary or desirable in interpreting, applying or administering the Limited Partnership Agreement or in administering, managing or operating the Partnership.
The Limited Partnership Agreement may also be amended by the General Partner with the 2 approval of the limited partners holding more than 66 and /3% of the limited partnership units provided that: (i) except as contemplated in Article 11 and Article 12 of the Limited Partnership Agreement, any material change which affects the rights or interests of the General Partner must be approved by the General Partner; (ii) any material change which affects the rights or interests of the holders of the LP Class A Units, LP Class B Units or LP Class C Units must have special approval of the holders of such partnership units, as applicable; and (iii) any material change which affects any limited partner in a manner that is different from the effects on other limited partners shall be valid only with the consent of such limited partner.
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The Limited Partnership Agreement may not be amended if such amendment would change the amendment section of the Limited Partnership Agreement or cause Boardwalk REIT to fail or cease to qualify as a "mutual fund trust" or "registered investment" under the Tax Act.
Further, notwithstanding any other provision to the contrary in the Limited Partnership Agreement, no amendments may be made which in any manner would allow any limited partner to take part in the management or the administration of the business of the Partnership, reduce the interest in the Partnership of any limited partner, allow any limited partner to exercise control over the business of the Partnership, change the right of a limited partner to vote at any meeting or change the Partnership from a limited partnership to a general partnership. Distributions
The Partnership will distribute to the General Partner and to the limited partners holding LP Class A Units, LP Class B Units and LP Class C Units their respective portions of distributable cash as set out below.
Distributions will be made forthwith after the General Partner determines the distributable cash of the Partnership and determines the amount of all expenses incurred by it for acting as general partner (the "Reimbursement Distribution Amount"), which shall take place no later than the 10th day of each month.
Distributable cash will represent, in general, all of the Partnership's cash on hand that is derived from any source (other than amounts received in connection with the subscription for additional interests in the Partnership) and that is determined by the General Partner not to be required in connection with the business of the Partnership. Such amount will be determined by the General Partner in a manner analogous to the manner in which Boardwalk REIT calculates its Distributions (without reference to the "LP Class A Preferred Distribution", defined below, or the "LP Class C Preferred Distribution", defined below). Following such determination, the distributable cash will be distributed to the limited partners of the Partnership as follows:
(a) to the Corporation, as holder of LP Class C Units of the amount of distributable cash of the Partnership that is equal to the aggregate of: (A) 0.5% of distributable cash, to a maximum of $100,000 in each fiscal year; and (B) each amount due and payable by the Corporation: (i) in respect of principal, interest or any other amount under the Retained Debt; (ii) in respect of the amount of either tax that is due and payable under Part I.3 of the Tax Act or capital tax that is due and payable under any provincial or territorial statute all of which is reasonably attributable to the Retained Debt, and any interest or penalties thereon; and (iii) in respect of the amount of tax that is due and payable under either the Tax Act or any similar provincial or territorial statute that is reasonably attributable to any distributions on the LP Class C Units, including any disposition whether by redemption or otherwise of any LP Class C Unit, and any interest or penalties thereon, and for greater certainty each amount under (i), (ii) and (iii) above shall be determined without duplication; excluding, in each case, any amount arising from the default by the holder of the LP Class C Units to satisfy its obligation under or in connection with the Retained Debt, unless such default can reasonably be attributed to the conduct of the Partnership (the "LP Class C Preferred Distribution"); (b) the Reimbursement Distribution Amount to the General Partner; (c) an amount to the holders of LP Class A Units sufficient to allow Boardwalk REIT and the Operating Trust to pay their expenses (including, without limitation, any fees or
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commissions payable to agents or underwriters in connection with the sale of securities by Boardwalk REIT or the Operating Trust) on a timely basis (the "LP Class A Preferred Distribution"); (d) an amount to the General Partner equal to 0.001% of the balance of the distributable cash of the Partnership; and (e) an amount equal to the remaining balance of the distributable cash of the Partnership to the holders of LP Class A Units and LP Class B Units in accordance with their entitlements as holders of LP Class A Units and LP Class B Units, as the case may be. However, holders of LP Class B Units are entitled to receive distributions on each such unit equal to the amount of the Distribution declared on each REIT Unit. The record date and the payment date for any Distribution declared on the LP Class B Units will be the same as those for the REIT Units. The holder of any LP Unit will be entitled to elect to: (a) reinvest all or any portion (the "Elected Amount") of any distribution declared by