TSX SYMBOL: BEI.UN May, 2008
Boardwalk REIT Announces Solid First Quarter 2008 Financial Results; FFO Per Unit Up 25.0% and DI Per Unit up 21.4% YOY; and its May 2008 Distribution
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SUPPLEMENTAL NOTES - Q1-2008 May 14, 2008 (Printer Friendly PDF File)
CALGARY, May 14 /CNW/ - Boardwalk Real Estate Investment Trust
("Boardwalk REIT" or the "Trust") today announced solid financial results for
the first quarter of 2008; FFO per unit up 25.0% and DI per unit up 21.4% YOY
and its May 2008 Distribution.
For the first quarter ended March 31, 2008, the Trust reported Funds From
Operations(1) ("FFO") of $27.7 million and FFO per unit of $0.50 on a diluted
basis, compared to FFO of $22.8 million and FFO per unit of $0.40 for the same
period last year. Distributable income ("DI") for the quarter was
$28.3 million and DI per unit was $0.51 on a diluted basis, compared to
$23.6 million and $0.42 per unit for the same period last year.
<<
Highlights of the Trust's first quarter 2008 financial results include:
- Rental revenues of $102.2 million, an increase of 16.7%, compared to
$87.6 million for the three-month period ended March 31, 2007.
- Net operating income of $60.5 million, representing a 18.6% increase,
from $51.0 million in the same period last year.
- FFO of $27.7 million, an increase of 21.7%, compared to $22.8 million
for the three-month period ended March 31, 2007.
- FFO per unit was $0.50 on a diluted basis, up 25.0%, compared to
$0.40 for the three-month period ended March 31, 2007.
- DI per unit was $0.51 per unit, up 21.4%, from the $0.42 per unit for
the three months ended March 31, 2007.
>>
Commenting on the Trust's Q1 2008 results, Sam Kolias, C.E.O. and
Chairman of the Board, said: "We are pleased to report on a strong first
quarter of 2008 for the Trust. Our Western Canadian markets continued to
generate solid revenue growth again this quarter, garnering strength from
impressive market fundamentals in Saskatchewan, and still strong, though less
robust than in 2006 and 2007, fundamentals in Alberta."
"Over the first quarter, market fundamentals in Saskatchewan continued to
break regional records, driven by a vibrant economy and rising commodity
prices for Saskatchewan produced products. The strength of the province
yielded strong revenue growth for the Trust, particularly in Saskatoon,
Saskatchewan's largest centre. Monthly occupied rent in our property portfolio
increased approximately $21 in Saskatchewan in March 2008 over December 2007
and increased approximately $125 year-over-year. Average market rents in
Saskatchewan increased $14 at the end of March 2008 compared to the end of
December 2007 and increased $234 year-over-year."
"Our Alberta portfolio, which makes up approximately 54% of our portfolio
overall, continued to perform over the first quarter. Despite a tempering in
some market fundamentals, Alberta continues to exhibit great economic
strength, fuelled by the province's thriving energy sector and strong
employment opportunities. Especially strong fundamentals in Edmonton, our
largest market, contributed to strong revenue growth for the Trust in the
first quarter."
Roberto Geremia, President, added: "In the last month of Q4 2007 and the
first month of Q1 2008, there was a weaker seasonal rental demand in Alberta,
and we believe that it was partially a result of reported market rental rates
that were too high. We quickly adjusted our market rents downward and with the
support of our strong operations team, realized an increase in occupancy,
supporting our assumption that high price was the primary contributor of the
lower demand. In April, we are pleased to note a continued increase in
occupancy in the Alberta portfolio. As a result of the adjustments outlined
above, average market rents were down approximately $17 in Edmonton and up
approximately $11 in Calgary at the end of March 2008 compared to the end of
December 2007. In Edmonton and Calgary, occupied rents increased approximately
$78 and $52, respectively, in March 2008 compared to December 2007."
