TSE SYMBOL: BEI NYSE SYMBOL: BEI February 16, 2004
Boardwalk Announces Record Fourth Quarter And Full Year 2003 Financial Results;
11% Increase In 2003 FFO Per Share, Excluding Gains
Boardwalk Provides Update On Proposed REIT Conversion
DOWNLOAD FEBRUARY 16, 2004 PRESS RELEASE (Printer Friendly 141Kb PDF File)
CALGARY, Feb. 16 /CNW/ - Boardwalk Equities Inc. ("BEI" - TSX, NYSE)
today announced record unaudited financial results for the fourth quarter of
2003 and for fiscal 2003. For the fourth quarter ended December 31, 2003, the
Company reported Funds From Operations ("FFO"), a key performance measurement
for real estate companies, of $18.3 million and FFO per share of $0.36 on a
diluted basis, compared to FFO of $13.5 million and FFO per share of $0.27 for
the same period last year. For the year ended December 31, 2003, the Company
reported FFO of $70.6 million and FFO per share of $1.39 on a diluted basis,
compared to FFO of $63.1 million and FFO per share of $1.26.
Funds From Operations ("FFO") is a generally accepted measure of
operating performance of real estate companies, however is a non-GAAP
measurement. The Company calculates FFO by taking Net Earnings and adding non
cash items including Future Income Taxes and Amortization. The determination
of this amount may differ from that of other real estate companies.
Highlights of the Company's fourth quarter 2003 financial results
include:
- Rental revenues of $69.9 million, an increase of 9.6% compared to
$63.8 million for the three-month period ended December 31, 2002.
- Net operating income of $44.9 million, representing a 12.0% increase
from $40.1 million in the same period last year.
- FFO from rental operations, which excludes any gains on property
dispositions, of $18.3 million, an increase of 35.6% compared to
$13.5 million for the three-month period ended December 31, 2002.
There were no property dispositions in the fourth quarter of 2003 or
2002.
- FFO per share from rental operations, which excludes gains, was
$0.36 on a diluted basis, up 33.3% compared to $0.27 for the
three-month period ended December 31, 2002.
Highlights of the Company's financial results for the fiscal 2003
include:
- Rental revenues of $271.0 million, an increase of 12.2% compared to
$241.6 million for the twelve-month period ended December 31, 2002.
- Net operating income of $176.2 million, representing a 8.2% increase
from $162.9 million in the same period last year.
- FFO of $70.6 million, an increase of 11.9% compared to $63.1 million
for the twelve-month period ended December 31, 2002. FFO from rental
operations, which excludes gains, of $69.5 million, an increase of
12.1% compared to $62.0 million for the twelve-month period ended
December 31, 2002.
- FFO per share of $1.39 on a diluted basis, compared to $1.26 for the
twelve-month period ended December 31, 2002, representing a 10.3%
increase. FFO per share from rental operations, which excludes gains,
was $1.37 on a diluted basis, an increase of 10.5% compared to
$1.24 for the twelve-month period ended December 31, 2002.
Commenting on the Company's fourth quarter and fiscal 2003 results,
Sam Kolias, President and C.E.O., said, "We are pleased to report that in 2003
Boardwalk achieved another year of record financial results and achieved solid
operating results in the fourth quarter. The Company's portfolio continued to
deliver solid operating results, notwithstanding the ongoing strength and
level of activity in housing markets across the country. This performance was
driven in large part by our focus on operations and on the progress made in
improving our portfolio occupancy levels, particularly in the second half of
the year."
Operational Highlights
The average vacancy rate across the Company's portfolio for the fourth
quarter of 2003 was 3.7%, unchanged from the third quarter of 2003, and down
from 4.9% in the fourth quarter of 2002.
The average monthly rent realized in fiscal 2003 was $734 per unit, an
increase of $18, or 2.5%, from $716 per unit for the twelve-months ended
December 31, 2002. Management estimates that market rents for its properties
at the end of December, 2003 averaged $788 per unit per month, which compares
to an average in-place monthly rent per occupied unit of $757 for the twelve-
months ended December 31, 2003. This translates into an estimated "loss-to-
lease" of approximately $11.3 million, maintaining existing occupancy rates.
Same-Property Results
Boardwalk continued to show solid performance in its stabilized
properties (defined as properties owned for over 24 months). The "same-
property" results for the Company's stabilized portfolio for the three-month
period ended December 31, 2003 showed rental growth of 1.3% and NOI growth of
1.4% compared to the same period last year. For the twelve-month period ended
December 31, 2003, the stabilized property portfolio had rental growth of 2.1%
and a decline in NOI of 0.8% compared to the same period last year. Excluding
the impact of a non-recurring gas rebate in 2002, "same-property" NOI for the
three and twelve month periods ended December 31, 2003 increased by 2.3% and
1.5%, respectively. A total of 25,715 units, representing approximately 82% of
Boardwalk's total portfolio, were classified as stabilized as at December 31,
2003. None of the Company's Quebec properties are currently classified as
stabilized.
Same-Property Results - Stabilized Portfolio
Three Months Ended December 31, 2003 vs. Three Months Ended
December 31, 2002
---------------------------
Rental Expenses
Rental --------------------------- % of Stab
Revenues Utilities Other Total NOI NOI
-------------------------------------------------------------------------
Calgary 0.4% -13.5% -10.4% -8.3% 4.5% 23%
Edmonton 0.6% -5.9% -4.6% -0.3% 1.1% 42%
Other Alberta 4.6% -7.0% -8.8% -3.8% 8.9% 7%
Saskatchewan 0.2% 12.6% 0.5% 7.1% -3.9% 14%
Ontario 4.5% 20.7% 1.8% 11.5% -0.7% 13%
-------------------------------------------------------------------------
Total 1.3% -1.6% -3.6% 1.3% 1.4% 100%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Excluding one
time non-
recurring
rebate in
2002 1.3% -5.0% -3.6% -0.2% 2.3%
--------------------------------------------------------------
--------------------------------------------------------------
Same-Property Results - Stabilized Portfolio
Twelve Months Ended December 31, 2003 vs. Twelve Months Ended
December 31, 2002
---------------------------
Rental Expenses
Rental --------------------------- % of Stab
Revenues Utilities Other Total NOI NOI
-------------------------------------------------------------------------
Calgary -0.5% -4.5% 6.6% 2.1% -1.5% 24%
Edmonton 2.5% 19.9% 11.0% 14.5% -2.5% 43%
Other Alberta 1.0% 26.4% 8.8% 14.8% -4.4% 7%
Saskatchewan 2.7% -2.8% 2.6% 0.9% 3.9% 14%
Ontario 4.7% 14.7% 6.1% 9.1% 2.9% 13%
-------------------------------------------------------------------------
Total 2.1% 10.8% 7.4% 8.6% -0.8% 100%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Excluding one
time non-
recurring
rebate in
2002 2.1% -3.9% 7.4% 3.2% 1.5%
--------------------------------------------------------------
--------------------------------------------------------------
Acquisition/Disposition Activity
In 2003, Boardwalk acquired a total of 1,953 units for approximately
$106 million, increasing its portfolio to over 31,200 units at year-end. This
represents a 6.5% increase in the Company's portfolio from the end of 2002.
The Company had one disposition in 2003, a 40-unit apartment complex in
Edmonton, Alberta which was sold for $3.0 million.
There were no acquisitions or dispositions in the fourth quarter of 2003.
Subsequent Events
Subsequent to December 31, 2003, the Company closed on the acquisition of
a 183-unit property in the Quebec City (Sainte-Foy) area at an acquisition
price of $16.9 million. The acquisition price equates to approximately $92,000
per unit, and approximately $124.8 per rentable square foot. The property
acquired was:
- Complexe Laudance - Quebec City (Sainte-Foy), QC - a luxury apartment
complex consisting of 183 units in two mid-rise concrete buildings.
The buildings were constructed and completed in 1989 and 1990. The
transaction closed on February 11, 2004.