the Partnership to be payable to such holder of such LP Unit provided that the election is in writing, specifies the Elected Amount and whether such distribution shall be made by the issuance of further LP Units of the same class, or in the case of LP Class B Units, and is received by the Partnership before the payment date for such distribution. Where the election is duly made by the holder, the Elected Amount will be deemed for all purposes of the Limited Partnership Agreement: (i) to be paid to and received by such holder on the payment date for such distribution; and (ii) to be reinvested by such holder as the subscription price of that number of LP units of the particular class calculated by the formula: A B Where: A = the Elected Amount, and B = the 20-day daily-volume weighted average trading price of REIT Units determined as of the payment date for such distribution; or
(b) in lieu of receiving all or a portion (the "Selected Amount") of the distribution declared by the Partnership, choose to be loaned an amount from the Partnership equal to the Selected Amount, and to have the distribution of the Selected Amount made to it on the first business day following the end of the fiscal year in which such distribution would otherwise have been made. Each such loan made in a fiscal year will not bear interest and will be due and payable in full on the first business day following the end of the fiscal year during which the loan was made. Allocation of Partnership Income & Partnership Losses
The aggregate Partnership Income or Partnership Loss16 for a fiscal year will be allocated as follows at the end of each fiscal year: (a) the limited partners who held LP Class A or LP Class B Units will be allocated all Partnership Income or Partnership Loss remaining after giving effect to the amounts of Partnership
16 ''Partnership Income'' or ''Partnership Loss'' mean the net income or loss of the Partnership for a fiscal year determined in accordance with the provisions of the Tax Act, subject to any adjustments in respect of such fiscal year that the General Partner determines appropriate.
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Income or Partnership Loss allocated pursuant to sub-paragraphs (b), (c) and (d) below, and, subject to the elections described above, such remaining Partnership Income or Partnership Loss allocated to the limited partners will be allocated to each person who was a limited partner at any time in such fiscal year in an amount calculated by the formula: A x C B Where: A = the aggregate amount of the distributions of distributable cash paid or payable to such limited partner with respect to such fiscal year as set forth below in sub-paragraph (e) under this sub-heading entitled "Allocation of Partnership Income & Partnership Losses"; B = the aggregate amount of the distributions of distributable cash paid or payable to all such limited partners with respect to such fiscal year as set forth below in sub-paragraph (e) under this sub-heading entitled "Allocation of Partnership Income & Partnership Losses"; and C = such remaining Partnership Income or Partnership Loss allocated to all such limited partners with respect to such fiscal year; and
(b) the General Partner will be allocated Partnership Income equal to the aggregate of: (i) all Reimbursement Distribution Amounts that are paid to it (whether in such fiscal year or within 30 days thereafter) in respect of expenses incurred by it in the fiscal year; and (ii) all amounts distributed to it in such period as set forth below in sub-paragraph (d) under this sub-heading entitled "Allocation of Partnership Income & Partnership Losses" to the extent not taken into account in the determination of the allocation of Partnership Income; (c) the holder of LP Class C Units will be allocated, in respect of such LP Class C Units, Partnership Income or Partnership Loss (which Partnership Loss is not to exceed $1,000), as applicable, equal to the amount that the General Partner determines is reasonable in respect of such fiscal year; (d) the holder of LP Class A Units will be allocated Partnership Income equal to the aggregate amount of LP Class A Preferred Distributions paid or payable to such holder with respect to such fiscal year; (e) in respect of each fiscal year of the Partnership, the General Partner will credit (or debit) the current account of each class of LP Units held by a partner by the amount of the Partnership Income (or Partnership Loss) of such fiscal year that is allocated to the partner under any of the foregoing sub-paragraphs or the following sub-paragraph in respect of such class of LP Units; and (f) in respect of each distribution that is made by the Partnership to a limited partner in respect of a class of LP Units, whether a distribution of distributable cash or otherwise the General Partner will: (i) determine the portion of such distribution, if any, that is a distribution of the Partnership Income for such fiscal year and will debit the current account of the limited partner in respect of such class of LP Units by an amount equal to the amount of such portion; and (ii) determine the portion of such distribution, if any, that is a distribution or return of the capital of the Partnership and will debit the capital account of the limited partner in respect of such class of LP Units by an amount equal to the amount of such portion. If, with respect to a given fiscal year, no distribution of distributable cash is made to the partners, the Partnership Income or Partnership Loss for such fiscal year (after deducting the amounts, if any, of the LP Class C Preferred Distribution, the Reimbursement Distribution Amount and the LP Class A Preferred