"In both Calgary and Edmonton, the resale housing market recorded an
increase in inventory over the first quarter of 2008, tempering the growth
rate of housing prices. Though the expense gap between buying a house and
renting remains significant, consumers now have increased housing options. We
currently believe that in the short-term, a more incremental approach to
market rents and a focus on increasing occupancy is the most effective way to
maximize revenue and retain Customer loyalty. By focusing on occupancy, we
believe that we will increase revenues, promote Customer satisfaction and
support sustainability for the Trust. While we work to increase occupancy, we
believe that a certain level of vacancy is a necessary aspect of revenue
maximization. We continue to implement our three-pronged revenue maximization
strategy, in which we actively monitor occupancy, adjust price and apply
suite-specific incentives when necessary. In order to maximize revenues, we
seek to achieve the optimal balance of price and occupancy."
<<
Operational Highlights
- The average vacancy rate across the Trust's portfolio for the first
quarter of 2008 was 5.65%, up from 4.69% in the fourth quarter of
2007, and up from 4.39% for the first quarter of 2007.
- The average monthly rent realized in the first quarter of 2008 was
$931 per rental unit, up $89 from $842 per rental unit for the same
period last year.
- The average market rent for the Trust's properties at the end of
March 2008 was an estimated $1,051 per rental unit per month, which
compares to an average in-place monthly rent per occupied unit of
$994 at the end of March 2008. This translates to an estimated 'loss-
to-lease' of approximately $23.7 million on an annualized basis, or
$0.43 per outstanding Trust Unit, given existing occupancy levels.
- For the first quarter, 'same-property' (or properties owned for a
period of 24 months or greater than) rental revenue grew by 9.6%
compared to the same period last year, overall operating costs
increased by 10.3%, resulting in same-property NOI increase of 9.1%.
A total of 33,574 units, representing approximately 92% of Boardwalk
REIT's total portfolio, were classified as stabilized as of March 31,
2008.
>>
More detail on our operations will be found in our conference call
presentation to be posted on our web site today at
http://www.boardwalkreit.com/FinancialReports/. The conference call audio for
this presentation can also be found on our web site at
http://www.boardwalkreit.com/FinancialReports/ following the call.
Amendment to Declaration of Trust
At its special meeting of Unitholders on May 13, 2008, Boardwalk REIT
Unitholders voted to adopt the previously announced amendment to its
Declaration of Trust to change the definition of "Gross Book Value" to
increase the asset bump by an additional $410 million, from $231 million to
$641 million. It is the Trust's intention to now approach its bondholders for
approval of this change to the bondholders' trust deed. Boardwalk REIT is of
the opinion that the proposed amendment to the definition of Gross Book Value
will give the Trust increased flexibility to implement its strategic plan,
which includes the purchase of accretive multi-family assets in the current
competitive acquisition environment and, at the same time, execute its Trust
Unit buy-back program.
Same-Property Results
Boardwalk continued to show solid performance in its stabilized
properties (defined as properties owned for 24 months or longer). The
"same-property" results for the Trust's stabilized portfolio for the
three-month period ended March 31, 2008 showed rental revenue growth of 9.6%
on a year-over-year basis. Operating expenses increased 10.3%, resulting in an
increase in NOI of 9.1% compared to the same period last year. A total of
33,574 units, representing approximately 92.0% of Boardwalk's total portfolio,
were classified as stabilized as at March 31, 2008.
<<
Same-Property Results - Stabilized Portfolio
-------------------------------------------------------------------------
% % Net
Mar 31 2008 % Operating Operating
- 3 M No. Revenue Expense Income %
Units Growth Growth Growth of NOI
-------------------------------------------------------------------------
Calgary 4,973 9.1% 19.9% 4.8% 20.7%
Edmonton 10,369 16.3% 17.1% 15.8% 35.8%
Other Alberta 1,680 5.6% 18.2% -0.4% 6.1%
British Columbia 871 6.2% 11.1% 2.9% 2.5%
Ontario 4,265 0.6% -2.3% 4.3% 7.7%
Quebec 6,756 2.7% -1.0% 5.8% 17.5%
Saskatchewan 4,660 16.0% 17.8% 14.2% 9.7%
-------------------------------------------------------------------------
33,574 9.6% 10.3% 9.1% 100.0%
-------------------------------------------------------------------------
>>
Commenting on Boardwalk REIT's same-property results, William Wong, Chief
Financial Officer, said, "For the first quarter of 2008, same-property revenue
increased by 9.6% compared to the same period in the prior year. Despite
rental expenses increasing by 10.3%, net operating income growth improved
overall by 9.1%. The increase in reported stabilized revenue was driven mainly
by the Trust's Alberta operations, which account for approximately 63% of the
Trust's reported stabilized net operating income. The majority of the reported
increase in rental operating expenses for the three months ended March 31,
2008 was due to higher operating costs in Alberta and higher utility costs in
the first quarter of 2008, as compared to the first quarter of 2007."
