NICOLA US REAL ESTATE LP 2019 ANNUAL REPORT
NICOLA US REAL ESTATE LP is an investment portfolio comprised of industrial, office and retail properties located in Seattle, Denver, San Francisco, Phoenix, Houston, Chicago and Las Vegas, and in over 16,000 multi-family apartment units located in the South and Southeast U.S., offered to clients of Nicola Wealth.
www.nicolawealth.com
NICOLA US REAL ESTATE LP | Annual Report 2019
2019 HIGHLIGHTS DEAR INVESTOR,
We are pleased to present our Annual Report for Nicola US Real Estate LP RETURN (NUSRELP) for 2019. This comprehensive report outlines a clear picture of both (Net of Fees) the current financial position and the results for the year. All amounts noted in 13.0% this report are in US dollars. NUSRELP generated a return of 13.0% (2018 11.4%) to investors after fees in 2019, another strong result in a competitive investing environment in the U.S. This ASSETS UNDER return is comprised of an Income Return of 5.2% (2018 6.1%) and a Capital Return MANAGEMENT of 7.8% (2018 5.3%). We have a long term investment horizon in the U.S. and will $1,785.0m continue to focus on cash flow to generate returns. We invested in capital expenditure projects on various assets to secure quality tenants. NET ASSET VALUE We acquired 17 properties during the year, which has an up front impact on $801.4m returns; however, we are confident these assets will be accretive to the portfolio over the medium to long term. NET ASSET VALUE Real estate is a long term investment and our historic performance with the PER UNIT portfolio has generated 11.2% since inception in 2010, and $100,000 invested since then is now worth $277,186. $161.22 (Class O & N-O) Net Asset Value (NAV) per unit for Class O increased to $161.22 at December 31, $161.01 (Class A & N-A) 2019, up from $151.79 a year ago, which equates to a 6.2% increase. In addition, Distributions of $9.11 (2018 $8.67) were paid during 2019, 6% of the prior year NAV.
REVENUE Assets Under Management (AUM) increased to $1,785 million from $1,455 million during 2019, a 23% increase, and NAV increased to $801 million from $686 $152.5m million in 2018, a 17% year over year increase. We have assembled an experienced and talented Asset Management team with NET INCOME an institutional grade technology platform to ensure the portfolio is managed to the highest standard. Senior Management invests their own equity into all $89.9m the real estate products and have a “hands-on” approach on all major decisions, ensuring the properties are well-leased, professionally managed and the portfolio is focused on generating strong long-term income returns. OBJECTIVE & STRATEGY
Our objective is to provide clients of Nicola Wealth access to long term ASSETS UNDER MANAGEMENT investments in real estate throughout the USA. Returns are generated from rental ASSETS($ millions UNDER atMANAGEMENT year end) ($ millions at year end) income, capital appreciation and historically stable distributions primarily from 2,000 $1,785 net operating income. 1,800
1,600 $1,455 Our strategy is to invest in stabilized income producing properties with a long 1,400 $1,244 term investment horizon. This includes a limited amount of “build to own” 1,200 $1,055 developed properties. The portfolio is diversified by asset type (industrial, office, 1,000 $879 800 retail and multi-family) and geographic locations across the USA.
600 $544
400 $349
200
- 2013 2014 2015 2016 2017 2018 2019
3 NICOLA US REAL ESTATE LP | Annual Report 2019
PORTFOLIO HIGHLIGHTS PORTFOLIO OCCUPANCY 1,600,000 BY SF In 2019, we started with 75 properties valued at $1,347 million. During the year, we 1,500,000 7,000,000 acquired 17 properties, including 9 commercial properties and interests in 8 multi- 1,400,000 6,000,000 1,250,000 95% 94% family properties: 1,200,000
5,000,000 • Deer Valley, Phoenix, AZ • Riverbend Apartments, League 1,000,000City, 1,000,000 TX • Preserve at Baywood Phase I, 800,000 4,000,000 Pasadena, TX • 101 University, Denver, CO 750,000 600,000 3,000,000 • Preserve at Baywood Phase II, • Gateway Corporate Center, Seattle, 95% Pasadena, TX WA (4 buildings) 500,000 400,000 2,000,000 • San Palmilla, Webster, TX • LV Industrial Portfolio - The Park at 93% 200,000 250,000 • Riverbend Martketplace, Fort Arville, Las Vegas, NV 1,000,000 Lauderdale, FL • LV Industrial Portfolio - Valley View - Business Park, Las Vegas, NV Industrial -Retail Office Seniors Self - • Riverbend Marketplace Outparcels, Office Industrial Retail Multi-Storage Fort Lauderdale, FL • LV Industrial Portfolio - Valley View family • Bradford Mill, Lousville, KY Commerce Center, Las Vegas, NV Occupied Unoccupied • Redmond West, 9511-9521 Willows • Clearwater Farm, Louisville, KY Road, Redmond, WA • Encore Grand Mission, Houston, TX • Northbridge at Mellenia Lake, GROSS ASSET VALUE Orlando, FL BY TYPE In addition we sold the following 7 properties: Other Industrial Retail 6% 6% • Maynard Building, Seattle, WA • Calais Park, St. Petersburg, FL 5% • Quilt Building, Seattle, WA • Champion Woods, Houston, TX • Riverbend Marketplace Outparcels, • Park 9, Orlando, FL Fort Lauderdale, FL • Park at Waterford, Kemah, TX Office 25% We ended the year with 85 properties valued at $1,691 million. Multi- Each quarter we submit our property performance data to MSCI (formerly Family IPD), the world’s leading independent real estate benchmarking service. As you 58% will see in the graph on page 8, we consistently outperform the benchmark on Income Return - we believe this strategy will produce positive returns.
STRATEGIC OUTLOOK GROSS ASSET VALUE The U.S. real estate market is significantly larger than the Canadian market, it has BY LOCATION more depth and investment opportunities to choose from and therefore offers Arizona more potential for growth. We continue to look for investments in major markets California Other 2% 3% in the Western U.S., including Seattle, Houston, Denver, Las Vegas and Phoenix, as 12% Florida well as looking to expand into other major cities such as Portland and Los Angeles. 12% Washington We will continue to expand our multi-family portfolio along with our partner, 17% Georgia Venterra, who focuses on the South and Southeast United States. Venterra provides 13% superior returns supported by thorough research of markets and excellent customer service, identifying properties where value can be added through redevelopment Nevada Illinois or improvement of existing assets. Our portfolio is performing well and we remain 2% 2% positive on the long-term economic outlook in the U.S. Texas If you have any further questions please contact your advisor at Nicola Wealth. 37%
Mark Hannah Managing Director Nicola US Real Estate LP 4 4 NICOLA US REAL ESTATE LP | Annual Report 2019
MANAGEMENT’S REPORT ON PARTNERSHIP PERFORMANCE
TOTAL RETURN
For the year ended December 31, 2019, the partnership generated a return of 13.0% (2018 11.4%) for Class O, net of fees and expenses.