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Distribution for such fiscal year) will be allocated to each person who was a limited partner at any time in such fiscal year in the proportion determined by the General Partner in its sole discretion. Allocation of Partnership Tax Income & Partnership Tax Loss
The Partnership Tax Income or Partnership Tax Loss17 for a fiscal year will be allocated to the General Partner and to each person who was a limited partner of the Partnership in that year in the manner provided below. At the end of each fiscal year, the General Partner will be allocated Partnership Tax Income in an amount equal to the aggregate of: (i) all Reimbursement Distribution Amounts that are paid to the General Partner; and (ii) all amounts distributed to the General Partner in accordance with subparagraph (d) under the above subheading entitled “Allocation of Partnership Income & Partnership Losses”. The holder of the LP Class A Units will be allocated Partnership Tax Income for a fiscal year equal to its LP Class A Preferred Distributions for such fiscal year. The holder of LP Class C Units, and in respect of such LP Class C Units, will be allocated Partnership Tax Income or Partnership Tax Loss (which Partnership Tax Loss is not to exceed $1,000), as applicable, equal to the amount that the General Partner determines is reasonable for such fiscal year. After giving effect to such allocations to the General Partner, the holder of LP Class C Units and the holder of LP Class A Units, each person who was a holder of LP Class A Units or LP Class B Units of the Partnership at any point during that year will be allocated all Partnership Tax Income or Partnership Tax Loss, as determined, calculated by the formula: A x C B Where: A = the aggregate amount of the cash distributions paid or payable to such limited partner with respect to such fiscal year as set forth above in sub-paragraph (e) under the sub- heading entitled " Allocation of Partnership Income & Partnership Losses "; B = the aggregate amount of the cash distributions paid or payable to all such limited partners with respect to such fiscal year as set forth above in sub-paragraph (e) under the sub-heading entitled "Allocation of Partnership Income & Partnership Losses"; and C = such Partnership Tax Income or Partnership Tax Loss allocated to all such limited partners with respect to such fiscal year.
If, with respect to a given fiscal year, no cash distribution is made by the Partnership to its partners, the Partnership Tax Income or Partnership Tax Loss, as the case may be, for that fiscal year, reduced by the amounts, if any, of the LP Class C Preferred Distribution, the Reimbursement Distribution Amount and the LP Class A Preferred Distribution for such fiscal year, will be allocated to each person who was a limited partner at any time in such fiscal year in the proportion determined by the General Partner, in its sole discretion. Functions & Powers of the General Partner
Subject to the provisions of the Limited Partnership Agreement, the General Partner has all the obligations, rights or authority granted by applicable law. The Limited Partnership Agreement provides that the General Partner is authorized to carry out the business of the Partnership with the full power and
17 ''Partnership Tax Income'' or ''Partnership Tax Loss'' mean, in respect of any fiscal year, income or loss of the Partnership for that fiscal year, including any taxable capital gain or allowable capital loss, determined in accordance with the provisions of the Tax Act.
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exclusive authority to administer, manage, control and operate the operations and affairs of the Partnership and the business of the Partnership and to bind the Partnership. In addition, the General Partner has, except as otherwise provided in the Limited Partnership Agreement, all of the power and authority for and on behalf of, and in the name of, the Partnership to do or cause to be done any act, take any proceeding, make any decision and execute and deliver or cause to be delivered any instrument, deed, agreement or document on behalf of the Partnership permitted by the Limited Partnership Agreement and involving matters or transactions which are necessary for or incidental to carrying on the business of the Partnership. The General Partner is required to exercise its powers and discharge its duties honestly, in good faith and in the best interests of the Partnership and to exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances and as would the director of a corporation in comparable circumstances. The General Partner is not entitled to dissolve the Partnership, wind up its affairs or effect a sale of all or substantially all of the Partnership's assets except in accordance with the provisions of the Limited Partnership Agreement.
The Limited Partnership Agreement provides that all material transactions and agreements involving the Partnership must be approved by the General Partner's board of directors. Restrictions on the Authority of the General Partner
The authority of the General Partner is limited in certain respects by the Limited Partnership Agreement.
For example, the General Partner is prohibited, without the prior approval of the limited partners given by special resolution, from selling or otherwise disposing of all or substantially all of the assets of the Partnership. Reimbursement of the General Partner
The Partnership will reimburse the General Partner for all expenses incurred by the General Partner in the performance of its duties as general partner under the Limited Partnership Agreement on behalf of the Partnership. Limited Liability
The General Partner will operate and carry on the business of the Partnership and conduct the affairs of the Partnership in a manner so as to ensure to the greatest extent possible the limited liability of its limited partners.