<<
Sequential Revenue Analysis
-------------------------------------------------------------------------
Q1 2008 Q4 2007 Q3 2007 Q2 2007
Stabilized vs. Q4 vs. Q3 vs. Q2 vs. Q1
Revenue Growth No. Units 2007 2007 2007 2007
-------------------------------------------------------------------------
Calgary 4,973 3.3% 0.4% 0.8% 4.2%
-------------------------------------------------------------------------
Edmonton 10,369 5.3% 1.8% 3.9% 4.5%
-------------------------------------------------------------------------
Other Alberta 1,680 3.2% 1.9% 0.8% (0.4)%
-------------------------------------------------------------------------
British Columbia 871 4.1% (1.9)% 2.6% 1.8%
-------------------------------------------------------------------------
Ontario 4,265 -0.4% 2.1% (1.4)% 0.4%
-------------------------------------------------------------------------
Quebec 6,756 0.0% 0.2% 2.3% 0.6%
-------------------------------------------------------------------------
Saskatchewan 4,660 2.7% 4.6% 5.5% 2.3%
-------------------------------------------------------------------------
33,574 2.9% 1.5% 2.4% 2.6%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Commenting on Boardwalk REIT's sequential stabilized revenue growth,
William Wong, Chief Financial Officer, said, "On a sequential basis,
stabilized revenues grew 2.9% from Q4 2007 to Q1 2008, 1.5% from Q3 2007 to Q4
2007, 2.4% from Q2 2007 to Q3 2007 and 2.6% from Q1 2007 to Q2 2007."
New Property Development
Commenting on the Trust's property acquisitions and dispositions,
Bill Chidley, Senior Vice President, Corporate Development, said, "We continue
to explore the possibility of developing new multi-family rental product in
select markets in Western Canada, focusing on several of our existing
buildings in Calgary, Edmonton and Fort McMurray that feature excess density.
The planning consultants estimate that in Calgary, an additional density of
6,200 to 12,700 apartment units could be achieved with re-zoning. In the
Edmonton area the consultants estimate 11,900 to 14,400 additional units could
be achieved, along with 450 additional units in Fort McMurray."
It is important to note that we are in the early stages of this process,
with the earliest completion of any new development between 2011 and 2012. As
part of this investigation, we are considering a number of ways to surface
this densification value, including direct development, joint venture and the
sale of excess density. Though we are excited by this potential, it is
important to note that in order to obtain the estimated maximum density, it
will be necessary to demolish existing rental units. It is our belief that the
key to this development is to find the optimal trade-off between maximizing
density and retaining as much of the existing rental stock as possible.
Boardwalk believes that being prepared for all future opportunities is a key
to our on-going success.
Unit Buyback
We continue to believe that one of the best investments we can make is
purchasing our Trust Units at current levels. For the quarter ended March 31,
2008, the Trust purchased in the public market 620,800 Trust Units for a total
of $23.0 million, or an average purchase price of $37.06 per Trust Unit. As of
May 01, 2008, Boardwalk REIT have purchased a cumulative total of
$65.68 million in Trust Units in the public market, representing 1,584,347
Trust Units with an average price of $41.46 per Trust Unit.
Continued Financial Strength
The Trust built upon its solid financial position throughout the first
quarter of 2008. Boardwalk REIT's total principal mortgage and debt
outstanding was $2.1 billion as of March 31, 2008, as compared to $1.7 billion
as of March 31, 2007. As of March 31, 2008, the Trust's total debt had an
average maturity of 3 years with a weighted average interest rate of 5.02%.
The Trust's debt-to-total enterprise value ratio was 49.0%.
We currently estimate that by the end of this fiscal year, if desired,
the Trust could have access to approximately $450 million of available capital
in the form of cash on hand, secured, undrawn acquisition and operating
facility and estimated additional mortgage proceeds for the remainder of the
year. The Trust's interest coverage ratio,excluding gains, for the three-month
period ended March 31, 2008 was 2.14 times, compared to 2.11 times in the same
period last year.