The table below shows the 1, 3, 5 year and since inception returns (Class O). PINNACLE PEAK COMMERCE CENTRE, Since Inception 1 Year 3 Year 5 Year Phoenix, AZ (June 2010) Total Returns 13.0% 11.3% 12.1% 11.2%
The chart below shows the annual historical returns for Class O, by year, for Nicola US Real Estate LP: RETURNS 11.2% since 16.00% inception 13.60% 13.70% 14.00% 12.78% 13.00% 12.00% 11.40% 11.19% 11.40% 9.70% 10.00% 8.08% 8.00%
6.00%
VININGS 4.00% 2.95% Stafford, TX 2.00% 0.00% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
NUSRELP was launched in June 2010, and the chart below shows the value of $100,000 invested since inception through December 2019 (assuming all distributions were reinvested). Since that date, the value has increased to $277,186 for Class O units.
$100,000 INVESTED SINCE INCEPTION
$300,000 $277,186 $280,000
$260,000
$240,000 WESTOVER OAKS $220,000 San Antonio, TX $200,000
$180,000
$160,000
$140,000
$120,000
$100,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
144/156 SECOND STREET San Francisco, CA
5 NICOLA US REAL ESTATE LP | Annual Report 2019
FINANCIAL HIGHLIGHTS
YEAR ENDED YEAR ENDED DECEMBER 31, 2019 DECEMBER 31, 2018 $ (MILLION) $ (MILLION) Property Revenue 152.0 129.3 Other Revenue 0.4 0.0 Total Revenue 152.4 129.3 Operating Expenses 73.5 57.9 REEDO BUILDING Mortgage Interest 30.5 25.5 Seattle, WA Management Fees 7.4 6.3 General Admin 0.4 0.3 Total Expenses 111.8 90.0 Income for the year before 40.6 39.3 undernoted items Fair value adjustments 60.8 40.2 including gains and losses on sale of rental properties Incentive Fee Expense (11.5) (10.9) Net Income for the Year 89.9 68.6 ONE O’HARE Rosemont, IL AS AT AS AT DECEMBER 31, 2019 DECEMBER 31, 2018 $ (MILLION) $ (MILLION) Rental Properties 1,690.6 1,346.6 Other Assets 94.4 108.1 Total Assets 1,785.0 1,454.7 Mortgages and Loan payables 895.4 699.0 Other Liabilities 88.2 69.7 Total Liabilities 983.6 768.7 NET ASSET VALUE 801.4 686.0
MERCER POINTE Bellevue, WA
WESTGATE I Houston, TX
6 NICOLA US REAL ESTATE LP | Annual Report 2019
NAV PER UNIT (CLASS O) CHANGE IN NET ASSET VALUE (NAV) (at year end) $161.22 Effective January 2019, Units were reclassed into 4 classes (Class O, N-O, A and $151.79 $139.80 $144.50 $130.30 N-A). The Class O NAV increased to $161.22 per unit from $151.79 per unit compared to December 31, 2018, an increase of 6.0%.*
DISTRIBUTIONS During 2019, the Partnership made distributions of $9.1080 (2018 $8.6700), 6% 2015 2016 2017 2018 2019 of the NAV per unit as of December 31, 2018. In addition, the Partnership made a tax payment distribution of $ 0.6035 per unit. This resulted in total distributions CASH vs DRIP of $45.7 million (2018 $ 36.8 million), of which 53%, or $24.3 million (2018 $22.7 million), was reinvested into the partnership through the Dividend Reinvestment Plan (DRIP). Each investor elects whether to receive distributions via cash or DRIP. 47% Cash 53% DRIP PARTNERS’ EQUITY During 2019, $154.7 million of investors’ capital was raised (2018 $98.7 million), $83.5 million of investors’ capital was redeemed (2018 $24.40 million). Included within the 2019 redemption amount is $60.5 million that relates to the elimination PARTNERS’ EQUITY of cross-fund ownership. ($ millionsPARTNERS'PARTNERS' EQUITY at year-end) EQUITY ($ millions($ at millions year-end) at year-end) 900,000,000 900,000,000 801 801 800,000,000 800,000,000 MORTGAGES 700,000,000 700,000,000 687 687 600,000,000 600,000,000 580 580 The partnership had a loan-to-value ratio of 50% at the end of 2019, compared to 500,000,000 500,000,000 456 456 48% at the end of 2018. 400,000,000 400,000,000347 347 300,000,000 300,000,000 Our weighted average cost of debt remains the same as 2018 at 3.9% at the end 200,000,000 200,000,000 100,000,000 100,000,000 of 2019. We carefully manage our debt, ensuring staggered loan maturities over a - - 5-to-10 year cycle to avoid higher exposure in any given year. 2015 20162015 20172016 20182017 20192018 2019
MORTGAGE EXPIRY ($M) LEASE EXPIRY PROFILE 500 We also manage our lease expiries in the NUSRELP portfolio. Over the next 12 384 400 months only 9% of the portfolio will be expiring and negotiations with these 300 tenants are well underway. Expiries increase to 12% in 2021 and drop back to 9%
200 in 2022. We monitor our larger tenants as many prefer to have security of tenure 126 135 in advance of their lease expiries. Exposure to vacancy in the portfolio remains 100 91 71 89 relatively low. 0 2020 2021 2022 2023 2024 2025+ With respect to our multi-family assets, the residential markets remain strong, with 94% occupancy at the end of 2019. We have been able to capitalize on revenue LEASE EXPIRATIONS growth with the shorter lease terms typical in this asset class. (% of SF)
35%
30%
25%
20%
15%
10%
5%
0% 2020 2021 2022 2023 2024 2025+
* The NAV per unit will vary between Class O (including N-O) and Class A (including N-A units) as a result of different management fees applicable to each class. Additional information is available in the Sales Disclosure Document. 7 NICOLA US REAL ESTATE LP | Annual Report 2019
VALUATION POLICY
In accordance with industry best practices and MSCI reporting requirements, all of our properties are appraised by a reputable independent third party appraisal firm at least once every 12 months.