However, limited partners may lose their limited liability in certain circumstances. If a limited partner loses its limited liability as a result of the negligence of the General Partner in performing its duties under the Limited Partnership Agreement, such limited partner will be indemnified by the General Partner for any costs, expenses, damages or liabilities incurred or suffered as a result of losing such limited liability. Management
The executive officers of the General Partner consist of Sam Kolias, Chairman and Chief Executive Officer; Van Kolias, Senior Vice President, Quality Control; Roberto A. Geremia, President; Lisa Russell, Senior Vice President, Acquisitions & Development; Leonora Davids, Vice President Western Canada Operations, Ontario & Quebec; Dean Burns, Vice President, General Counsel & Secretary; Bhavnesh Jaraim, Vice President, Technology & Chief Information Officer; James Ha, Vice President, Finance & Investor Relations; Jeff Klaus, Vice President, Development & Acquisitions;, Marketing & Customer Service; Helen Mix, Vice President, Human Resources; Lisa Smandych, Chief Accounting Officer; and William Wong,
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Chief Financial Officer. The executive officers have extensive experience in acquiring, refurbishing and profitably managing multi-family residential properties.
Additional officers or personnel may be employed by Boardwalk REIT or provided under the Boardwalk REIT Administrative Services Agreement to support management in fulfilling its duties. In addition to the services it obtains under the Boardwalk REIT Administrative Services Agreement, Boardwalk REIT may also outsource other services necessary to its operations to third parties, subject to approval of the Trustees as necessary.
The following table sets forth the name, province and country of residence, current office held with the General Partner and the principal occupation during the last five (5) years of each of the executive officers of the General Partner:
Name and Municipality of Residence Position Held Principal Occupation Sam Kolias(1) Chief Executive Officer Executive of General Partner since May 3, 2004 and, prior thereto, Alberta, Canada Executive of the Corporation. Van Kolias Senior Vice President, Executive of General Partner since May 3, 2004 and, prior thereto, Alberta, Canada Quality Control Executive of the Corporation. Roberto A. Geremia President Executive of General Partner since May 3, 2004 and, prior thereto, Alberta, Canada Executive of the Corporation. Lisa Russell Senior Vice President, Executive of General Partner since May 3, 2004 and, prior thereto, Alberta, Canada Corporate Executive of the Corporation since March 2003. Prior thereto, Ms. Development Russell held various operations and acquisitions positions with the Corporation between September 1995 and February 2003. Leonora Davids Vice President, Executive of the General Partner since March 1, 2019 and, prior Alberta, Canada Western Canada thereto, Regional Director, Southern Alberta of the General Operations Partner between July 1, 2008 and February 28, 2019. Dean Burns Vice President, Executive of the General Partner since November 1, 2004 and, Alberta, Canada General Counsel and prior thereto, Director of Legal Affairs of the General Partner Secretary since May 25, 2004. Prior thereto, Mr. Burns was a barrister and solicitor, and prior thereto, a student-at-law, with the law firm of Stikeman Elliott LLP in Calgary, Alberta, from August 1999 to May 15, 2004. James Ha Vice President, Finance Executive of General Partner since February 1, 2018 and, prior Alberta, Canada & Investor Relations thereto, Director, Mortgage & Finance of the General Partner since 2010. Bhavnesh Jaraim Vice President, Executive of General Partner since January 1, 2018 and, prior Alberta, Canada Technology & Chief thereto, Director of Product Operations of the General Partner Information Officer since January 2017. Prior thereto, Mr. Jaraim was Senior Business Analyst with Enbridge from March 2016 to December 2016 and Senior IT Strategic Analyst with Enbridge from October 2012 to February 2016. Jeff Klaus, Vice President, Executive of the General Partner since February 1, 2018 and, prior Alberta Canada Acquisitions & thereto, Director of Acquisitions and Analysis of the General Development Partner since 2003. Helen Mix Vice President, Human Executive of General Partner since May 3, 2004 and, prior thereto, Alberta, Canada Resources Executive of the Corporation since January 2003. Prior thereto, Ms. Mix held various human resources and payroll positions with the Corporation between July 1999 and December 2002. Lisa Smandych Chief Accounting Executive of the General Partner since March 1, 2019 and, prior Alberta, Canada Officer thereto, Director of Corporate Reporting of the General Partner between February 25, 2008 and February 28, 2019.
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Name and Municipality of Residence Position Held Principal Occupation William Wong Chief Financial Officer Executive of General Partner since December 15, 2004 and prior Alberta, Canada thereto, Director of Taxation and Financial Reporting of the Corporation since October 2002. Note: (1) Also a director of the General Partner. The directors of the General Partner are the Trustees.