Beginning January 1, 2004, the Corporation will adopt the straight-line
method to compute amortization of its revenue producing buildings. The
adoption of the straight-line method from the sinking-fund method will be
applied prospectively in accordance with the transitional provision of CICA
Handbook Section 1100 and is consistent with the recommendations of the
Canadian Institute of Public and Private Real Estate Companies ("CIPPREC").
Continued Financial Strength
The Company maintained its solid financial position in the fourth quarter
of 2003. Boardwalk's total mortgage debt was $1.39 billion as at December 31,
2003, up from $1.31 billion at December 31, 2002, reflecting the additional
debt on acquisitions completed during the year. As at December 31, 2003, the
Company's debt had an average maturity of 4.2 years with a weighted average
interest rate of 5.68%, and the Company's debt-to-total-market-capitalization
ratio was 60.3%.
The Company's interest coverage ratio, excluding gains, for the twelve-
month period ended December 31, 2003 increased to 2.00 times compared to
1.93 times in the same period last year.
During 2003, Boardwalk successfully completed approximately $177 million
in mortgage refinancings and renewals.
Update on Proposed REIT Conversion
Commencing in August 2003 through October 2003, Boardwalk management and
Boardwalk Properties Company Limited, with the assistance of professional
advisors, including CIBC World Markets Inc. acting as financial advisor to the
Corporation, explored potential transactions to reorganize the Corporation
into a real estate investment trust ("REIT").
On November 5, 2003, the Board of Directors of Boardwalk considered
management's proposal to reorganize the business of the Corporation into a
REIT. The Board of Directors considered, among others, the following factors
in its review and discussion of the proposal:
(a) monthly cash distributions were anticipated to provide an attractive
return to Unitholders without impairing the Corporation's ability to
finance capital expenditures and to meet external debt payments;
(b) the Corporation has characteristics that are suited to a REIT
structure, in particular the Corporation's diversified portfolio of
multi-family residential properties which provide a relatively
stable cash flow;
(c) the new trust structure would result in a higher level of cash
distributions than would be available under the existing corporate
structure of the Corporation;
(d) a significant portion of Boardwalk REIT's distributions to
Unitholders would be tax-deferred;
(e) the anticipated improved access that Boardwalk REIT would have to
the public capital markets to fund growth initiatives than is or
would be available to the Corporation under current market
conditions and given its existing corporate structure; and
(f) Boardwalk REIT would be the largest and most geographically diverse
publicly traded multi-family residential trust in Canada.
Following their review the Board of Directors resolved to appoint a
special committee of independent directors to consider the proposed REIT
transaction. The Special Committee retained RBC Capital Markets as its
financial advisor to provide its opinion as to the fairness of consideration
under the proposed transaction, from a financial point of view, to the Public
Shareholders.
On December 10, 2003, the Special Committee reported to the Board of
Directors that, on the basis of the preliminary views of RBC Capital Markets
as to the fairness of consideration under the proposed transaction, from a
financial point of view, to the Public Shareholders, the Special Committee
unanimously concluded that the proposed transaction is in the best interests
of the Corporation and its Public Shareholders.
The Board of Directors met again on January 8, 2004 to receive the
Fairness Opinion and authorize the filing of the Information Circular with the
SEC. The negotiation of the final terms of the proposed transaction was
concluded, and the Acquisition and Arrangement Agreement was signed effective
January 9, 2004.
An information circular has been prepared in connection with the proposed
transaction and filed with the United States Securities and Exchange
Commission via EDGAR. A copy of the information circular has also been made
available on SEDAR although readers are cautioned that information contained
therein may change as a result of SEC review.
We are currently awaiting comments from the SEC at which time it will be
determined if any additional disclosure to the existing public documents will
be required. Upon successful completion of this process the Company intends to
mail out the completed information circular concerning the proposed
transaction and Special Meeting to all securityholders. At this point,
management expects the proposed conversion to be completed by late March 2004
or early April 2004 timeframe.
Commenting on the proposed conversion, Sam Kolias, President and CEO,
said "We are excited about the prospect of completing Boardwalk's conversion
into a REIT. This conversion is aimed at enhancing shareholder value and
providing a stronger platform to expand the Company's operations in the
future. We will rank among the largest REITs in Canada, with an equity market
capitalization of approximately $1 billion."
Quarterly Dividend Announced
On February 13, 2004 the Board of Directors declared a quarterly cash
dividend in the amount of $0.075 (Canadian) per common share outstanding,
which is payable on March 10, 2004 to all common shareholders of record as of
February 27, 2004. The dividend equates to an annual dividend rate of
$0.30 per share.
Outlook and 2004 Earnings Guidance
Commenting on the outlook for the Company, Rob Geremia, Senior Vice
President, Finance and CFO, said "We are reaffirming our fiscal 2004 guidance
for total FFO per share of between $1.44 and $1.50 for the Corporation, which
does not include any contribution from property sales, approximately 1.0 to
2.0 percent same store NOI growth, 1,000 to 2,000 new units, and $1.0 million
in large corporations tax savings. Assuming the REIT conversion takes place,
all of Boardwalk's current 2.4 million stock options would vest bringing the
total outstanding shares up to 53.3 million. This action could result in
additional Large Corporation Tax savings. We will continue to update the
market as this process continues."
Supplementary Information
Boardwalk produces Quarterly Supplemental Information that provides
detailed information regarding the Company's activities during the quarter.
The Fourth Quarter 2003 Supplemental Information is available on the INVESTOR
section of our website (www.bwalk.com).
Teleconference on Fourth Quarter and Year End Financial Results
We invite you to participate in the teleconference that will be held to
discuss these results this same morning at 11:00 am EST. Senior management
will speak to the fourth quarter financial results and provide a corporate
update. Presentation materials will be made available on the INVESTOR section
of our website (www.bwalk.com) prior to the call.
Participation & Registration: Please RSVP to Investor Relations at
403-531-9255 or by email to investor@bwalk.com.
Teleconference: The telephone numbers for the conference are:
416-640-4127 (within Toronto) or toll-free 1-800-814-4861 (outside Toronto).
Webcast: Investors will be able to listen to the call and view our slide
presentation over the Internet by visiting http://investor.bwalk.com 15 min.
prior to the start of the call. An information page will be provided for any
software needed and system requirements. The live audiocast will also be
available at
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=728640
Replay: An audio recording of the teleconference will be available
approximately one hour after the call until 11:59pm EST on February 23rd,
2004. You can access it by dialing 416-640-1917 and using the passcode
21035473 followed by the number sign. An audio archive will also be available
on our Investor site (http://investor.bwalk.com) approximately two hours after
the conference call.
Corporate Profile
Boardwalk Equities Inc. is Canada's largest owner/operator of multi-
family rental communities. Boardwalk currently owns and operates in excess of
250 properties with over 31,400 units (inclusive of the 183 units acquired
subsequent to December 31, 2003) totalling approximately 26 million net
rentable square feet. The Company's portfolio is concentrated in the provinces
of Alberta, Saskatchewan, Ontario and Quebec. Boardwalk is headquartered in
Calgary and its shares are listed on both the Toronto Stock Exchange and the
New York Stock Exchange and trade under the symbol BEI. The Company has a
total market capitalization of approximately $2.3 billion.
Forward-Looking Statements
This release contains forward-looking statements within the meaning of
the U.S. Private Securities Litigation Reform Act of 1995. The forward-looking
statements are statements that involve risks and uncertainties, including, but
not limited to, changes in the demand for apartment and town home rentals, the
effects of economic conditions, the impact of competition and competitive
pricing, the effects of the Company's accounting policies and other matters
detailed in the Company's filings with Canadian and United States securities
regulators available on SEDAR in Canada and by request through the Securities
and Exchange Commission in the United States, including matters set forth in
the Company's Annual Report to Shareholders under the heading "Management's
Discussion and Analysis". Because of these risks and uncertainties, the
results, expectations, achievements, or performance described in this release
may be different from those currently anticipated by the Company.