MSCI BENCHMARKING AND REALPAC
INCOME RETURNS % We submit our property financials to MSCI, the world leader in real estate ALL BENCHMARKED ASSETS performance and benchmarking. The chart below illustrates the relative performance of our portfolio to the U.S. All Fund Index. The chart shows the direct unlevered Portfolio Benchmark Relative property income returns since 2011 in red and the NUSRELP performance in blue. 1 Year 5.8 4.1 1.6 3 Years 5.9 4.2 1.6 This chart is reproduced with the permission of MSCI. 5 Years 6.1 4.4 1.6 8.0 7 Years 6.1 4.6 1.5 7.0 6.0 5.0 4.0 NUSRELP 3.0 MSCI Benchmark 2.0 1.0 0.0 2011 2012 2013 2014 2015 2016 2017 2018 2019
MANAGEMENT AND INCENTIVE FEES
The partnership pays the following fees in relation to the NUSRELP Portfolio to the GP: MANAGEMENT EXPENSE RATIO • Asset Management fee of 1.00% per annum of NAV for Class O and 1.2 % per 3.50 annum of NAV for Class A, charged monthly 3.00 • Acquisition fee of 0.50% of the acquisition price of the asset, or our ownership 2.50 share in the case of joint ventures 2.00 • Incentive fee of 25% of the return of the partnership in excess of 8% in any 1.50 1.00 calendar year 0.50 - 2015 2016 2017 2018 2019 The Management Expense Ratio (MER) is relatively constant for Asset Management Asset Management Fee Other Fund Expenses fees and Professional & Admin fees as these are the cost to maintain the partnership. Acquisition Fee Incentive Fee Acquisition costs depend on the volume of acquisitions while the Incentive fee will vary year to year based on the fund performance. The fees were as follows:
Class O 2019 2018 Asset Management fees 1.00% 1.00% Professional & Admin fees 0.05% 0.05% Acquisition fees 0.22% 0.13% Incentive fees 1.54% 1.74% Total MER 2.81% 2.92%
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NEW KEY ACQUISITIONS
DEER VALLEY, PHOENIX, AZ (PARTNER: HOPEWELL) This property was acquired in March 2019 and comprises 31 acres of industrial zoned DEER VALLEY land in the popular Deer Valley submarket at the north end of the Loop 101 Freeway. Phoenix, AZ This development is part of our “Build-to-Own” strategy, and will comprise four distribution buildings averaging 98,000 sf each, which will be completed in two phases.
THE PRESERVE PHASES 1 & 2, HOUSTON, TX NEW (PARTNER: VENTERRA) This multi-family property was acquired in January 2019 and comprises two phases with a total of 528 units. Phase 1, completed in 2009, with 192 units, while the 336 unit Phase 2 was completed in 2017. This garden style apartment complex is situated in the desirable East Houston suburb of Pasadena, and offers significant upside potential THE PRESERVE PHASES 1 & 2 including renovation of existing units, enhanced amenity package and will also benefit Houston, TX from Venterra’s management platform, that has a strong focus on customer service and rent maximization software.
NEW FOREST VIEW & TIMBER MILL, WOODLANDS, HOUSTON, TX (PARTNER: VENTERRA) We increased our holding of this multi-family portfolio in March 2019, increasing from a minority 3% stake to a 63% majority holding, after buying out Venterra’s capital partner. Forest View was constructed in 1993 and comprises 256 units, while Timber Mill FOREST VIEW & TIMBER was completed in 1995 and features 216 units, and are situated in the North Houston MILL, WOODLANDS Community known as Woodlands. The strategy is to continue with the value add program Houston, TX consisting of suite renovations and benefit from Venterra’s management platform.
SAN PALMILLA, HOUSTON, TX NEW (PARTNER: VENTERRA) This mid-rise multi-family community comprises 347 units and was acquired in April 2019. We acquired a 35% interest in this property that was built in 2017 and acquired at $20,000 per unit below replacement cost. The property is situated in the desirable southeast suburb of Houston known as Webster. It is located adjacent to the I-45 SAN PALMILLA Highway and is convenient to NASA and other substantial job drivers in the southeast Houston, TX quadrant of Houston. The strategy is to benefit from Venterra’s strong management platform with focus on customer service.
RIVERBEND MARKETPLACE, FORT LAUDERDALE, FL NEW (PARTNER: NORTHBRIDGE) This recently completed shopping centre was acquired in June 2019 and comprises 90,745 SF on 19.63 acres of land. The property is shadow anchored by a Wal-Mart Supercentre and benefits from an excellent location in a growing community in Fort RIVERBEND MARKETPLACE Lauderdale where the population base exceeds 365,000 residents within a 5 mile Fort Lauderlade, FL radius. This neighborhood shopping centre comprises 5 multi-tenant buildings with several national brand tenants.
9 NICOLA US REAL ESTATE LP | Annual Report 2019
KEY ACQUISITIONS continued NEW
BRADFORD MILLS LOFTS, LOUISVILLE, KY (PARTNER: VENTERRA) This fully amenitized multi-family community comprises 146 Units and was acquired in June 2019. Built in 2010, this Class A property was acquired at below replacement BRADFORD MILLS LOFTS cost. The property is situated within 2 miles of downtown Louisville in Germantown, Louisville, KY which is within walking distance of some of the best restaurants, retail and entertainment venues. The thriving Louisville economy is driven by healthcare, the University of Louisville, tourism and manufacturing. Forbes recently named Louisville as the #1 city in the U.S. for manufacturing job growth. The strategy is to benefit from NEW Venterra’s strong management platform with focus on customer service.
REDMOND WEST, 9511-9521 WILLOWS ROAD, REDMOND, WA The property was acquired in August 2019 and is comprised of a 71,818 sf industrial/ flex office building. The property is 100% leased to two tenants at below market REDMOND WEST rents, providing secure cash flow and the ability to generate long-term value. This 9511-9521 WILLOWS ROAD acquisition becomes the 11th property for NUSRELP in the greater Seattle area. Redmond, WA
NORTHBRIDGE AT MILLENIA LAKE, ORLANDO, FL (PARTNER: VENTERRA) NEW Acquired in August 2019, this property is comprised of a 607 unit garden style multi- family community, located in Orlando’s premier shopping district at the intersection of I-4 and the Florida Turnpike. The property was built in two phases in 2004 and 2007, and has an exceptional amenity package that includes two pools, a clubhouse, fitness center, conference room, bowling alley and on-site retail. The strategy is to renovate NORTHBRIDGE AT 105 of the units that have not yet been upgraded and to benefit from Venterra’s MILLENIA LAKE strong management platform with focus on customer service. Orlando, FL
RIVERBEND APARTMENTS, HOUSTON, TX (PARTNER: VENTERRA) NEW The property was acquired in September 2019 and is comprised of a 192 unit garden style community in the League City submarket of Houston. The property is located near I-45, the main north/south highway through the Houston area, providing excellent connectivity and access to several major employers. Amenities include a resort-style pool, clubhouse, fitness center, business center, playground, and dog park. RIVERBEND APARTMENTS The strategy is to upgrade units with new appliances and finishes and to benefit from Houston, TX Venterra’s strong management platform with focus on customer service.