Subsequent Event
Subsequent to March 31, 2008, Boardwalk REIT acquired a property in
Calgary, Alberta, totaling 297 apartment units from an unrelated third party
for an aggregate purchase price of $48.8 million. The transaction is scheduled
to close June 13, 2008 and will be funded using cash-on-hand.
Outlook and 2008 Financial Guidance
In its 2007 Annual Report, Boardwalk REIT outlined specific targets for
its fiscal 2008 overall financial performance. The Trust on a quarterly basis
reviews the key assumptions used in determining this guidance and if
warranted, makes adjustments. Based on this review, we are maintaining our
2008 full year guidance for both FFO and DI per Unit; however, we are lowering
our stabilized buildings NOI growth from the initial guidance of 8.0% - 14.0%
to 8.0% - 12.0%. The reduction in our NOI has not resulted in a revision in
either FFO or DI full year expectations, as we anticipate that this decrease
will be compensated by lower overall expected financing charges and increased
return on acquisitions. We are currently taking a more conservative approach
to acquisitions, as we feel our normal course issuer bid will provide us with
better value in the current year. We are reducing our new acquisition targets
from the previously stated 1,000 - 2,000 units to 500 - 1,000 units.
<<
-------------------------------------------------------------------------
2008 2008
Original Objectives Revised Guidance
-------------------------------------------------------------------------
FFO Rental Operations $2.35 to $2.50 $2.35 to $2.50
-------------------------------------------------------------------------
Distributable Income $2.37 to $2.52 $2.37 to $2.52
-------------------------------------------------------------------------
New Unit Acquisitions 1,000 to 2,000 500 to 1,000
-------------------------------------------------------------------------
Stabilized Buildings NOI growth 8% to 14% 8% to 12%
-------------------------------------------------------------------------
>>
May 2008 Monthly Distribution
The Trust has declared its May 2008 distribution in the amount of
15.00 cents per trust unit ($1.80 on an annualized basis). The May
distribution will be payable on June 16, 2008 to unitholders of record on
May 30, 2008.
Supplementary Information
Boardwalk produces Quarterly Supplemental Information that provides
detailed information regarding the Trust's activities during the quarter. The
First Quarter 2008 Supplemental Information is available on our investor
website at www.boardwalkreit.com.
Teleconference on First Quarter 2008 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 first quarter financial results and provide a corporate
update. Presentation materials will be made available on our investor website
at www.boardwalkreit.com prior to the call.
Participation & Registration: Please RSVP to Investor Relations at
403-206-6758 or by email to investor@bwalk.com.
Teleconference: The telephone numbers for the conference are: (416)
644-3414 (within Toronto) or toll-free (800) 733-7560 (outside Toronto).
Webcast: Investors will be able to listen to the call and view our slide
presentation over the Internet by visiting http://www.boardwalkreit.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=2190760
Replay: An audio recording of the teleconference will be available from
1:00 pm ET on Wednesday, May 14, 2008 until 11:59 pm ET on Wednesday, May 21,
2008. You can access it by dialling 416-640-1917 and using the passcode
21265024 followed by the pound (number) sign. An audio archive will also be
available on our website (http://www.boardwalkreit.com/) approximately two
hours after the conference call.
Corporate Profile
Boardwalk REIT is an open-ended real estate investment trust formed to
acquire all of the assets and undertakings of Boardwalk Equities Inc.
Boardwalk REIT's principal objectives are to provide its unitholders with
monthly cash distributions, partially on a Canadian income tax-deferred basis,
and to increase the value of its units through the effective management of its
residential multi-family revenue producing properties and the acquisition of
additional properties. Boardwalk REIT currently owns and operates in excess of
260 properties with over 36,480 units totalling approximately 40 million net
rentable square feet, and is Canada's largest owner/operator of multi-family
rental communities. Boardwalk REIT's portfolio is concentrated in the
provinces of Alberta, British Columbia, Saskatchewan, Ontario and Quebec.