INFORMATION CONCERNING THE CORPORATION History
The Corporation was incorporated under the ABCA on July 14, 1993. On August 15, 1994, the Corporation filed Articles of Amendment under the ABCA to effect a two (2) for one (1) common share split. On September 28, 1998, the Articles of the Corporation were amended and restated to create preferred shares ("Preferred Shares"), Series I and on March 2, 1999, the Articles of the Corporation were further amended and restated to increase the number of Series I Preferred Shares from 4,624,997 to 5,604,956. On March 7, 2001, the Articles of the Corporation were amended and restated to create Preferred Shares, Series II and to authorize the issuance of up to 3,399,810 Series II Preferred Shares of the Corporation. The Preferred Shares of the Corporation, Series I and II, were created in connection with certain property acquisitions made by the Corporation in the fiscal years ended May 31, 1999 and December 31, 2001 respectively. Such Preferred Shares were non-voting, not entitled to a dividend and redeemable at the option of the Corporation for a redemption price of $1.00 per share. All of the issued and outstanding Preferred Shares were redeemed by the Corporation on March 25, 2004. The Articles of the Corporation were further amended and restated on November 11, 2003 to allow the Corporation to hold shareholder meetings outside of the Province of Alberta. Effective August 15, 1994, the Common Shares of the Corporation were split on a two (2) for one (1) basis. Effective December 1, 1997, the Corporation paid a stock dividend of one (1) common share for each common share held. Effective December 30, 2004, the Corporation was amalgamated pursuant to the provisions of the ABCA with Newco to form a corporation also known as "BPCL Holdings Inc." Such amalgamation was effected to increase the adjusted cost base of the LP Class C Units by an amount equal to the principal amount of the Retained Debt. References hereinafter to the "Corporation" include, where appropriate and required, the amalgamated successor to the Corporation and Newco.
The Corporation's principal office is located at Suite 200, 1501 - First Street SW, Calgary, Alberta T2R 0W1. Its registered office is located at 908 Riverdale Avenue SW, Calgary, Alberta, T2S 0Y6.
The Corporation was incorporated in 1993 for the purpose of making a public offering pursuant to the junior capital program on the Alberta Stock Exchange. The Corporation's major transaction pursuant to the requirements of that program was the acquisition of seven (7) multi-family residential projects located in Calgary and Edmonton from BPCL. The transaction closed effective April 15, 1994, although pursuant to a management agreement, BPCL continued to manage the properties. The Corporation, since completing its major transaction and prior to the Effective Date, continued to acquire new properties and sold selected properties. The management agreement with BPCL was terminated effective May 31, 1996, at which time the Corporation took over management of all its properties, until the transfer of such properties to the Partnership on the Effective Date. Business of the Corporation Following the Acquisition & the Arrangement
On successful completion of the Acquisition and the Arrangement, the Corporation became owned by BPCL and the Corporation retains an interest in the Partnership as a limited partner. The Corporation
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retains an approximate 8% equity interest (after the preferred distribution and other entitlements of the LP Class C Units, which it also holds) in the Partnership and thereby in the Assets transferred to the Partnership through its indirect interest in the LP Class B Units.
In order to effect the Acquisition and the Arrangement for the benefit of all Shareholders, the Corporation retained legal title to certain real properties that were beneficially transferred to the Partnership pursuant to the Master Asset Contribution Agreement and the Corporation remains liable for the associated Retained Debt. The LP Class C Units held by the Corporation will provide preferred distributions to the Corporation that, if paid, are expected to be sufficient to permit the Corporation to meet its obligations under the Retained Debt as such obligations become due and payable. In addition, the Corporation has and will enter into certain and necessary arrangements with the Partnership in connection with the Corporation's continuing obligations with respect to these properties and the associated Retained Debt.
The Corporation has three (3) directors, Messrs. Sam Kolias and Van Kolias, and Mrs. Samantha Kolias-Gunn, and three (3) officers, Mr. Sam Kolias as President, Mr. Van Kolias as Secretary and Mrs. Samantha Kolias-Gunn as Chief Financial Officer.
See "Overview of the Acquisition & the Arrangement Replacing the Corporation as a Public Entity with Boardwalk REIT - Arrangements with BPCL".
LEGAL PROCEEDINGS
Neither the Corporation nor Boardwalk REIT are currently parties to any material legal proceedings, nor are any legal proceedings currently being contemplated by the Corporation or the Trust which are material to their business. Management of the Corporation and Boardwalk REIT are currently not aware of any legal proceedings contemplated against the Corporation or the Trust, respectively.