101 UNIVERSITY BOULEVARD, DENVER, CO (PARTNER: MDC) NEW The property was acquired in October 2019 and is comprised of a 52,290 sf office building located in the affluent Cherry Creek submarket of Denver. Originally constructed in 1970, the property was significantly renovated over the last few years. The property is now 100% leased to a roster of national and local professional tenants with no major exposure to a single tenant. This acquisition is the 2nd 101 UNIVERSITY BOULEVARD property for NUSRELP in the Denver market. Denver, CO
10 NICOLA US REAL ESTATE LP | Annual Report 2019
NEW KEY ACQUISITIONS continued
GATEWAY CORPORATE CENTER, TUKWILA, WA
Acquired in November 2019, this property is comprised of a four (4) building flex office/industrial park totaling 176,179 sf of rentable area. The property is centrally GATEWAY CORPORATE located within Greater Seattle at the crossroads of I-5, I-405, and SR-599, and in CENTER Tukwila, WA close proximity to SeaTac International Airport. Existing rental rates are below market, providing the opportunity to increase rents and generate long-term value. This acquisition is part of NUSRELP’s strategy to increase its allocation to the industrial asset class with a focus on small and mid-bay product. NEW
LAS VEGAS INDUSTRIAL PORTFOLIO, LAS VEGAS, NV
This small-bay industrial portfolio is comprised of three (3) properties, totaling 13 buildings and 276,443 sf of rentable area. Completed in December 2019, this LAS VEGAS INDUSTRIAL acquisition is the first for NUSRELP in the Las Vegas market. The properties are all PORTFOLIO located in the southwest submarket, a core infill industrial node west of the “strip”. Las Vegas, NV This portfolio provides a critical mass in the Las Vegas market and the strategy is to grow the portfolio in this market with a focus on industrial assets.
SOLD KEY DISPOSITIONS
PARK 9, ORLANDO, FL
This garden style apartment community comprises 356 units and was SOLD in June 2019. It is located 3 miles southwest of the University of Central Florida (UCF) in PARK 9 Orlando, FL Orlando. We originally acquired it in March 2014. During our 5-year hold period, we implemented significant upgrades to the suites and amenity area. The asset benefited from Venterra’s management platform that has a strong focus on customer service and their algorithm based revenue maximization software. The strategy was
SOLD completed and the asset positioned for disposition to optimize value for our investors.
QUILT BUILDING, 316 1ST AVENUE SOUTH, SEATTLE, WA
The property was originally acquired in 2011 as part of a three-property portfolio of office buildings in the Pioneer Square submarket of Seattle. This six-storey building QUILT BUILDING, 316 1ST is comprised of ground level retail, three levels of office space and two levels of AVENUE SOUTH Seattle, WA residential apartment units. After the recent completion of a major façade renovation, the property was well-positioned for disposition to optimize value for our investors and was sold in September 2019.
SOLD MAYNARD BUILDING, 119 1ST AVENUE SOUTH, SEATTLE, WA
The property was originally acquired in 2011 as part of a three-property portfolio of office buildings in the Pioneer Square submarket of Seattle. The Maynard building was the last remaining of the three properties within the NUSRELP portfolio and was sold MAYNARD BUILDING, 119 in December 2019. The recent completion of the façade renovation positioned the 1ST AVENUE SOUTH, property for disposition. The portfolio netted a very attractive return for the investors Seattle, WA over the holding period.
11 NICOLA US REAL ESTATE LP | Annual Report 2019
SUMMARY OF INVESTMENT PORTFOLIO
The following table summarizes all properties held by the Partnership as at December 31, 2019.
PROPERTY SQUARE RENTAL PROPERTIES CITY STATE OWNERSHIP TYPE FOOTAGE Cabot Business Center Phoenix AZ 100.00% Industrial 109,779 Pinnacle Peak Commerce Phoenix AZ 100.00% Industrial 93,725 Center GATEWAY II Deer Valley Phoenix AZ 85.00% Development - Bellevue, WA Arizona Total 203,504 144 Second Street San Francisco CA 100.00% Office 24,804 156 Second Street San Francisco CA 100.00% Office 28,584 California Total 53,388 101 University Denver CO 80.00% Office 52,067 The Point at Inverness Englewood CO 45.00% Office 190,334 Colorado Total 242,401 The Park at Arville Las Vegas NV 100.00% Industrial 160,277 Valley View Business Park Las Vegas NV 100.00% Industrial 42,737 Valley View Commerce Center Las Vegas NV 100.00% Industrial 73,429 THE POINT AT INVERNESS Nevada Total 276,443 Englewood, CO Merchants Way Katy TX 100.00% Office 135,716 Westgate I Houston TX 100.00% Office 253,363 Texas Total 389,079 Norfolk Industrial Seattle WA 100.00% Industrial 121,035 Redmond West on Willows Redmond WA 100.00% Industrial 71,818 1550 Building Seattle WA 100.00% Office 47,154 Canyon Park Bothell WA 100.00% Office 143,758 Gateway Corporate Center 1 Seattle WA 100.00% Office 52,380 Gateway Corporate Center 2 Seattle WA 100.00% Office 70,550 Gateway Corporate Center 3 Seattle WA 100.00% Office 38,122 Gateway Corporate Center 8 Seattle WA 100.00% Office 15,119 CANYON PARK Bothell, WA Gateway II Bellevue WA 100.00% Office 67,989 Mercer Pointe Bellevue WA 100.00% Office 71,329 Reedo Building Seattle WA 100.00% Office 53,636 University District Building Seattle WA 100.00% Office 83,347 Georgetown Center Seattle WA 100.00% Retail 129,927 South Hill Village Puyallup WA 100.00% Retail 141,707 Washington Total 1,107,871 Riverbend Marketplace Ft. Lauderdale FL 50.24% Retail 90,745 One O'Hare Rosemont IL 50.00% Office 380,360 Lake Montclair Center Dumfries VA 57.49% Retail 105,832 Others Total 576,937 GATEWAY NORTH Clearwater, FL Subtotal Industrial, Office and Retail 2,849,623
12 NICOLA US REAL ESTATE LP | Annual Report 2019
SUMMARY OF INVESTMENT PORTFOLIO continued