CONSOLIDATED BALANCE SHEETS
(CDN$ THOUSANDS)
AS AT December December
31, 2003 31, 2002
---------------------------
(Unaudited) (Audited)
Assets
Revenue producing properties (NOTE 2) $1,713,171 $1,604,277
Properties held for resale 7,493 7,038
Mortgages and accounts receivable (NOTE 4) 13,126 14,704
Other assets (NOTE 5) 14,652 13,723
Deferred financing costs 38,044 37,521
Segregated tenants' security deposits 6,771 7,596
Cash and cash equivalents 10,123 23,631
-------------------------------------------------------------------------
$1,803,380 $1,708,490
---------------------------
---------------------------
Liabilities
Mortgages payable (NOTE 7) $1,387,067 $1,307,177
Accounts payable and accrued liabilities 19,801 21,498
Refundable tenants' security deposits and other 9,730 10,496
Capital lease obligations (NOTE 6) 3,515 4,598
Future income taxes (NOTE 10) 74,765 62,976
-------------------------------------------------------------------------
$1,494,878 1,406,745
---------------------------
Shareholders' Equity
Share capital (NOTE 8) 275,509 266,516
Retained earnings 32,993 35,229
-------------------------------------------------------------------------
$308,502 301,745
-------------------------------------------------------------------------
$1,803,380 $1,708,490
---------------------------
---------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS
(CDN$ THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3 months 3 months Year Year
ended ended ended ended
December December December December
31, 2003 31, 2002 31, 2003 31, 2002
------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Audited)
Revenue
Rental income $ 69,893 $ 63,844 $ 270,992 $ 241,575
Sales - properties
held for resale - - - 7,498
-------------------------------------------------------------------------
69,893 63,844 270,992 249,073
------------------------------------------------
Expenses
Revenue producing properties:
Operating expenses 8,816 7,548 33,819 26,182
Utilities 9,591 10,145 34,736 32,489
Utility rebate
(NOTE 1 (g) (iii)) - (390) - (3,692)
Property taxes 6,626 6,427 26,217 23,664
Cost of sales - properties
held for resale - - - 6,531
Administration 5,755 5,557 23,290 19,921
Financing costs 19,264 19,109 76,630 74,181
Deferred financing costs
amortization 662 738 3,227 3,239
Amortization (NOTE 1) 13,176 12,732 50,766 46,691
-------------------------------------------------------------------------
63,890 61,866 248,685 229,206
------------------------------------------------
Operating earnings before
the following: 6,003 1,978 22,307 19,867
Gain on debt settlement - (692) - (692)
------------------------------------------------
Earnings from continuing
operations before
income taxes 6,003 2,670 22,307 20,559
Large corporations taxes 878 1,253 3,546 3,600
Future income taxes
(recovery) (NOTE 10) 6,592 (797) 11,761 5,406
-------------------------------------------------------------------------
(Loss) earnings from
continuing operations $ (1,467) $ 2,214 $ 7,000 $ 11,553
Earnings (loss) from
discontinued operations,
net of tax - (1) 751 23
-------------------------------------------------------------------------
Net (loss) earnings for
the period $ (1,467) $ 2,213 $ 7,751 $ 11,576
------------------------------------------------
------------------------------------------------
Basic earnings per share
(NOTE 9)
- from continuing
operations $(0.03) $0.04 $0.14 $0.23
- from discontinued
operations - 0.00 0.01 0.00
-------------------------------------------------------------------------
Basic earnings per share $(0.03) $0.04 $0.15 $0.23
------------------------------------------------
------------------------------------------------
Diluted (loss) earnings
per share (NOTE 9)
- from continuing
operations $(0.03) $0.04 $0.14 $0.23
- from discontinued
operations - 0.00 0.01 0.00
-------------------------------------------------------------------------
Diluted (loss) earnings
per share $(0.03) $0.04 $0.15 $0.23
------------------------------------------------
------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(CDN$ THOUSANDS)
3 months 3 months Year Year
ended ended ended ended
December December December December
31, 2003 31, 2002 31, 2003 31, 2002
------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Audited)
Retained earnings,
beginning of period $ 38,260 $ 33,089 $ 35,229 $ 26,782
Net (loss) earnings
for the period (1,467) 2,213 7,751 11,576
Dividends paid (3,800) - (9,595) (2,477)
Premium on share
repurchases - (73) (392) (652)
-------------------------------------------------------------------------
Retained earnings,
end of period $ 32,993 $ 35,229 $ 32,993 $ 35,229
------------------------------------------------
------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
(CDN$ THOUSANDS)
3 months 3 months Year Year
ended ended ended ended
December December December December
31, 2003 31, 2002 31, 2003 31, 2002
------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Audited)
Operating activities
Net (loss) earnings
for the period $ (1,467) $ 2,213 $ 7,751 $ 11,576
(Earnings) loss from
discontinued operations,
net of tax - 1 (751) (23)
Future income taxes
(recovery) 6,592 (797) 11,761 5,406
Amortization 13,176 12,732 50,766 46,691
Gain on debt settlement - (692) - (692)
-------------------------------------------------------------------------
Funds from continuing
operations 18,301 13,457 69,527 62,958
Funds from discontinued
operations - 15 33 94
Net change in operating
working capital (1,405) 5,402 (489) 7,434
Net change in properties
held for resale (107) (39) 1,442 5,702
-------------------------------------------------------------------------
Total operating cash flows 16,789 18,835 70,513 76,188
------------------------------------------------
Financing activities
Issue of common shares for
cash (net of issue costs) 4,615 1,313 9,229 8,828
Stock repurchase program - (122) (628) (1,167)
Dividends paid (3,800) - (9,595) (2,477)
Financing of revenue
producing properties 27,390 175,212 177,208 305,841
Repayment of debt on
revenue producing
properties (22,928) (126,273) (138,292) (238,708)
Deferred financing costs
incurred (net of
deferred financing
costs amortization) (597) (4,377) (3,342) (5,544)
-------------------------------------------------------------------------
4,680 45,753 34,580 66,773
------------------------------------------------
Investing activities
Purchases of revenue producing
properties (NOTE 2) - (27,484) (68,831) (102,926)
Project improvements to
revenue producing
properties (10,321) (12,647) (49,047) (39,433)
Net cash proceeds from
sale of properties - - 1,223 -
Technology for real estate
operations (1,057) (152) (1,946) (2,643)
-------------------------------------------------------------------------
(11,378) (40,283) (118,601) (145,002)
------------------------------------------------
Net (decrease) increase in
cash and cash equivalents
balance during period 10,091 24,305 (13,508) (2,041)
Cash and cash equivalents,
beginning of period 32 (674) 23,631 25,672
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 10,123 $ 23,631 $ 10,123 $ 23,631
------------------------------------------------
------------------------------------------------
Taxes paid $ 833 $ 1,344 $ 3,399 $ 3,691
------------------------------------------------
------------------------------------------------
Interest paid $ 19,452 $ 18,224 $ 76,468 $ 72,486
------------------------------------------------
------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Notes To Consolidated Financial Statements
Three months ended December 31, 2003 and 2002 (unaudited) and
years ended December 31, 2003 (unaudited) and 2002 (audited)
(TABULAR AMOUNTS IN CDN$ THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE
AMOUNTS UNLESS OTHERWISE STATED)
1. SIGNIFICANT ACCOUNTING POLICIES
(a) Operations
Boardwalk Equities Inc. (the "Corporation") is a real estate
corporation that specializes in multi-family residential housing.
(b) Basis of presentation and principles of consolidation
The Corporation's accounting policies and its standards of financial
disclosure conform with the recommendations of the handbook of
The Canadian Institute of Chartered Accountants ("CICA Handbook") and
with the recommendations of the Canadian Institute of Public and
Private Real Estate Companies ("CIPPREC"). These principles differ in
certain respects from those generally accepted in the United States
of America ("U.S. GAAP").
The preparation of financial statements in accordance with Canadian
generally accepted accounting principles ("Canadian GAAP") requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and to make disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those estimates.