AUDITORS, TRANSFER AGENT & REGISTRAR
The auditors of the Trust are Deloitte LLP, Chartered Professional Accountants, at its offices in Calgary, Alberta.
The transfer agent and registrar of the Trust Units is Computershare Trust Company of Canada at its principal offices in Calgary, Alberta and Toronto, Ontario.
INTEREST OF MANAGEMENT & OTHERS IN MATERIAL TRANSACTIONS
Except as otherwise disclosed in this AIF, no transaction has been entered into since January 1, 2002 or is proposed to be entered into by the Trust or Corporation involving a senior officer or director of the Corporation, a senior officer or Trustee of Boardwalk REIT, the principal shareholder of the Corporation, the principal Unitholder of the Trust, or any associate or affiliates of any of such persons or companies which has materially affected or would materially affect the Corporation, Boardwalk REIT or any affiliates thereof.
INTERESTS OF EXPERTS
Deloitte LLP is the auditor of the Trust and is independent within the meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of Alberta.
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MATERIAL CONTRACTS
The Corporation, Boardwalk REIT, the Partnership, the Operating Trust and the General Partner, as applicable, have entered into the following Material Contracts within the three (3) most recently completed financial years or which contract is still in effect: (a) the Acquisition and Arrangement Agreement. See "Overview of the Acquisition & the Arrangement Replacing the Corporation as a Public Entity with Boardwalk REIT — The Acquisition & Arrangement Agreement". (b) the Limited Partnership Agreement. See "Information Concerning the Partnership"; (c) the Declaration of Trust. See "Declaration of Trust & Description of REIT Units"; (d) the Operating Trust Declaration of Trust. See "Information Concerning Operating Trust"; (e) the Exchange and Support Agreement. See "Overview of the Acquisition & the Arrangement Replacing the Corporation as a Public Entity with Boardwalk REIT — Ancillary Agreements in Connection with the Acquisition & the Arrangement —Exchange & Support Agreement" and "Information Concerning Operating Trust"; (f) the Master Asset Contribution Agreement and ancillary contracts entered into in connection therewith. See "Overview of the Acquisition & the Arrangement Replacing the Corporation as a Public Entity with Boardwalk REIT — Arrangements with BPCL" and "— Ancillary Agreements in Connection with the Acquisition & the Arrangement"; (g) the Boardwalk REIT Administrative Services Agreement. See "Management of Boardwalk REIT — Boardwalk REIT Administrative Services Agreement"; (h) the LBA. See "Challenges & Risks – Refinancing Risks” and “- Outstanding Indebtedness"; and (i) the agreement between Toronto Dominion Bank and the Partnership establishing the Facility, dated November 12, 2008, as amended on July 28, 2009, July 28, 2010, July 28, 2011, July 26, 2012, July 26, 2013, July 26, 2014, July 24, 2015, July 21, 2016, November 28, 2016, April 19, 2017, July 17, 2018 and October 22, 2019. See "Strategy for Growth – Managing Capital" and "Challenges & Risks – Outstanding Indebtedness". A copy of these agreements is available on SEDAR (www.sedar.com).
ADDITIONAL INFORMATION
Additional information relating to Boardwalk REIT, including information as to directors' and officers' remuneration and indebtedness, principal holders of Boardwalk REIT's securities and securities authorized for issuance under equity compensation plans, where applicable, is set out in the Trust's Management Information and Proxy Circular dated March 31, 2018 mailed to Unitholders in connection with the annual meeting of such Unitholders (the "Annual Meeting"), held on May 15, 2018 (the "Management Information Circular").
Additional financial information is provided in Boardwalk REIT's financial statements and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2019.
Additional information relating to Boardwalk REIT may also be found on SEDAR at www.sedar.com.
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SCHEDULE "A"
AUDIT AND RISK MANAGEMENT COMMITTEE CHARTER
Policy Statement
It is the policy of Boardwalk Real Estate Investment Trust and its subsidiary entities (the "REIT") to establish and maintain an audit and risk management committee (the "Audit Committee"), composed entirely of independent trustees, to assist the Board of Trustees (the "Board") in carrying out its oversight responsibility for the REIT's internal controls, financial reporting and risk management processes. The Audit Committee will be provided with resources commensurate with the duties and responsibilities assigned to it by the Board including administrative support. If determined necessary by the Audit Committee, it will have the discretion to institute investigations of improprieties, or suspected improprieties within the scope of its responsibilities, including the authority to retain independent advisors.