PROPERTY SQUARE RENTAL PROPERTIES CITY STATE OWNERSHIP TYPE FOOTAGE Citrus Run Apartments Tampa FL 35.00% Multi-Family 77,480 Cobblestone at Eagle Fleming FL 58.00% Multi-Family 268,187 Harbor Apartments Island District Universal Orlando FL 35.00% Multi-Family 426,138 Boulevard Apartments NORFOLK INDUSTRIAL Falcon Square at Winter Seattle, WA FL 10.71% Multi-Family 425,178 Independence Garden Gateway North Clearwater FL 50.00% Multi-Family 322,368 Links at Windsor Parks Jacksonville FL 50.00% Multi-Family 321,576 NorthBridge at Millenia Lake Orlando FL 35.00% Multi-Family 756,619 Valencia at Westchase Tampa FL 50.00% Multi-Family 305,832 (Sheldon Palms) Village Walk Jacksonville FL 52.50% Multi-Family 279,174 Villas Continental Orange Park FL 50.00% Multi-Family 102,969 Apartments Florida Total 3,285,521 Apex West Midtown Atlanta GA 45.40% Multi-Family 353,185 CHAMPIONS GREEN Axial Buckhead Atlanta GA 37.50% Multi-Family 161,100 APARTMENTS Apartments Alpharetta, GA Balmoral Village Peachtree City GA 50.00% Multi-Family 344,896 Champions Green Alpharetta GA 75.00% Multi-Family 442,848 Apartments CoHo Apartments Atlanta GA 35.00% Multi-Family 142,720 Tree Park Aprtments Hall County GA 37.50% Multi-Family 557,298 Tuscany at Lindbergh Atlanta GA 65.00% Multi-Family 335,164 Villas at Newnan Newnan GA 50.00% Multi-Family 405,008 Georgia Total 2,742,219 Bradford Mills Loft Louisville KY 35.00% Multi-Family 114,930 Metropolitan Louisville KY 35.00% Multi-Family 110,900 TUSCANY AT LINDBERG Clearwater Louisville KY 35.00% Multi-Family 501,562 Atlanta, GA Kentucky Total 727,392 Chatham Lofts Apartments Cary NC 35.00% Multi-Family 62,948 Chatham Pointe Apartments Cary NC 35.00% Multi-Family 201,842 North Carolina Total 264,790 West 46th Apartments Nashville TN 35.00% Multi-Family 119,622 Tennessee Total 119,622 Bala Woods Kingwood TX 68.50% Multi-Family 276,982 Belterra Fort Worth TX 50.00% Multi-Family 278,292 Calais Midtown Houston TX 57.50% Multi-Family 355,556 Carlyle Place San Antonio TX 80.00% Multi-Family 170,472 BALA WOODS Carrington at Park Lakes Humble TX 7.98% Multi-Family 283,613 Kingwood, TX Coles Crossing Cypress TX 36.19% Multi-Family 384,718
13 NICOLA US REAL ESTATE LP | Annual Report 2019
SUMMARY OF INVESTMENT PORTFOLIO continued
PROPERTY SQUARE RENTAL PROPERTIES CITY STATE OWNERSHIP TYPE FOOTAGE College View La Porte TX 19.00% Multi-Family 85,192 Dolce Living Grand Harbor Houston TX 50.00% Multi-Family 320,640 Encore Grand Mission Richmond TX 35.00% Multi-Family 214,200 Estancia at Morningstar The Colony TX 16.62% Multi-Family 323,736 Fairways at South Shore League City TX 50.00% Multi-Family 378,270 VILLAS CONTINENTAL APARTMENTS Forest View The Woodlands TX 62.93% Multi-Family 215,648 Orange Park, FL Ilume Apartments (4123 Dallas TX 30.00% Multi-Family 279,529 Cedar Springs Rd) Ilume Park Apartments Dallas TX 30.00% Multi-Family 221,512 (Park West) Preserve at Baywood - Pasadena TX 50.00% Multi-Family 311,748 Phase I Preserve at Baywood - Pasadena TX 50.00% Multi-Family 176,412 Phase II Preserve at Colony Lakes Stafford TX 38.21% Multi-Family 385,548 Republic Park Vista Fort Worth TX 35.00% Multi-Family 275,908 San Palmilla Apartments Webster TX 35.00% Multi-Family 347,039 VENTANA Shadowbrooke Stafford TX 5.95% Multi-Family 226,728 San Antonio, TX Silverbrooke Stafford TX 5.95% Multi-Family 262,392 South Shore Lakes League City TX 50.00% Multi-Family 249,760 St. Andrews Apartments Pearland TX 4.52% Multi-Family 446,252 Stonecreek Ranch Austin TX 68.50% Multi-Family 166,026 The Palazzo San Antonio TX 50.00% Multi-Family 100,816 The Phoenix Fort Worth TX 50.00% Multi-Family 141,735 The Preserve at Old Beaumont TX 8.56% Multi-Family 291,548 Dowlen Timber Mill The Woodlands TX 62.93% Multi-Family 181,140 Ventana San Antonio TX 50.00% Multi-Family 380,076 Venue at Hometown North 1550 BUILDING TX 35.00% Multi-Family 216,624 Apartments Richland Hills Seattle, WA Villa Lago Fort Worth TX 6.16% Multi-Family 186,084 Vinings Stafford TX 50.00% Multi-Family 219,480 VR Riverbend League City TX 35.00% Multi-Family 191,056 Westover Oaks San Antonio TX 75.00% Multi-Family 226,640 Zang Triangle Dallas TX 70.00% Multi-Family 222,082 Texas Total 8,993,454 Subtotal Multi-Family 16,132,998
Grand Total Portfolio 18,982,621
ZANG TRIANGLE Dallas, TX
14 NICOLA US REAL ESTATE LP | Annual Report 2019
INDEPENDENT AUDITOR’S REPORT
To the Partners of Nicola U.S. Real Estate Limited Partnership:
Opinion
We have audited the consolidated financial statements of Nicola U.S. Real Estate Limited Partnership and its subsidiaries (the “partnership”), which comprise the consolidated balance sheet as at December 31, 2019, and the consolidated statement of operations, consolidated statement of partners’ capital and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the partnership as at December 31, 2019, and its consolidated results of operations and its consolidated cash flows for the year then ended in accordance with the financial reporting provisions of section 11.4 of the Limited Partnership Agreement.
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the partnership in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Emphasis of Matter – Basis of Accounting and Restriction on Use
We draw attention to note 2 to the consolidated financial statements, which describes the basis of accounting. The consolidated financial statements are prepared to assist Nicola U.S. Real Estate Limited Partnership meet the financial reporting provisions of section 11.4 of the Limited Partnership Agreement. As a result, the consolidated financial statements may not be suitable for another purpose. Our report is intended solely for Nicola U.S. Real Estate Limited Partnership and its partners and should not be used by parties other than Nicola U.S. Real Estate Limited Partnership and its partners. Our opinion is not modified in respect of this matter.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the financial reporting provisions of section 11.4 of the Limited Partnership Agreement, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
15 NICOLA US REAL ESTATE LP | Annual Report 2019
In preparing the consolidated financial statements, management is responsible for assessing the partnership’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the partnership or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the partnership’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the partnership’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the partnership’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the partnership to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
16 NICOLA US REAL ESTATE LP | Annual Report 2019
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
CHARTERED PROFESSIONAL ACCOUNTANTS
Vancouver, Canada March 31, 2020
See accompanying notes to the consolidated financial statements.