The consolidated financial statements include the accounts of the
Corporation, its wholly-owned subsidiaries, including Suite Systems
Inc. ("SSI"), and HomeXpress Limited ("HomeXpress"). HomeXpress is a
public company of which the Corporation owns 63%. That company is no
longer in operation as of October 11, 2001. All material inter-
company transactions have been eliminated.
(c) Revenue recognition
i. Revenue from a rental property is recognized once the
Corporation has attained substantially all of the benefits
and risks of ownership of the rental property. Rental
revenue includes rents, parking and other sundry revenues.
All residential leases are for one-year terms or less;
consequently, the Corporation accounts for leases with its
tenants as operating leases.
ii. Revenue from the sales of property held for resale is
recognized when all conditions of the purchase and sale
agreement have been met, a sufficient purchaser deposit
(usually 15%) has been received and there is reasonable
assurance on the collectibility of any outstanding amount.
(d) Real estate properties
i. Revenue producing properties
Revenue producing real estate properties, which are held for
investment, are stated at the lower of cost less accumulated
amortization or "net recoverable amount". Cost includes all
amounts relating to the acquisition and improvement of the
properties. All costs associated with upgrading the existing
facilities, other than ordinary repairs and maintenance, are
capitalized and amortized as project improvements.
The net recoverable amount represents the undiscounted
estimated future net cash flows expected to be received from
the ongoing use of the property plus its residual value. To
arrive at this amount, the Corporation projects future net
cash flows over a maximum of 10 years and includes the
proceeds from the estimated residual sale value at the end
of that period. The projections take into account
management's best estimate of the most probable set of
economic conditions anticipated to prevail in the market
area.
ii. Properties held for resale
The Corporation capitalizes all direct costs, net of related
revenue. Direct costs include property taxes, administration
costs, finance costs and other costs associated with the
cost of property held for resale. Real estate properties
held for resale are recorded at the lower of cost or net
realizable value.
(e) Amortization
Revenue producing real estate properties are amortized over the
estimated useful lives of the assets. Amortization is computed using
the sinking-fund method using an interest rate of 4% over a period of
40 to 50 years for buildings and the declining-balance method at
rates ranging from 8% to 35% for other non-building assets.
Under the sinking-fund method used to amortize revenue producing
buildings, an increasing amount is charged to income consisting of a
fixed annual sum, together with interest compounded at an interest
rate of 4%, so as to fully amortize the buildings over their
estimated life from date of acquisition.
At January 1, 2002, the Corporation revised the estimates on the
economic usefulness of certain non-building assets. This change in
accounting estimate was treated prospectively.
Beginning January 1, 2004, the Corporation will adopt the straight-
line method to compute amortization of its revenue producing
buildings. The adoption of the straight-line method from the sinking-
fund method will be applied prospectively in accordance with the
transitional provision of CICA Handbook Section 1100.
(f) Deferred financing costs
Insurance premiums paid to Canada Mortgage and Housing Corporation
("CMHC") to obtain insurance through the National Housing Act ("NHA")
are amortized over 25 years on a straight-line basis. Upon the
refinancing of a mortgage, any unamortized insurance premium
associated with the previous mortgage is written off to income. Costs
of refinancing are amortized on a straight-line basis over the term
of the new loan.
(g) Risk management and fair value
Risk Management
The Corporation is exposed to financial risk that arises from the
fluctuation in interest rates, the credit quality of its tenants, and
the fluctuation in utility rates. These risks are managed as follows:
i. Interest rate risk
Interest rate risk is minimized through the Corporation's
current strategy of having the majority of its mortgages
payable in fixed term arrangements. In addition, management
is constantly reviewing its operating facility and, if
market conditions warrant, the Corporation has the ability
to convert its existing demand debt to fixed rate debt. The
Corporation had demand debt outstanding of $nil at
December 31, 2003 (December 31, 2002 - $nil). In addition,
the Corporation structures its financings so as to stagger
the maturities of its debt, thereby minimizing the
Corporation's exposure to interest rate fluctuations.
The majority of the Corporation's mortgages are insured by
CMHC under the NHA mortgage program. This added level of
insurance offered to lenders allow the Corporation to
receive the best possible financing and interest rates, and
significantly reduces the potential for a lender to call a
loan prematurely.
ii. Credit risk
Credit risk arises from the possibility that tenants may
experience financial difficulty and be unable to fulfill
their lease term commitments. The Corporation mitigates this
risk of credit loss through the diversification of its
existing portfolio and limiting its exposure to any one
tenant. Thorough credit assessments are conducted in respect
to all new leasing. In addition, where legislation allows,
the Corporation obtains a security deposit to assist in a
potential recovery requirement.
iii. Utilities
At December 31, 2003, the Corporation has long-term supply
arrangements with two electrical utility companies to supply
the Corporation with its electrical power needs for Alberta
for the next twenty-four to twenty-five months at a blended
rate of approximately $0.07/kwh. These agreements provide
that the Corporation purchase its power for all Alberta
properties under contract for the upcoming months.
The Corporation also has two physical settlement fixed-price
supply contracts for Alberta natural gas requirements. These
contracts fix the price of natural gas for 75% of the
Corporation's requirements in Alberta. The two contracts are
for physical settlement, and each represents approximately
37.5% of the Corporation's Alberta requirements. The first
of these contracts runs from January 1, 2003 to
September 30, 2004 and provides the commodity at a price of
$5.44/GJ. The second contract runs from October 1, 2003 to
September 30, 2005 and provides the commodity at a price of
$6.16/GJ.
In Saskatchewan, the Corporation has a physical supply
agreement to supply 100% of the Corporation's natural gas
requirements for that province. The agreement extends until
October 31, 2005 at a fixed price of $5.20/GJ.
While the above utility contracts for both electrical power
and natural gas reduce the risk of exposure to adverse
changes in commodity prices, they also reduce the potential
benefits of favourable changes in commodity prices. For
accounting purposes, all settlements are recorded as utility
expense in the period the settlement occurs.
As of March 2, 2002, ATCO Gas ("ATCO"), the transporter of
all natural gas in Alberta, distributed a non-recurring
rebate. The Alberta Energy and Utility Board instructed ATCO
to rebate a portion of the sale proceeds of the
Viking-Kinsella producing assets to ATCO North customers in
the form of a one-time rebate. The rebate was distributed to
all ATCO North customers, based on historical usage, at a
rate of $3.325/GJ.
The Alberta Government introduced two separate rebate
programs to assist corporations with the increase in energy
prices in 2001. The natural gas rebate program expired in
April 2001 (resulting in a disproportionate share of this
rebate in the first quarter of 2001) and the electrical
rebate program expired on December 31, 2001. Due to the
current electricity pricing environment, there was not an
extension of this program after 2001.
Fair Value
In accordance with the disclosure requirements of the CICA Handbook,
the Corporation is required to disclose certain information
concerning its "financial instruments", defined as a contractual
right to receive or deliver cash or another financial asset. The fair
values of the majority of the Corporation's financial assets and
liabilities, representing net working capital, approximate their
recorded values at December 31, 2003 and 2002 due to their short-term
nature. In these circumstances, the fair value is determined to be
the market or exchange value of the assets or liabilities.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect estimates. The significant financial instruments
of the Corporation and their carrying values as of December 31, 2003
and 2002 are as follows:
AS AT December 31, December 31,
2003 2002
-------------------------
(Unaudited) (Audited)
Mortgages and accounts receivable
Carrying value $ 13,126 $ 14,704
Fair market value $ 13,126 $ 14,704
---------------------------------------------------------------------
Mortgages payable
Carrying value $1,387,067 $1,307,177
Fair market value $1,439,926 $1,349,780
The fair value of the Corporation's mortgages payable exceeds the
recorded value by approximately $52.9 million at December 31, 2003
(December 31, 2002 - $42.6 million) due to changes in interest rates
since the dates on which the individual mortgages were assumed. The
fair value of the mortgages payable has been estimated based on the
current market rates for mortgages with similar terms and conditions.