<<
(1) Funds From Operations ("FFO") is a generally accepted measure of
operating performance of real estate investment trusts and companies;
however, it is a non-GAAP measure. The Trust calculates FFO by taking
net earnings after discontinued operations, adjusting for gains or
losses on disposal of discontinued operation assets and extraordinary
items, and adding non-cash expenses including future income taxes and
amortization. The determination of this amount may differ from that
of other real estate investment trusts and companies. Distributable
Income ("DI") is calculated based on the definition as set out in the
Trust's declaration of trust and is computed by taking FFO and adding
back amortization on any deferred financing charges incurred prior to
May 3, 2004 as well as adjusting for any discounts or premiums
relating to the amortization of mark-to-market debt adjustment
incurred subsequent to the real estate investment trust conversion
date of May 3, 2004.
>>
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This news release contains forward-looking statements relating to our
operations and the environment in which we operate, which are based on our
expectations, estimates, forecast and projections, which we believe are
reasonable as of the current date. These statements are not guarantees of
future performance and involve risks and uncertainties that are difficult to
control or predict. For more exhaustive information on these risks and
uncertainties you should refer to our most recently filed annual information
form which is available at www.sedar.com. Actual outcomes and results may
differ materially from those expressed in these forward-looking statements.
Readers, therefore, should not place undue reliance on any such
forward-looking statements. Further, a forward-looking statement speaks only
as of the date on which such statement is made and should not be relied upon
as of any other date. While we may elect to, we undertake no obligation to
publicly update any such statement to reflect new information or the
occurrence of future events or circumstances at any particular time.
<<
Consolidated Balance Sheets
(CDN$ THOUSANDS)
As at March 31, December 31,
2008 2007
-------------------------
(Unaudited) (Audited)
Assets
Revenue producing properties (NOTE 4) $ 2,138,794 $ 2,149,853
Other assets (NOTE 5) 16,503 15,776
Mortgages and accounts receivable 10,067 10,071
Segregated tenants' security deposits 13,309 12,935
Cash and cash equivalents 91,675 960
Discontinued operations (NOTE 6) 7,577 6,293
-------------------------------------------------------------------------
$ 2,277,925 $ 2,195,888
-------------------------
-------------------------
Liabilities
Mortgages payable $ 1,892,239 $ 1,770,015
Debentures (NOTE 7) 118,844 118,768
Accounts payable and accrued liabilities 44,983 48,279
Refundable tenants' security deposits and other 16,591 16,186
-------------------------------------------------------------------------
2,072,657 1,953,248
Future income taxes (NOTES 3 and 11) 102,668 100,287
-------------------------------------------------------------------------
2,175,325 2,053,535
Unitholders' Equity
Unitholders' equity 102,600 142,353
-------------------------------------------------------------------------
$ 2,277,925 $ 2,195,888
-------------------------
-------------------------
Commitments and contingencies (NOTE 14)
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(CDN$ THOUSANDS, EXCEPT PER UNIT AMOUNTS)
3 months 3 months
ended ended
March 31, March 31,
2008 2007
-------------------------
(Unaudited) (Unaudited)
Revenue
Rental income $ 102,209 $ 87,570
Expenses
Revenue producing properties:
Operating expenses 18,559 15,541
Utilities 16,724 13,862
Utility rebate (NOTE 14) (1,258) (925)
Property taxes 7,679 8,068
Administration 5,754 5,291
Financing costs 25,595 21,669
Deferred financing costs amortization 1,468 1,279
Amortization of capital assets 19,999 18,136
Amortization of intangibles 1,939 1,198
-------------------------------------------------------------------------
96,459 84,119
-------------------------
Earnings from continuing operations
before income taxes 5,750 3,451
Current income taxes 4 -
Future income taxes (recovery) (NOTE 11) 2,381 (232)
-------------------------------------------------------------------------
Earnings from continuing operations 3,365 3,683
Earnings (loss) from discontinued operations,
net of tax (NOTE 6) 2,267 (52)
-------------------------------------------------------------------------
Net earnings 5,632 3,631
Other comprehensive income - -
-------------------------
Comprehensive income $ 5,632 $ 3,631
-------------------------
-------------------------
Basic earnings per unit (NOTE 10)
- from continuing operations $ 0.06 $ 0.06
- from discontinued operations 0.04 0.00
-------------------------------------------------------------------------
Basic earnings per unit $ 0.10 $ 0.06
-------------------------
-------------------------
Diluted earnings per unit (NOTE 10)
- from continuing operations $ 0.06 $ 0.06