17 NICOLA US REAL ESTATE LP | Annual Report 2019
18 NICOLA US REAL ESTATE LP | Annual Report 2019
NICOLA U.S. REAL ESTATE LIMITED PARTNERSHIP CONSOLIDATED STATEMENT OF OPERATIONS (IN U.S. DOLLARS) DECEMBER 31, 2019
2019 2018 Revenue Rentals and expense recoveries $152,085,902 $129,337,831 Investment income 365,272 12,329
152,451,174 129,350,160
Expenses Administration 346,985 306,377 Management fees 7,432,597 6,324,289 Mortgage interest and bank charges 30,484,463 25,538,993 Professional fees 1,216,026 932,974 Rental operating costs 72,334,818 56,930,257
111,814,889 90,032,890
Income for the year before undernoted items 40,636,285 39,317,270
Fair value adjustments including gains on sale of rental properties 60,795,117 40,215,379 Incentive fees expense (11,486,396) (10,947,411)
Net income for the year $ 89,945,006 $ 68,585,238
See accompanying notes to the consolidated financial statements. 19 NICOLA US REAL ESTATE LP | Annual Report 2019
---
2018 4,519,360 98,622,025 68,585,238
579,993,954 106,018,771 (24,353,456) (36,835,036)
$ $686,012,725
Total --- 62)
945,006 2019 4,970,970 54,690,599 89,
686,012,725 1 115,407,838 801,420,563 (83,484,305) (45,743,4
$ $
------69 69
8,114 8,183
2018
$ $
------90 90
8,183 8,273 General Partner 2019
$ $
------
2018
A $ $ -
2019
) ------
Class N
58,201 969,790 469,195 ( 2019 1,878,005 2,378,600 9,371,243 6,992,643
$ $
------
2018
O
- $ $
) ) --- (IN U.S.(IN DOLLARS)
Class N 517,354 2019 4,975,336 9,057,120 92,466,435 40,622,747 10,154,438 83,409,315 ( (
$ (54,858,969) $
------
FOR THE YEAR ENDED DECEMBER 31, 31, DECEMBER ENDED YEAR THE FOR 2018 accompanying notes to the consolidated financial statements.
NICOLA U.S. REAL ESTATE LIMITED PARTNERSHIP LIMITED ESTATE REAL U.S. NICOLA $ $ CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL PARTNERS’ OF STATEMENT CONSOLIDATED
See )
------Class A
5,890 40,536 82,228 ( 516,755 431,669 948,424 389,977 2019
$ $
---
4,542 85,840 00 2018 4,519,360 98,622,025 68,585,169
579,9 686, 106,018,702 (24,353,456) (36,835,036)
$ $
) ) Class O
9,870 38,460 004,542 2019 4,389,525
78,7
99,975,833 40,258,395 111,79 707,683,308 121,654,599 ( ( (28,625,336)
$686, $
of (out)
Capital the year
ning end theof
egin the yearthe during yearthe yearthe yearthe B Contributions Redemptions during Net income for Distributions during
transactionsNet Partner’s Capital Number unitsof Partner’s Transfers in
year
20 NICOLA US REAL ESTATE LP | Annual Report 2019
NICOLA U.S. REAL ESTATE LIMITED PARTNERSHIP CONSOLIDATED STATEMENT OF CASH FLOWS (IN U.S. DOLLARS) DECEMBER 31, 2019
2019 2018 Cash flows from operating activities Net income for the year $ 89,945,006 $ 68,585,238 Items not involving cash Fair value adjustments including gains on sale of rental properties (60,795,117) (40,215,379) Intangible costs incurred (4,546,708) (2,434,338)
24,603,181 25,935,521 Net change in non-cash working capital balances Increase in receivables and other assets (783,865) (698,359) Increase in accounts payable and accrued liabilities 13,007,381 9,112,564
36,826,697 34,349,726
Cash flows used in investing activities Acquisitions and additions of rental properties (332,279,852) (181,958,748) Proceeds on sale of rental properties 58,727,259 14,187,345
(273,552,593) (167,771,403)
Cash flows from financing activities Increase in mortgages payable, net 196,381,852 91,161,300 Partners' capital contributions 126,199,181 81,121,417 Partners' capital redemptions (83,003,521) (23,275,227) Partners' capital distributions (21,516,942) (13,691,632)
218,060,570 135,315,858
Increase (decrease) in cash during the year (18,665,326) 1,894,181
Cash, beginning of the year 92,020,306 90,126,125
Cash, end of the year $ 73,354,980 $ 92,020,306
See accompanying notes to the consolidated financial statements. 21 NICOLA US REAL ESTATE LP | Annual Report 2019
NICOLA U.S. REAL ESTATE LIMITED PARTNERSHIP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. DOLLARS) DECEMBER 31, 2019
1. General information
The partnership was formed under the Partnership Act of British Columbia on December 18, 2006 to directly and indirectly invest in, operate and sell real estate property in the United States.
Any income of the partnership is allocated to the limited partners and the General Partner by multiplying the aggregate income or loss, as the case may be, by the sum of the “Time Weighted Proportions” as defined in the limited partnership agreement, of all units held by such partner.
The accompanying financial statements only present the financial position and the results of the operations of the partnership. They do not include other assets, liabilities, revenue and expenses of the partners. No provision for income tax has been made, as the partnership is not a taxable entity.
2. Basis of accounting and significant accounting policies
The Limited Partnership Agreement requires that the consolidated financial statements be prepared in accordance with Canadian accounting standards for private enterprises (“ASPE”), except as modified by the items listed below, to reflect a fair value basis of accounting for the partnership’s assets and liabilities.
a) Net asset value
The net asset value (“NAV”) is determined in accordance with section 11.4 of the Limited Partnership Agreement, which requires the values of assets and liabilities of the partnership at the fiscal year-end to be determined by the General Partner in accordance with the following principles:
i) Rental Properties
Rental properties held by the partnership, where the partnership’s interest represents $10 million or greater, are valued based on the gross asset value of such rental property as determined by an accredited third party appraiser no less frequently than on an annual basis. For any property purchased in the calendar year, the General Partner may, in its sole discretion, consider the gross asset value of such property to be equal to the purchase price of such property.