The fair value of the Corporation's mortgages payable is an amount
computed based on the interest rate environment prevailing at
December 31, 2003 and 2002, respectively; the amount is subject to
change and the future amounts will converge. There are no additional
costs to the Corporation, assuming no early extinguishment of
existing debt is delivered upon.
(h) Use of estimates
The accounting process requires that management make, and
periodically review, a number of estimates including the following
material items:
i. economic useful life of buildings for purposes of
calculating amortization as disclosed in Note 1(e);
ii. forecast of economic indicators in order to measure fair
values of buildings for purposes of determining net
recoverable amount under Canadian generally accepted
accounting principles as discussed in Note 1(d);
iii. amount of capitalized on-site wages which relate to project
improvements, as discussed in Note 2;
iv. amount of utility accrual for charges related to the current
period; and
v. amount of provision for write-down of technology
investments.
Actual results may differ from these estimates.
(i) Cash and cash equivalents
The Corporation considers highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(j) Stock-based compensation plans
Effective January 1, 2003, the Corporation changed its accounting
policy for stock options granted on or after that date to reflect the
adoption of the revised CICA Handbook Section 3870. Under the new
policy, the Corporation now determines the fair value of stock
options, using an accepted option-pricing model, on their grant date
and recognizes this amount as compensation expense over the period
the stock options vest, with a corresponding increase to contributed
surplus in shareholders' equity. The new accounting policy has been
applied prospectively in accordance with the transitional provision
of Section 3870.
Previously under the Corporation's intrinsic value method policy, the
Corporation did not record compensation expense for stock options
granted to directors, executives and employees in the consolidated
financial statements because there was no intrinsic value at the date
of grant. Note 8 discloses the pro forma amounts to the Corporation's
net earnings and net earnings per share for the three months and
years ended December 31, 2003 and 2002 had the impact of compensation
costs using the fair value method been applied effective January 1,
2002.
(k) Disposal of long-lived assets
Effective January 1, 2003, the Corporation adopted the new CICA
Handbook Section 3475, Disposal of Long-Lived Assets and Discontinued
Operations, for disposals on or after January 1, 2003. The
recommendations of this section requires disposal of long-lived
assets be classified as held for sale, and the results of operations
and cash flows associated with the assets disposed be reported
separately as discontinued operations, less applicable income taxes.
A long-lived asset is classified by the Corporation as an asset held
for sale at the point in time when it is available for immediate
sale, management has committed to a plan to sell the asset and is
actively locating a buyer for the asset at a sales price that is
reasonable in relation to the current fair value of the asset, and
the sale is probable and expected to be completed within a one-year
period. For unsolicited interest in a long-lived asset, the asset is
classified as held for sale only if all the conditions of the
purchase and sale agreement have been met, a sufficient purchaser
deposit has been received and the sale is probable and expected to be
completed shortly after the end of the current period. The impact of
adopting the new recommendations for disposals of long-lived assets
on or after January 1, 2003 is disclosed in Note 3.
(l) Disclosure of guarantees
Effective January 1, 2003, the Corporation adopted Accounting
Guideline 14 (AcG-14), Disclosure of Guarantees. This guideline
provides assistance regarding the identification of guarantees and
requires a guarantor to disclose the significant details of
guarantees that have been given, regardless of whether it will have
to make payments under the guarantees. Please refer to Note 13 for
further disclosure on the Corporation's guarantees.
(m) Comparative figures
Certain comparative figures have been reclassified to conform with
the current period's presentation, or as a result of accounting
changes.
2. REVENUE PRODUCING PROPERTIES
AS AT December 31, December 31,
2003 2002
-------------------------
(Unaudited) (Audited)
Land $ 113,568 $ 96,749
Building and non-building assets 1,834,724 1,695,092
---------------------------------------------------------------------
Total revenue producing properties 1,948,292 1,791,841
Less: accumulated amortization (235,121) (187,564)
---------------------------------------------------------------------
$1,713,171 $1,604,277
-------------------------
-------------------------
Acquisitions
3 months 3 months Year Year
ended ended ended ended
December December December December
31, 2003 31, 2002 31, 2003 31, 2002
------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Audited)
Cash paid $ - $ 27,484 $ 68,831 $ 102,926
Debt assumed - 1 38,834 110,829
---------------------------------------------------------------------
Total purchase price - 27,485 107,665 213,755
Fair value
adjustments to debt - - 2,137 19,500
---------------------------------------------------------------------
Book value $ - $ 27,485 $ 109,802 $ 233,255
------------------------------------------------
------------------------------------------------
Units acquired - 346 1,956 3,558
------------------------------------------------
------------------------------------------------
Dispositions
3 months 3 months Year Year
ended ended ended ended
December December December December
31, 2003 31, 2002 31, 2003 31, 2002
------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Audited)
Cash received $ - $ - $ 1,385 $ 2,281
Vendor take back
mortgage - - - 500
Debt assumed - - 1,655 4,717
---------------------------------------------------------------------
Total proceeds - - 3,040 7,498
Net book value - - 1,993 6,531
---------------------------------------------------------------------
Gain on sales $ - $ - $ 1,047 $ 967
------------------------------------------------
------------------------------------------------
Units sold - - 40 121
------------------------------------------------
------------------------------------------------
Included in revenue producing properties is capitalized wages of
$1.3 million for the three months ended December 31, 2003,
$1.5 million for the three months ended December 31, 2002,
$5.1 million for the year ended December 31, 2003 and $4.7 million
for the year ended December 31, 2002 relating to project
improvements. Included in the cost of properties held for resale for
the year are capitalized financing and property taxes costs of
$0.1 million for the three months ended December 31, 2003,
$0.2 million for the three months ended December 31, 2002,
$0.4 million for the year ended December 31, 2003 and $0.5 million
for the year ended December 31, 2002 less net operating revenue of
$nil for each of the respective periods. Real estate assets are
pledged as security against mortgages payable.
3. DISPOSAL OF LONG-LIVED ASSETS AND DISCONTINUED OPERATIONS
During the first quarter of 2003, the Corporation received a
$3.0 million unsolicited offer to purchase a 40-unit property located
in Edmonton, Alberta. The sale was completed by the end of the first
quarter of 2003. There were no other dispositions during the current
year to date. Note 2 discloses the carrying amounts of the major
assets and liabilities included in the disposition. The following
table sets forth the results of operations associated with the long-
lived asset, separately reported as discontinued operations for the
current and prior periods.
3 months 3 months Year Year
ended ended ended ended
December December December December
31, 2003 31, 2002 31, 2003 31, 2002
------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Audited)
Revenue
Rental income $ - $ 83 $ 86 $ 321
------------------------------------------------
Expenses
Revenue producing
properties:
Operating expenses - 17 4 47
Utilities - 28 17 58
Utility rebate
(NOTE 1 (g) (iii)) - (12) - (13)
Property taxes - 6 6 22
Administration - 3 2 10
Financing costs - 26 24 103
Amortization - 15 - 57
---------------------------------------------------------------------
- 83 53 284
------------------------------------------------
Operating earnings
from discontinued
operations before
income taxes $ - $ - $ 33 $ 37
Future income taxes - 1 12 14
Operating earnings
(loss) from
discontinued
operations - (1) 21 23
Gain on disposition - - 1,047 -
Future income taxes - - (317) -
---------------------------------------------------------------------
Earnings (loss) from
discontinued
operations $ - $ (1) $ 751 $ 23
------------------------------------------------
------------------------------------------------
4. MORTGAGES AND ACCOUNTS RECEIVABLE
The mortgages and accounts receivable comprise an aggregate amount of
$13.1 million at December 31, 2003 (December 31, 2002 -
$14.7 million). In this balance, mortgages receivable arising on
sales of property represents $6.9 million at December 31, 2003
(December 31, 2002 - $8.5 million) which comes due periodically up to
May 2007. The Corporation is currently earning a weighted average
interest rate of 1.9% at December 31, 2003 (December 31, 2002 -
3.04%) on these amounts. The remaining balance consists of mortgage
holdbacks and incidental income earned but not yet received.