- from discontinued operations 0.04 0.00
-------------------------------------------------------------------------
Diluted earnings per unit $ 0.10 $ 0.06
-------------------------
-------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY
(CDN$ THOUSANDS, EXCEPT NUMBER OF UNITS)
3 months 3 months
ended ended
March 31, March 31,
2008 2007
-------------------------
(Unaudited) (Unaudited)
Trust units (NOTE 9)
Balance, beginning of period $ 338,084 $ 365,744
Units issued under equity financing,
net of issue costs - (136)
Units issued under distribution
reinvestment plan 2,121 2,450
Deferred unit plan (NOTE 8) 461 630
Unit purchased and cancelled (NOTE 9) (23,009) -
-------------------------------------------------------------------------
Balance, end of period $ 317,657 $ 368,688
-------------------------
Cumulative earnings
Balance, beginning of period $ 95,591 $ 154,917
Net earnings for the period 5,632 3,631
-------------------------------------------------------------------------
Balance, end of period $ 101,223 $ 158,548
-------------------------
Accumulated other comprehensive income
Balance, beginning of period $ - $ -
Other comprehensive income for the period - -
-------------------------------------------------------------------------
Balance, end of period $ - $ -
-------------------------
Cumulative distributions to unitholders
Balance, beginning of period $ (291,322) $ (201,794)
Distributions declared to unitholders (NOTE 10) (24,958) (20,861)
-------------------------------------------------------------------------
Balance, end of period $ (316,280) $ (222,655)
-------------------------
Total unitholders' equity $ 102,600 $ 304,581
-------------------------
-------------------------
Units issued and outstanding 55,144,852 56,411,163
-------------------------
-------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CDN$ THOUSANDS)
3 months 3 months
ended ended
March 31, March 31,
2008 2007
-------------------------
(Unaudited) (Unaudited)
Operating activities
Net earnings $ 5,632 $ 3,631
Loss (earnings) from discontinued
operations, net of tax (2,267) 52
Future income taxes (recovery) 2,381 (232)
Amortization of capital assets 19,999 18,136
Amortization of intangibles 1,939 1,198
Amortization of deferred financing costs 1,468 1,279
-------------------------------------------------------------------------
29,152 24,064
Cash from discontinued operations - (28)
Net change in operating working capital (5,273) (155)
-------------------------------------------------------------------------
Total operating cash flows 23,879 23,881
-------------------------
Financing activities
Issue of trust units (net of issue costs)
(NOTE 9) 2,121 2,313
Distributions paid (25,012) (20,854)
Unit repurchase program (NOTE 9) (23,009) -
Financing of revenue producing properties 209,387 246,140
Repayment and maturity of debt on revenue
producing properties (81,362) (109,701)
Deferred financing costs incurred (7,022) (5,175)
-------------------------------------------------------------------------
75,103 112,723
-------------------------
Investing activities
Purchases of revenue producing properties
(NOTE 4) - (160,191)
Improvements to properties (16,325) (14,370)
Net cash proceeds from sale of properties
(NOTE 4) 8,381 -
Additions to corporate technology assets (323) (335)
-------------------------------------------------------------------------
(8,267) (174,896)
-------------------------
Net increase (decrease) in cash and cash
equivalents balance 90,715 (38,292)
Cash and cash equivalents (bank indebtedness),
beginning of period 960 (4,042)
-------------------------------------------------------------------------
Cash and cash equivalents (bank indebtedness),
end of period $ 91,675 $ (42,334)
-------------------------
-------------------------
Supplementary cash flow information:
Taxes paid $ 4 $ -
Interest paid $ 26,542 $ 21,064
-------------------------
-------------------------
Net change in operating working capital:
Net change in mortgages and accounts receivable $ 4 $ (666)
Net change in other assets (2,012) (829)
Net change in tenants' security deposits 31 189
Net change in accounts payable and accrued
liabilities (3,296) 1,151
-------------------------
$ (5,273) $ (155)
-------------------------
-------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 2008
(TABULAR AMOUNTS IN CDN$ THOUSANDS, EXCEPT NUMBER OF UNITS AND PER UNIT
AMOUNTS UNLESS OTHERWISE STATED)
(UNAUDITED)
1. ORGANIZATION OF TRUST
Boardwalk Real Estate Investment Trust ("Boardwalk REIT" or the
"Trust") is an unincorporated, open-ended real estate investment
trust created pursuant to the Declaration of Trust, dated January 9,
2004 and as amended and restated on May 3, 2004, May 10, 2006 and May
10, 2007, under the laws of the Province of Alberta. Boardwalk REIT
was created to invest in revenue producing multi-family residential
properties or interests within Canada, initially through the
acquisition of operations of Boardwalk Equities Inc. (the
"Corporation"), which was acquired on May 3, 2004.