22 NICOLA US REAL ESTATE LP | Annual Report 2019
NICOLA U.S. REAL ESTATE LIMITED PARTNERSHIP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. DOLLARS) DECEMBER 31, 2019
2. Basis of accounting and significant accounting policies - continued
a) Net asset value - continued
i) Rental Properties - continued
If the partnership holds an interest in a rental property representing less than $10 million based on gross asset value of such rental property, such rental property is valued no less frequently than on an annual basis either by an accredited third party appraiser or by applying a market cap rate to the net operating income of such rental property, as calculated by the General Partner.
ii) Portfolio investments
The fair market value of any security which is listed on a stock exchange is determined by (a) in the case of a security which was traded on the day as of which the NAV of the partnership is being determined, the closing sale price; (b) in the case of a security which was not traded on the day as of which the NAV of the partnership is being determined, a price which is the average of the closing recorded bid and asked prices; or (c) if no bid or asked quotation is available, the price last determined for such security for the purpose of calculating the NAV of the partnership. The value of inter-listed securities is computed in accordance with directions laid down from time to time by the General Partner; and provided however that if, in the opinion of the General Partner, stock exchange or over-the-counter quotations do not properly reflect the prices which would be received by the partnership upon the disposal of securities necessary to effect any redemptions of units, the General Partner may place such value upon such securities as appears to the General Partner to most closely reflect the fair market value of such securities.
iii) Other financial assets
The fair market value of any cash, receivables, prepaid expenses and deposits is deemed to be the cost thereof unless the General Partner shall have determined that any such asset is not worth the cost amount thereof, in which event the value shall be deemed to be the lesser of cost and net realizable value.
iv) Foreign exchange
The fair market value of all assets and liabilities of the partnership valued in terms of a currency other than United States currency is translated to United States currency at the Federal Reserve of the United States noon rate of exchange on the valuation date.
23 NICOLA US REAL ESTATE LP | Annual Report 2019
NICOLA U.S. REAL ESTATE LIMITED PARTNERSHIP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. DOLLARS) DECEMBER 31, 2019
2. Basis of accounting and significant accounting policies - continued
a) Net asset value - continued
v) Liabilities
The liabilities of the partnership are deemed to include the following, recorded at amortized cost:
a) all operating and administrative expenses payable and/or accrued, including but not limited to the fees payable under management and/or service agreements;
b) obligations for any payment, including any declared but unpaid distributions;
c) reasonably estimated allowances as determined by the General Partner for maintenance of properties, taxes, future selling costs and any other contingent liability; and
d) mortgages payable, including any interest rate derivative instruments; except those mortgages payable assumed under a property purchase, which will be marked to market upon acquisition of properties using the market interest rate at the time the mortgage is assumed.
b) Consolidation
The consolidated financial statements include the accounts of the partnership and of the following partnerships in which it is the only limited partner:
• 144/156 Second Street Limited Partnership • Nicola 101 University Limited Partnership • Nicola GCC Limited Partnership • Nicola LVP Limited Partnership • Nicola Outparcel Pref Limited Partnership • Nicola Riverbend Limited Partnership • Nicola US (Deer Valley) Limited Partnership • Nicola Willows Limited Partnership • Norfolk Building Limited Partnership • PSQ Portfolio Limited Partnership • Reedo Limited Partnership • Spire 1550 4th Avenue Limited Partnership • Spire Cabot Limited Partnership • Spire Canyon Park Limited Partnership • Spire Champion Parkway Atlanta Limited Partnership • Spire Gateway Limited Partnership • Spire Georgetown Centre Limited Partnership • Spire Inverness Point Limited Partnership • Spire Lake Montclair Limited Partnership
24 NICOLA US REAL ESTATE LP | Annual Report 2019
NICOLA U.S. REAL ESTATE LIMITED PARTNERSHIP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. DOLLARS) DECEMBER 31, 2019
2. Basis of accounting and significant accounting policies - continued
b) Consolidation – continued
• Spire Mercer Pointe Limited Partnership • Spire Merchants Way Limited Partnership • Spire Pinnacle Limited Partnership • Spire Rosemont Limited Partnership • Spire South Hill Limited Partnership • Spire UDB Limited Partnership • Spire Venterra Limited Partnership • Spire Westgate Limited Partnership
In addition, the consolidated financial statements include the partnership’s proportionate share of the assets and liabilities of limited partnerships in which Nicola U.S. Real Estate Limited Partnership consolidated interests range from 16% to 86%.
All inter-entity transactions have been eliminated.
c) Revenue recognition
Rentals and expense recoveries revenue includes all amounts earned from tenants related to lease agreements, including property tax and operating cost recoveries. Rental revenue and expense recovery is recorded when it becomes receivable based on the terms of the lease. The partnership does not recognize rental revenue on a straight- line basis over the term of the respective lease agreements.
Interest is recorded as earned until such time as the related receivable is recognized as impaired at which time interest ceases to be accrued. Other investment income is recognized as earned or declared.
Realized gains and losses on the sale of properties and other investments are recognized when the partnership has transferred to the purchaser the significant risks and rewards of ownership of the asset.
d) Use of estimates
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Due to the significant judgements involved in determining fair values, the partnership’s estimated values may differ from the fair values estimated by other parties and from the values ultimately realized on the sale of an asset or settlement of a liability.
25 NICOLA US REAL ESTATE LP | Annual Report 2019
NICOLA U.S. REAL ESTATE LIMITED PARTNERSHIP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. DOLLARS) DECEMBER 31, 2019 2. Basis of accounting and significant accounting policies - continued
d) Use of estimates - continued
Critical assumptions in relation to the estimates of fair value of rental properties include the receipt of contractual rents, expected structure market rents, renewal rates, maintenance requirements, discount rates that reflect current market factors, capitalization rates and comparable sales data, where available. If there are changes in these assumptions the fair value of rental properties may change materially. The partnership makes estimates and assumptions relating to the fair value measurements of mortgages and loans payable and the determination of its estimate of future selling costs and contingent liabilities.
3. Rental properties 2019 2018
Balance, beginning of the year $1,346,554,627 $1,132,819,712 Acquisitions and additions 332,279,852 181,958,748 Dispositions (32,414,632) (8,790,760) Fair value adjustment 44,154,545 40,566,927
Balance, end of the year $ 1,690,574,392 $ 1,346,554,627
See note 5.
4. Receivables and other assets 2019 2018
Contractual rents receivable $ 7,978,905 $ 6,055,648 Prepaid expenses, deposit and other 2,659,922 3,458,861 Subscriptions receivable due from investors 10,047,203 5,892,222 Taxes recoverable 397,253 737,707
$ 21,083,283 $ 16,144,438
5. Mortgages payable
The partnership’s share of mortgages payable ranging from $435,000 to $34,306,000 each, are secured by land and buildings across the United States and assignments of rents and bear interest at rates from 3.06% to 5.90%.