5. OTHER ASSETS
AS AT December 31, December 31,
2003 2002
-------------------------
(Unaudited) (Audited)
Corporate technology assets
(net of amortization) $ 3,746 $ 4,658
Head office building (net of amortization) 2,546 3,261
Deposits on properties 1,200 950
Inventory 1,524 1,606
Re-organization and restructuring 2,124 -
Prepaid and other 3,512 3,248
---------------------------------------------------------------------
$ 14,652 $ 13,723
-------------------------
-------------------------
Re-organization and restructuring costs included in other assets of
$2.1 million at December 31, 2003 (December 31, 2002 - $nil) is
related to the Corporation's proposed re-organization into a real
estate investment trust as described in Note 15 "Subsequent Events".
6. TECHNOLOGY INVESTMENTS
There was no provision for loss of technology investments made for
the years ended December 31, 2003 and 2002.
The Corporation still has capital leases totalling $3.5 million at
December 31, 2003 (December 31, 2002 - $4.6 million) with a weighted
average interest rate of 9.7% (December 31, 2002 - 9.7%) relating to
a telecommunication initiative that was terminated on October 18,
2001. Future minimum payments under capital leases together with the
balance of the obligation due under capital leases are as follows for
the year ending:
December 31, December 31,
2003 2002
-------------------------
(Unaudited) (Audited)
2003 $ - $ 1,481
2004 1,481 1,481
2005 1,330 1,330
2006 1,222 1,222
2007 - -
---------------------------------------------------------------------
Total 4,033 5,514
Less amount representing interest 518 916
---------------------------------------------------------------------
Total net obligation $ 3,515 $ 4,598
-------------------------
-------------------------
7. MORTGAGES PAYABLE
AS AT December 31, December 31,
2003 2002
-------------------------
(Unaudited) (Audited)
(a) Revenue producing properties
Mortgages payable bearing interest at a
weighted average of 5.68% at December 31,
2003 (December 31, 2002 - 5.87%) per annum,
payable in monthly principal and interest
instalments totalling $9.3 million for the
year ended December 31, 2003 (December 31,
2002 - $8.9 million), mature from 2004 to
2020 and are secured by specific charges
against specific properties. $1,385,268 $1,305,349
(b) Other assets
Mortgages payable bearing interest at a
weighted average of 7.92% at December 31,
2003 and 2002 per annum, payable in monthly
principal and interest instalments totalling
$15 thousand for the years ended December 31,
2003 and 2002, mature in September 2010 and
are secured by specific charges against
specific properties. 1,799 1,828
---------------------------------------------------------------------
$1,387,067 $1,307,177
-------------------------
-------------------------
Estimated principal payments required to meet mortgage obligations as
at December 31, 2003 (unaudited) are as follows:
Revenue Producing Properties Other Assets Total
--------------------------------------------------------
2004 $194,309 $36 $194,345
2005 153,260 39 153,299
2006 190,258 42 190,300
2007 242,752 45 242,797
2008 240,723 48 240,771
Subsequent 363,966 1,589 365,555
---------------------------------------------------------------------
$1,385,268 $1,799 $1,387,067
--------------------------------------------------------
--------------------------------------------------------
Estimated principal payments required to meet mortgage obligations as
at December 31, 2002 (audited) are as follows:
Revenue Producing Properties Other Assets Total
--------------------------------------------------------
2003 $213,220 $36 $213,256
2004 119,340 39 119,379
2005 92,241 42 92,283
2006 108,709 45 108,754
2007 223,616 49 223,665
Subsequent 548,223 1,617 549,840
---------------------------------------------------------------------
$1,305,349 $1,828 $1,307,177
--------------------------------------------------------
--------------------------------------------------------
CMHC provides mortgage loan insurance in connection with mortgages
made to the Corporation. On September 13, 2002, the Corporation and
CMHC entered into an agreement (the "Agreement") whereby the
Corporation will provide certain financial information and be subject
to certain restrictive covenants, including limitation on additional
debt, distribution of dividends in respect of capital stock in the
event of default, and maintenance of certain financial ratios. In the
event of default, the Corporation's total financial liability under
this Agreement is limited to a one-time penalty payment of
$250 thousand under a Letter of Credit issued in favour of CMHC.
(c) Demand facilities
The Corporation has a demand facility in the form of an acquisition
and operating line. This demand facility is secured by a first or
second mortgage charge of specific assets. The maximum amount
available varies with the value of pledged assets to a maximum not to
exceed $100.0 million. Approximately $34.8 million was available from
this facility on December 31, 2003 (December 31, 2002 -
$34.0 million). An amount of $nil was outstanding at December 31,
2003 and 2002. This facility carries an interest rate ranging from
prime plus 0.5% to prime plus 1.5% per annum, and has no fixed terms
of repayment. The facility is reviewable annually by the Bank.
8. SHARE CAPITAL
(a) Authorized:
Unlimited number of common shares
Unlimited number of preferred shares, issuable in series
Issued:
Preferred shares
The Corporation did not issue any preferred shares for the years
ended December 31, 2003 and 2002. There was a total of 8,945,155
preferred shares outstanding at December 31, 2003 and 2002. These
preferred shares are offset by non-interest bearing notes receivable
from the holders of the preferred shares for the equivalent amount.
Both the preferred shares and the notes receivable are retractable at
either party's option and may legally be offset against each other.
Accordingly, these have been offset for consolidated financial
statement presentation.
Common shares Shares Amount
----------------------------
December 31, 2003 (unaudited) 50,868,119 $275,509
December 31, 2002 (audited) 50,109,314 $266,516
Details of shares issued are as follows:
December 31, 2001 (audited) 49,404,281 $258,202
On exercise of stock options 801,633 8,828
Share buy-back, recorded at book
value of shares (96,600) (514)
---------------------------------------------------------------------
December 31, 2002 (audited) 50,109,314 266,516
On exercise of stock options 802,805 9,229
Share buy-back, recorded at
book value of shares (44,000) (236)
---------------------------------------------------------------------
December 31, 2003 (unaudited) 50,868,119 $275,509
----------------------------
----------------------------
The Corporation commenced a normal course issuer bid on March 3, 2000
allowing it to purchase up to 2,236,400 common shares for
cancellation until its termination on March 2, 2001 or such earlier
time as the bid is complete. This bid was extended with a termination
date to March 22, 2002 or such earlier time as the bid is complete.
On August 6, 2002, the Corporation commenced a normal course issuer
bid allowing it to purchase up to 3,267,840 common shares for
cancellation until its termination on August 5, 2003 or such earlier
time as the bid is complete. On August 25, 2003, the Corporation
commenced a normal course issuer bid allowing it to purchase up to
2,770,228 common shares for cancellation until its termination on
August 24, 2004 or such earlier time as the bid is complete. The
Corporation acquired and cancelled 44,000 common shares at
December 31, 2003 (December 31, 2002 - 96,600) at a cost of
$0.6 million (December 31, 2002 - $1.2 million). The excess of the
cost over stated value of the shares acquired of $0.4 million at
December 31, 2003 (December 31, 2002 - $0.7 million) has been charged
to retained earnings.
(b) Stock options
Under the stock option plan, the Company grants options to directors,
executives and employees. The stock option plan provides for the
granting of options to purchase up to 10,643,636 common shares at
December 31, 2003 (December 31, 2002 - 10,643,636). The exercise
price is equal to the market value of the common shares at the date
of grant. Vesting periods range from immediate vesting for certain
executives to five year vesting for remaining employees and
directors. Options are granted at management's discretion with Board
of Directors' approval being required. No option may be exercisable
more than 10 years from the date of grant. There was a total of
2,398,828 options outstanding at December 31, 2003 (December 31, 2002
- 3,480,072) to directors, officers and employees. The exercise
prices range from $9.11 to $16.73 at December 31, 2003 (December 31,
2002 - $9.11 to $22.92). These options expire up to August 28, 2012.