Composition of the Committee
1. The Audit Committee shall consist of at least three (3) Trustees. The Board shall appoint the members of the Audit Committee and the Chair of the Audit Committee. 2. Each Trustee appointed to the Audit Committee by the Board shall be an independent trustee who is unrelated. An unrelated trustee is a trustee who is independent of management and is free from any interest, any business or other relationship which, in the view of the Board, could, or could reasonably be perceived, to materially interfere with the trustee's ability to act with a view to the best interests of the REIT. Although unitholding may be a factor in such determination, unitholding alone will not lead to a conclusion that there is a lack of independence. In determining whether a trustee is independent of management, the Board shall make reference to the then current legislation, rules, policies and instruments of applicable regulatory authorities. 3. Each member of the Audit Committee shall be "financially literate". In order to be financially literate, a Trustee must be, at a minimum, able to read and understand financial statements of the complexity of those of the REIT and the accounting principles used in their preparation, as well as an understanding of internal controls and procedures for financial reporting. 4. A Trustee appointed by the Board to the Audit Committee shall be a member of the Audit Committee until replaced by the Board or until his or her resignation.
Meetings of the Committee
1. The Audit Committee shall convene a minimum of five (5) times each year at such times and places as may be designated by the Chair of the Audit Committee and whenever a meeting is requested by the Board, a member of the Audit Committee, the auditors, or a senior officer of the REIT. Meetings of the Audit Committee shall correspond with the review of the quarterly and annual financial statements and management discussion and analysis. 2. Notice of each meeting of the Audit Committee shall be given to each member of the Audit Committee. 3. Notice of a meeting of the Audit Committee shall: (a) be in writing; (b) state the nature of the business to be transacted at the meeting in reasonable detail;
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(c) to the extent practicable, be accompanied by copies of documentation to be considered at the meeting; and (d) be given at least five (5) business days prior to the time stipulated for the meeting or such shorter period as the members of the Audit Committee may permit. (e) A quorum for the transaction of business at a meeting of the Audit Committee shall consist of at least half (½) of the members of the Audit Committee. (f) A member or members of the Audit Committee may participate in a meeting of the Audit Committee by means of such telephonic, electronic or other communication facilities, as permits all persons participating in the meeting to communicate adequately with each other. A member participating in such a meeting by any such means is deemed to be present at the meeting. (g) In the absence of the Chair of the Audit Committee, the members of the Audit Committee shall choose one of the members present to be Chair of the meeting. In addition, the members of the Audit Committee may invite the Secretary of the REIT or such other person, who need not be a member of the Committee, as they may choose to be Secretary of the meeting. (h) Senior management of the REIT and other parties may attend meetings of the Audit Committee at the Audit Committee's invitation; however, the Audit Committee: (i) shall meet with the external auditors, independent of management; and (ii) may meet separately with management. (i) Minutes shall be kept of all meetings of the Audit Committee and shall be signed by the Chair and the Secretary of the meeting.
Duties and Responsibilities of the Committee
1. The Audit Committee's primary duties and responsibilities are to: (a) identify and monitor the management of the principal risks that could impact the financial reporting and business of the REIT; (b) monitor the integrity of the REIT's financial reporting process and system of internal controls regarding financial reporting and accounting compliance; (c) monitor the independence and performance of the REIT's external auditors; (d) deal directly with the external auditors to approve external audit plans, other services (if any) and fees; (e) directly oversee the external audit process and results (in addition to items described in Section 4 below); (f) provide an avenue of communication among the external auditors, management and the Board; and (g) ensure that an effective anonymous "whistle blowing" procedure exists to permit stakeholders to express concerns regarding accounting or financial matters to an appropriately independent individual.
2. The Audit Committee shall have the authority to: (a) inspect any and all of the books and records of the REIT, its subsidiaries and affiliates; (b) discuss with the management of the REIT, its subsidiaries and affiliates and senior staff of the REIT, any affected party and the external auditors, such accounts, records and other matters as any member of the Audit Committee considers necessary and appropriate;
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(c) engage independent counsel and other advisors as it determines necessary to carry out its duties; and (d) set and pay the compensation for any advisors employed by the Audit Committee.
3. The Audit Committee shall, at the earliest opportunity after each meeting, report to the Board the results of its activities and any reviews undertaken and make recommendations to the Board as deemed appropriate.