2. BASIS OF PRESENTATION
These unaudited interim consolidated financial statements have been
prepared in accordance with the recommendations of the handbook of
the Canadian Institute of Chartered Accountants ("CICA Handbook") and
are consistent with those used in the audited consolidated financial
statements as at and for the year ended December 31, 2007, except as
disclosed in Note 3 below. These interim financial statements do not
include all of the disclosures required by Canadian generally
accepted accounting principles ("Canadian GAAP") applicable to annual
financial statements and, therefore, they should be read in
conjunction with the audited consolidated financial statements.
The preparation of financial statements in accordance with 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.
Due to seasonality, the operating results for the three months ended
March 31, 2008 are not necessarily indicative of the results that may
be expected for the full year ending December 31, 2008 due to
seasonal variations in utility costs and other factors. Historically,
Boardwalk REIT has experienced higher utility expenses in the first
quarter as a result of the winter months, resulting in variations in
the quarterly results.
Certain comparative figures have been reclassified to conform to the
presentation of the current period, or as a result of accounting
changes.
3. ACCOUNTING CHANGES
On January 1, 2008, the Trust adopted four new accounting standards
issued by the CICA as outlined below:
a) Section 1535 - Capital Disclosures
b) Section 3031 - Inventories
c) Section 3862 - Financial Instruments - Disclosure
d) Section 3863 - Financial Instruments - Presentation
Section 1535 - Capital Disclosures requires the disclosure of both
qualitative and quantitative information, which allows the users of
financial statements to evaluate the entity's objective, policies and
processes for managing capital.
Section 3031 - Inventories, which replaced Section 3030 -
Inventories, provides guidelines on the measurement and costing of
inventories, as well as allows for the reversal of inventory values
previously written-down. This new section also enhances disclosure
requirements for inventory to include accounting policies and
carrying amounts used to value inventory, inventory amounts
recognized as an expense and disclosure of any write-downs or the
reversal of any inventory write-downs previously recorded.
Section 3862 - Financial Instruments-Disclosure and Section 3863 -
Financial Instruments-Presentation, which replaced Section 3861 -
Financial Instruments Presentation and Disclosure, revises and
enhances the disclosure requirements for financial instruments and
carry forward unchanged the presentation requirements for financial
instruments. Section 3862 requires entities to provide disclosures in
their financial statements which allow the users to evaluate both the
significance of financial instruments for the entity's financial
position and performance; and the nature and extent of risks arising
from financial instruments to which the entity is exposed during the
period and at the balance sheet date, and how the entity manages
those risks. The purpose of Section 3863 is to enhance financial
statement users' understanding of the significance of financial
instruments to an entity's financial position, performance and cash
flows.
Impact of Adoption of Sections 1535, 3031, 3862 and 3863
Our consolidated financial statements include additional disclosures
on capital management (NOTE 12) and financial instruments (NOTE 13).
There was no material impact to the consolidated financial statements
on adoption of Section 3031 by the Trust.
Bill C-52
On June 22, 2007, Bill C-52 received Royal Assent in Canada. As a
result of this, under Canadian GAAP, once a bill is enacted, it is a
requirement to record the income tax implications effective on that
date. In accordance with Bill C-52, the assumption being made is
that, effective January 1, 2011, Boardwalk REIT will no longer
qualify as a Real Estate Investment Trust ("REIT") in accordance with
the definition contained in that legislation, and will remain within
certain "normal growth" limits such that it will be subject to income
tax pursuant to this new legislation.