All options were issued at market price.
Changes in options outstanding during year
The following table depicts the changes in options in the years
presented:
December 31, 2003 December 31, 2002
(Unaudited) (Audited)
---------------------------------------------
Weighted Weighted
average average
exercise exercise
Options price Options price
---------------------------------------------
Outstanding at
beginning of year 3,480,072 $12.46 3,647,834 $12.60
Granted - - 930,722 $12.16
Exercised (802,805) $11.50 (801,633) $11.02
Forfeited (278,439) $18.01 (296,851) $17.14
---------------------------------------------------------------------
Outstanding at
end of year 2,398,828 $12.20 3,480,072 $12.46
---------------------------------------------
---------------------------------------------
Options exercisable at year end
The following table summarized information about the options
outstanding and exercisable at December 31, 2003 (unaudited):
Options outstanding Options exercisable
-------------------------------------------------------------------------
Weighted Weighted
average average
remaining remaining
contrac- Weighted contrac- Weighted
Range of Number tual average Number tual average
exercise out- life exercise exer- life exercise
prices standing (years) price cisable (years) price
-------------------------------------------------------------------------
$9.01 to $11.00 283,300 6.4 $9.74 263,900 6.4 $9.75
$11.01 to $13.00 1,694,792 5.6 $11.94 1,013,934 6.0 $11.85
$13.01 to $15.00 242,636 5.7 $13.85 178,640 5.5 $13.66
$15.01 to $17.00 178,100 5.3 $16.26 140,700 5.2 $16.46
-------------------------------------------------------------------------
2,398,828 5.7 $12.20 1,597,174 5.9 $12.11
---------------------------------------------------------
---------------------------------------------------------
The following table summarized information about the options
outstanding and exercisable at December 31, 2002 (audited):
Options outstanding Options exercisable
-------------------------------------------------------------------------
Weighted Weighted
average average
remaining remaining
contrac- Weighted contrac- Weighted
Range of Number tual average Number tual average
exercise out- life exercise exer- life exercise
prices standing (years) price cisable (years) price
-------------------------------------------------------------------------
$9.01 to $11.00 647,800 7.1 $9.41 605,000 7.1 $9.40
$11.01 to $13.00 1,979,222 6.6 $11.95 910,698 7.4 $11.76
$13.01 to $15.00 401,450 6.1 $14.03 275,812 5.5 $13.88
$15.01 to $17.00 279,900 6.4 $16.17 178,520 6.3 $16.34
$17.01 to $19.00 79,700 0.2 $17.94 79,700 0.2 $17.94
$19.01 to $21.00 23,000 0.2 $19.73 23,000 0.2 $19.73
$21.01 to $23.00 69,000 0.3 $22.55 69,000 0.2 $22.55
-------------------------------------------------------------------------
3,480,072 6.3 $12.46 2,141,730 6.4 $12.41
---------------------------------------------------------
---------------------------------------------------------
The Corporation did not record compensation expense for stock options
granted prior to January 1, 2003 to directors, executives and
employees in the financial statements because there was no intrinsic
value, as defined by CICA Handbook, Section 3870, at the date of
grant. As required by Canadian GAAP, the impact on compensation costs
of using a fair value based method, as if the compensation costs had
been recorded in net earnings, must be disclosed. If the fair value
basic method had been used for stock options granted for the year
ended December 31, 2002, the Company's net earnings and net earnings
per share would approximate the following pro forma amounts for the
three months and years ended December 31, 2003 and 2002:
3 months 3 months
ended ended Year ended Year ended
December December December December
31, 2003 31, 2002 31, 2003 31, 2002
------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Audited)
Compensation costs $(509) $(550) $(2,064) $(1,931)
Net (loss) earnings
As reported $(1,467) $2,213 $7,751 $11,576
Pro forma $(1,976) $1,663 $5,687 $9,645
Net (loss) earnings
per common share
Basic
As reported $(0.03) $0.04 $0.15 $0.23
Pro forma $(0.04) $0.03 $0.11 $0.19
Diluted
As reported $(0.03) $0.04 $0.15 $0.23
Pro forma $(0.04) $0.03 $0.11 $0.19
The fair value of each option granted was estimated to be $6.74 on
the date of grant using the Black-Scholes option-pricing model with
weighted average assumptions for grants as follows:
Risk free interest rate 5.33%
Expected lives (years) 7 - 10 years
Expected volatility 42.56%
Dividend per share $0.05
The Corporation did not grant any stock options subsequent to
December 31, 2002.
9. PER SHARE CALCULATIONS
The following table sets forth the computation of basic and diluted
earnings per share with respect to earnings from continuing
operations and earnings from discontinued operations.
3 months 3 months
ended ended Year ended Year ended
December December December December
31, 2003 31, 2002 31, 2003 31, 2002
------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Audited)
Numerator
(Loss) earnings
from continuing
operations $(1,467) $2,214 $7,000 $11,553
Earnings (loss)
from discontinued
operations - $(1) $751 $23
---------------------------------------------------------------------
Denominator
Denominator for
basic earnings
per share -
weighted average
shares (THOUSANDS) 50,603 50,067 50,380 49,717
---------------------------------------------------------------------
Effect of dilutive
securities
Stock options
(THOUSANDS) 660 637 511 525
Denominator for
diluted earnings per
share adjusted for
weighted average
shares and assumed
conversion
(THOUSANDS) 51,263 50,704 50,891 50,242
---------------------------------------------------------------------
---------------------------------------------------------------------
(Loss) earnings per
share from continuing
operations
Basic $(0.03) $0.04 $0.14 $0.23
Diluted $(0.03) $0.04 $0.14 $0.23
---------------------------------------------------------------------
Earnings per share
from discontinued
operations
Basic $0.00 $0.00 $0.01 $0.00
Diluted $0.00 $0.00 $0.01 $0.00
---------------------------------------------------------------------
---------------------------------------------------------------------
10. INCOME TAXES
The Corporation has tax losses at December 31, 2003 (unaudited) of
approximately $209 million available to reduce future taxable income,
the benefit of which has been accounted for in computing future
income taxes. These losses begin to materially expire in 2005,
subject to the ability of the Corporation to re-file and further
amend its income tax returns. The adjustment for changes in the
effective tax rate reflects the benefit of the reduction of the
current combined federal and provincial substantially enacted rates
from 37% reducing to 35% for the year ended December 31, 2003
(December 31, 2002 - 39% reducing to 34%).
The Corporation's provision for future income taxes is comprised as
follows:
3 months 3 months
ended ended Year ended Year ended
December December December December
31, 2003 31, 2002 31, 2003 31, 2002
------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Audited)
Continuing
operations $6,592 $(797) $11,761 $5,406
Discontinued
operations - 1 329 14
---------------------------------------------------------------------
Total future
income taxes $6,592 $(796) $12,090 $5,420
------------------------------------------------
------------------------------------------------
The future income tax expense is computed as follows:
3 months 3 months
ended ended Year ended Year ended
December December December December
31, 2003 31, 2002 31, 2003 31, 2002
------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Audited)
Tax expense based on
expected rate $2,265 $1,714 $8,716 $8,129
Non-taxable portion
of capital gains - 9 (223) (190)
Adjustment to future
income tax liabilities 843 1,685 1,615 1,685
Adjustment for change
in effective tax rate 3,484 (4,204) 1,982 (4,204)
---------------------------------------------------------------------
Future income
tax expense
(recovery) $6,592 $(796) $12,090 $5,420
------------------------------------------------
------------------------------------------------
The future income tax liability is calculated as follows:
AS AT December 31, December 31,
2003 2002
-------------------------
(Unaudited) (Audited)
Tax assets related to operating losses $77,354 $63,254
Tax liabilities related to differences
in tax and book basis (152,119) (126,230)
---------------------------------------------------------------------
Future income tax liability $(74,765) $(62,976)
-------------------------
-------------------------
11. RELATED PARTY TRANSACTIONS
There were no related party transactions for the years ended
December 31, 2003 and 2002.