4. The Audit Committee shall: (a) review the audit plan with the REIT's external auditors and with management; (b) discuss with management and the external auditors any proposed changes in major accounting policies or principles, the presentation and impact of significant risks and uncertainties and key estimates and judgments of management that may be material to financial reporting; (c) review with management and with the external auditors significant financial reporting issues arising during the most recent fiscal period and the resolution or proposed resolution of such issues; (d) review any problems experienced or concerns expressed by the external auditors in performing an audit, including any restrictions imposed by management or significant accounting issues on which there was a disagreement with management; (e) review with senior management the process of identifying, monitoring and reporting the principal risks affecting financial reporting and business of the REIT; (f) review audited annual financial statements and related documents in conjunction with the report of the external auditors and obtain an explanation from management of all significant variances between comparative reporting periods; (g) consider and review with management, the internal control memorandum or management letter containing the recommendations of the external auditors and management's response, if any, including an evaluation of the adequacy and effectiveness of the internal financial controls of the REIT and subsequent follow-up to any identified weaknesses; (h) review with financial management and the external auditors the quarterly unaudited financial statements and management discussion and analysis before release to the public; and (i) before release, review and if appropriate, recommend for approval by the Board, all public disclosure documents containing audited or unaudited financial information, including any prospectuses, annual reports, annual information forms, management discussion and analysis and press releases.
5. The Audit Committee shall: (a) evaluate the independence and performance of the external auditors and annually recommend to the Board the appointment of the external auditor or the discharge of the external auditor when circumstances are warranted and the compensation of the external auditor; (b) pre-approve all non-audit services to be provided to the REIT or its subsidiary entities by the REIT's external auditors; (c) approve the engagement letter for non-audit services to be provided by the external auditors or affiliates, together with estimated fees, considering the potential impact of such services on the independence of the external auditors;
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(d) when there is to be a change of external auditors, review all issues and provide documentation related to the change, including the information to be included in the Notice of Change of Auditors and documentation required pursuant to National Instrument 51-102 (or any successor legislation) of the Canadian Securities Administrators and the planned steps for an orderly transition period; and (e) review all reportable events as determined on the advice of counsel, including disagreements, unresolved issues and consultations, as defined by applicable securities policies, on a routine basis, whether or not there is to be a change of external auditors.
6. The Audit Committee shall: (a) evaluate the REIT's policies with respect to ensuring compliance with environmental regulations applicable to the REIT's assets and shall periodically obtain assurance from management that such policies have been applied; (b) evaluate the REIT's policies with respect to derivative trading and hedge transactions and periodically obtain assurance from management that such policies have been adhered to; (c) evaluate the REIT's policies with respect to disaster recovery, including policies and programs for computer systems and buildings; (d) annually review the amount and terms of any insurance to be obtained or maintained by the REIT with respect to risks inherent in its operations and potential liabilities incurred by the Trustees or officers in the discharge of their duties and responsibilities; and (e) evaluate risks related to fraud in financial reporting and provide recommendations to management of procedures to manage such risks.
7. The Audit Committee shall provide advice to the board regarding the appointment of the Chief Financial Officer. 8. The Audit Committee shall enquire into and determine the appropriate resolution of any conflict of interest in respect of audit or financial matters, which are directed to the Audit Committee by any member of the Board, a unitholder of the REIT, the external auditors, or senior management. 9. The Audit Committee shall annually review with management the need for an internal audit function. 10. The Audit Committee shall establish and maintain procedures for: (a) the receipt, retention and treatment of complaints received by the REIT regarding accounting controls, or auditing matters; and (b) the confidential, anonymous submission by employees of the REIT on concerns regarding questionable accounting or auditing matters.
11. The Audit Committee shall review and approve the REIT's hiring policies regarding employees and former employees of the present and former external auditors or auditing matters. 12. The Audit Committee shall review with the Trust's internal legal counsel as required but at least annually, any legal or taxation matter that could have a significant impact on the REIT's business or financial statements, and any enquiries received from regulators, or government agencies. 13. The Audit Committee shall assess, on an annual basis, the adequacy of this Charter and the performance of the Audit Committee. 14. In contributing to the Audit Committee's discharging of its duties under this Charter, each Member shall be entitled to rely in good faith upon:
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(a) accounting information of the Trust represented to him by an officer of the Trust or in a written report of the auditors; and (b) any report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by any such person.
15. In contributing to the Audit Committee's discharging of its duties under this Charter, each Member shall be obliged only to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Nothing in this Charter is intended, or may be construed, to impose on any Member a standard of care or diligence that is in any way more onerous or extensive than the standard to which all Board Members are subject. The essence of the Audit Committee's duties is the monitoring and reviewing to gain reasonable assurance (but not to ensure) that the Trust's business activities are being conducted effectively and that the financial reporting objectives are being met and to enable the Audit Committee to report thereon to the Board.