26 NICOLA US REAL ESTATE LP | Annual Report 2019
NICOLA U.S. REAL ESTATE LIMITED PARTNERSHIP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. DOLLARS) DECEMBER 31, 2019
5. Mortgages payable - continued
The principal repayment requirements are as follows:
2020 $ 90,630,973 2021 71,320,266 2022 89,187,079 2023 125,539,621 2024 135,166,751 2025 and subsequent 383,536,038
$895,380,728
6. Accounts payable and accrued liabilities 2019 2018
Accounts payable and accrued liabilities $ 26,113,402 $ 19,588,719 Accrued interest on mortgages 716,172 776,400 Distributions payable 1,379,063 1,488,980 Future selling costs and other contingent liabilities 38,234,088 33,108,741 Incentive fees 11,486,396 6,947,411 Redemptions payable 1,907,895 1,427,111 Security deposits 4,268,606 3,333,187 Unearned revenue 4,105,742 3,037,221
$ 88,211,364 $ 69,707,770
7. Partners’ capital
During the year the partnership’s capital distributions consisted of distributions of cash of $21,407,025 (2018 - $14,114,085) and distributions reinvested in units of the partnership of $24,336,437 (2018 - $22,720,951).
For 2020, management has set the distribution rate at 6% of the December 31, 2019 NAV. As a result, the partnership expects total 2020 distributions, based on the number of units held at December 31, 2019, to approximate $48,000,000.
27 NICOLA US REAL ESTATE LP | Annual Report 2019
NICOLA U.S. REAL ESTATE LIMITED PARTNERSHIP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. DOLLARS) DECEMBER 31, 2019 8. Other information
a) Related party transactions
In addition to transactions and balances described elsewhere, the financial statements include the following transactions with the General Partner:
2019 2018
Accounts payable and accrued liabilities $ 11,486,396 $ 6,947,411
Management fees and incentive fees expenses $ 18,918,993 $ 13,271,700
Included in rental properties are acquisition fees incurred in 2019 in the amount of $1,599,327 (2018 - $850,203) paid to the General Partner.
The partnership paid $143,399 (2018 - $111,126) as fund administrative fees to a company related to the General Partner.
At December 31, 2019 parties related to the General Partner’s shareholder own 756,480 (2018 – 607,222) units of the partnership subscribed for at the same prices as for all other partners.
The transactions with related parties are measured at the exchange amount, which is the amount of consideration established and agreed to between the parties.
b) Financial instruments
The main risks the partnership's financial instruments are exposed to include the following:
i) Credit risk - The financial instruments that potentially subject the partnership to a significant concentration of credit risk consist primarily of cash and receivables. The partnership mitigates its exposure to credit loss by placing its cash with major financial institutions. The partnership routinely assesses the financial strength of its tenants and, as a consequence, believes that its accounts receivable credit risk exposure is limited.
ii) Interest rate risk - The partnership is exposed to interest rate price risk to the extent that a significant portion of mortgages payable are at fixed interest rates.
iii) Liquidity risk - Liquidity risk relates to the risk the partnership will encounter difficulty in meeting its obligations associated with financial liabilities. The partnership's financial liabilities consist of mortgages payable and accounts payable and accrued liabilities. Management closely monitors cash flow requirements to ensure that it has sufficient cash on demand to meet operational and financial obligations.
28 NICOLA US REAL ESTATE LP | Annual Report 2019
NICOLA U.S. REAL ESTATE LIMITED PARTNERSHIP NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. DOLLARS) DECEMBER 31, 2019
8. Other information - continued
b) Financial instruments - continued
iv) Market risk - Market risk is the risk that changes in market prices and interest rates will affect the partnership's net income and the value of financial instruments. These risks are generally outside the control of the partnership. The objective of the partnership is to mitigate market risk exposures within acceptable limits, while maximizing returns.
c) Commitments
The partnership has an agreement with the General Partner whereby the General Partner is paid an asset management fee in an amount equal to 1.2% per annum, of the net assets, at fair market value, attributable to the Class A and N-A units, and 1% per annum, of the net assets, at fair market value, attributable to the Class O and N-O units, as determined by the General Partner. In addition, the General Partner is paid an incentive fee of 25% of the return of the partnership in excess of 8%. The General Partner is also paid an acquisition fee of 0.5%, based on the gross purchase price, on the completion of the purchase of rental properties.
d) Contingent liabilities
A significant portion of the partnership’s assets and liabilities represent its proportionate share of assets and liabilities held by limited partnerships in which it has invested. Accordingly, the partnership is contingently liable for the co-investors’ share of the liabilities of those partnerships. The assets of those partnerships are available to satisfy the liabilities.
9. Subsequent events
Subsequent to the year-end:
a) VR Grand Holdings Limited Partnership, of which, Spire Venterra Limited Partnership acquired a 35% interest in during the year, completed the purchase of a rental property for $46,000,000, partly financed by a mortgage payable in the amount of $29,900,000.
b) On March 11, 2020, the World Health Organization categorized COVID-19 as a pandemic. The potential economic effects within the partnership’s environment and in the global markets and measures being introduced at various levels of government to curtail the spread of the virus could have a material impact on the partnership’s operations. The extent of the impact of this outbreak and related containment measures on the partnership’s operations cannot be relatively estimated at this time.
29 NICOLA US REAL ESTATE LP | Annual Report 2019
30 NICOLA US REAL ESTATE LP | Annual Report 2019
NICOLA WEALTH REAL ESTATE EXECUTIVE TEAM
MARK HANNAH ALEX MESSINA MARY AUBREY Managing Director Director of Acquisitions Director of Asset Management Nicola Canadian Real Estate LP Nicola Canadian Real Estate LP Nicola Canadian Real Estate LP 778.383.6937 778.383.4020 778.383.6942 [email protected] [email protected] [email protected]
AUDITORS
BAKER TILLY WM LLP Suite 900, 400 Burrard Street Vancouver, British Columbia V6C 3B7
Disclaimer
- Past performance is not indicative of future results. - Please speak with a Nicola Wealth advisor to discuss if this - Returns are net of LP expenses. investment is right for you. - This investment is only available for sale to residents of - Nicola Wealth is registered as a Portfolio Manager, Exempt Canada who are accredited investors. Please read the Limited Market Dealer and Investment Fund Manager with the required Partnership Agreement and subscription documents for provincial securities’ commissions. additional details and important disclosure information. - All investments contain risk and may gain or lose value. - Distributions are not guaranteed and may vary in amount and - Nicola U.S. Real Estate Limited Partnership was set up in July frequency over time. 2007 but opened to investors in June 2010. All returns are 31 - This does not constitute an offer of sale. calculated from June 2010. NICOLA US REAL ESTATE LP 5th Floor, 1508 West Broadway Vancouver, BC V6J 1W8 604.739.6450