12. COMMITMENTS AND CONTINGENCIES
The Corporation has long-term supply arrangements with two electrical
utility companies and commitments for fixed-price natural gas supply
contracts as described in Note 1(g)(iii).
The Corporation, in the normal course of operations, will become
subject to a variety of legal and other claims against the
Corporation. Management and the Corporation's legal counsel evaluate
all claims on their apparent merits, and accrue Management's best
estimate of the estimated costs to satisfy such claims. Management
believes that the outcome of legal and other claims filed against the
Corporation will not be material to the Corporation.
The Corporation has established a group registered retirement savings
plan for its employees whereby the Corporation will match the
contributions of the employees to a maximum of 3% of regular earnings
earned in a calendar year or one-half the contribution limit set for
registered retirement savings plans, whichever is less. The
Corporation's costs totalled approximately $338 thousand for the year
ended December 31, 2003 (December 31, 2002 - $127 thousand). There
was no requirement for future contributions in respect of past
service.
13. GUARANTEES
In the normal course of business, the Corporation enters into various
agreements that may contain features that meet the AcG-14 definition
of a guarantee. AcG-14 defines a guarantee to be a contract
(including an indemnity) that contingently requires the Corporation
to make payments to the guaranteed party based on (i) changes in an
underlying interest rate, foreign exchange rate, equity or commodity
instrument, index or other variable, that is related to an asset, a
liability or an equity security of the counterparty, (ii) failure of
another party to perform under an obligating agreement or (iii)
failure of a third party to pay its indebtedness when due.
In connection with the sales of properties by the Corporation, a
mortgage assumed by the purchaser will have an indirect guarantee
provided by Boardwalk to the lender until the mortgage is refinanced
by the purchaser. In the event of default by the purchaser, Boardwalk
would be liable for the outstanding mortgage balance. The
Corporation's maximum exposure at December 31, 2003 is approximately
$6.2 million. In the event of default, the Corporation's recourse for
recovery includes the sale of the respective building asset. The
Corporation expects that the proceeds from the sale of the building
asset will cover, and in most likelihood exceed, the maximum
potential liability associated with the amount being guaranteed.
Therefore, at December 31, 2003, no amounts have been recorded in the
consolidated financial statements with respect to the above noted
indirect guarantees.
14. SEGMENTED INFORMATION
The Corporation specializes in multi-family residential housing and
operates primarily within one business segment in four provinces
located in Canada. The following summary presents segmented financial
information for the Corporation's business by geographic location:
3 months 3 months
ended ended Year ended Year ended
December December December December
31, 2003 31, 2002 31, 2003 31, 2002
------------------------------------------------
Alberta (Unaudited) (Unaudited) (Unaudited) (Audited)
Revenue $ 38,550 $ 37,896 $ 152,583 $ 151,076
------------------------------------------------
Expenses
Operating 4,862 4,190 19,013 15,455
Utilities 5,458 6,673 19,208 20,978
Utility rebate - (94) - (3,386)
Property taxes 2,715 2,938 11,016 11,358
-------------------------------------------------------------------------
13,035 13,707 49,237 44,405
------------------------------------------------
Net operating income $ 25,515 $ 24,189 $ 103,346 $ 106,671
------------------------------------------------
Saskatchewan
Revenue $ 8,685 $ 8,516 $ 34,038 $ 32,893
------------------------------------------------
Expenses
Operating 1,258 1,152 4,585 4,163
Utilities 1,212 1,040 3,928 3,979
Property taxes 1,107 1,121 4,723 4,778
-------------------------------------------------------------------------
3,577 3,313 13,236 12,920
------------------------------------------------
Net operating income $ 5,108 $ 5,203 $ 20,802 $ 19,973
------------------------------------------------
Ontario
Revenue $ 8,931 $ 8,476 $ 34,850 $ 33,327
------------------------------------------------
Expenses
Operating 1,256 1,133 4,838 4,473
Utilities 1,425 1,455 5,846 5,369
Utility rebate - (295) - (295)
Property taxes 1,505 1,357 5,679 5,364
-------------------------------------------------------------------------
4,186 3,650 16,363 14,911
------------------------------------------------
Net operating income $ 4,745 $ 4,826 $ 18,487 $ 18,416
------------------------------------------------
Quebec (operations
commenced May 2002)
Revenue $ 13,505 $ 8,646 $ 48,276 $ 21,962
------------------------------------------------
Expenses
Operating 1,377 1,070 5,189 2,147
Utilities 1,514 908 5,650 1,906
Property taxes 1,300 988 4,725 2,074
-------------------------------------------------------------------------
4,191 2,966 15,564 6,127
------------------------------------------------
Net operating income $ 9,314 $ 5,680 $ 32,712 $ 15,835
------------------------------------------------
Total
Net operating income $ 44,682 $ 39,898 $ 175,347 $ 160,895
Unallocated revenue* 221 393 4,370 10,136
Unallocated expenses(xx) (46,370) (38,078) (171,966) (159,455)
-------------------------------------------------------------------------
Net (loss) income $ (1,467) $ 2,213 $ 7,751 $ 11,576
------------------------------------------------
------------------------------------------------
AS AT December December
31, 2003 31, 2002
-------------------------
(Unaudited) (Audited)
Alberta
Identifiable assets
Revenue producing properties $ 969,196 $ 971,598
Mortgages and accounts receivable 8,338 8,550
Deferred financing costs 26,621 25,464
Tenants' security deposit 5,674 6,559
-------------------------
$1,009,829 $1,012,171
-------------------------
Saskatchewan
Identifiable assets
Revenue producing properties $ 178,867 $ 180,792
Mortgages and accounts receivable 11 22
Deferred financing costs 4,585 4,714
Tenants' security deposits 1,096 1,037
-------------------------
$ 184,559 $ 186,565
-------------------------
Ontario
Identifiable assets
Revenue producing properties $ 215,428 $ 215,175
Mortgages and accounts receivable 250 1,166
Deferred financing costs 2,709 2,954
-------------------------
$ 218,387 $ 219,295
-------------------------
Quebec
Identifiable assets
Revenue producing properties $ 342,364 $ 229,272
Mortgages and accounts receivable 4,425 4,709
Deferred financing costs 4,102 4,357
-------------------------
$ 350,891 $ 238,338
-------------------------
Total assets
Identifiable assets $1,763,666 $1,656,369
Unallocated assets(xxx) 39,714 52,121
-------------------------
$1,803,380 $1,708,490
-------------------------
-------------------------
* Unallocated revenue includes property sales, interest income,
revenue from discontinued operations and other non-rental income.
(xx) Unallocated expenses include cost of property sales, operating
expenses from discontinued operations, non-rental operating
expenses, administration, financing costs, amortization, income
taxes and other provisions.
(xxx) Unallocated assets include properties held for development, cash,
short-term investments and other assets.
15. SUBSEQUENT EVENTS
On January 13, 2004, the Corporation filed a Management Information
Circular with respect to a proposed re-organization of the
Corporation into a real estate investment trust and a secondary
offering of the Corporation's shares. In addition, the Corporation
also executed the Acquisition and Arrangement Agreement in connection
with the proposed reorganization.
Subsequent to December 31, 2003, the Corporation contracted to
acquire 183 residential units from an unrelated third party for a
purchase price of $16.9 million. The acquisition will be financed
through cash of $8.7 million and the assumption of existing
mortgages.
For further information please contact:
Boardwalk Equities Inc.
Sam Kolias,
President and CEO,
(403) 531-9255;
Roberto Geremia,
Senior Vice President, Finance and Chief Financial Officer,
(403) 531-9255;
Mike Hough,
Senior Vice President,
(416) 364-0849;
Paul Moon,
Director of Corporate Communications,
(403) 531-9255.
Recent investor information can be found on the Internet at
http://investor.bwalk.com/.