Impact of Bill C-52
The impact of our interpretation of Bill C-52 on Boardwalk REIT was
that, based on a detailed review of the legislation, at this time it
may be interpreted that the Trust does not qualify as a REIT, which
would be exempt from the specified investment flow-through ("SIFT")
rules, and as such has recorded an estimate of its the future income
tax liability at December 31, 2007 based on it being subject to the
tax prescribed by the SIFT rules on January 1, 2011. The result is
that the Trust recorded a future income tax liability at December 31,
2007 of $99.9 million, which was revised upward by $2.8 million to
$102.7 million at March 31, 2008. At a future time, once it has been
deemed that the Trust would be in compliance with the SIFT rules, the
amount of the adjustment will be reversed. Although the adjustment to
earnings and cumulative earnings at March 31, 2008 is significant, it
is not large enough to affect any existing debt covenants currently
in place, including those stipulated for Boardwalk REIT's unsecured
debentures. At this time, it is the belief of the Trust that it will
be in compliance with the existing and or amended legislation prior
to the effective date of January 1, 2011.
At March 31, 2008, the technical amendments announced in late
December 2007 had not received Royal Assent. However, if these
amendments receive Royal Assent, as was the case with Bill C-52, it
is believed that Boardwalk REIT would qualify as a REIT and will
reverse the future income tax liability reported in these financial
statements.
Hedging Relationships
During the three months ended March 31, 2008, the Trust entered into
a forward bond transaction with a major Canadian financial
institution. In total, the transaction, which comprised of bond
forward contracts on specific mortgages set to mature in 2008, was
for $101.6 million with a weighted average term and interest rate of
7.2 years and 3.63%, respectively. Subsequent to entering into this
transaction, the Trust initiated changes to the terms of one of the
contracts in the transaction and negotiated a settlement amount of
$100,000 related to the changes. The contract was assessed to be
ineffective and the settlement amount of $100,000 has been included
in financing costs. The balance of the remaining contracts in the
transaction have been assessed as effective.
During the three months ended March 31, 2008, the Trust entered into
an interest rate swap agreement on the mortgages of specific
properties within its portfolio in an effort to hedge the variability
in cash flows attributed to fluctuating interest rates. These
interest rate swap agreements were designated as cash flow hedges on
March 11, 2008. The effective date of the hedge is May 1, 2008 and
will continue to be designated as such until May 1, 2015. Settlements
on both the fixed and variable portion of the interest rate swap will
occur on a monthly basis. The fixed interest rate is 4.15%, plus a
stamping fee, while the total amount of the mortgage debt subject to
the interest rate swap is $91.5 million. Hedge accounting will be
applied to these agreements in accordance with CICA Handbook section
3865.
The Trust has assumed that there is no ineffectiveness in the hedge
of its interest rate exposure. The effectiveness of the hedging
relationship will be reviewed on a quarterly basis and measured at
fair value. The portion of the gain or loss on the swap transaction
that is determined to be an effective hedge will be recognized in
other comprehensive income ("OCI"). The ineffective portion of the
gain or loss on the swap transaction will be recognized immediately
in net earnings. On recognition of the financial liability of the
hedged item on the balance sheet, the associated gains or losses that
were recognized in OCI will be reclassified into net earnings in the
same period or periods during which the interest payments of the
hedged item affected net earnings. However, if all or a portion of
the net loss recognized in OCI will not be recovered in one or more
future periods, the amount not expected to be recovered will be
immediately reclassified into net earnings.
Future Changes in Significant Accounting Policies
Boardwalk REIT monitored the recently issued CICA accounting
pronouncements to assess the applicability and impact, if any, of
these new pronouncements on our consolidated financial statements and
note disclosures. The CICA issued one new accounting standard that is
effective for the Trust's fiscal year commencing January 1, 2009:
a) Section 3064 - Goodwill and Intangible Assets
Section 3064 - Goodwill and Intangible Assets, which replaces Section
3062 - Goodwill and Other Intangible Assets and Section 3450 -
Research and Development Costs, establishes standards for the
recognition, measurement, presentation and disclosure of goodwill
subsequent to its initial recognition and of intangible assets by
profit-oriented enterprises. Standards concerning goodwill remain
unchanged from the standards included in the previous Section 3062.
The new section will be applicable to financial statements relating
to fiscal years beginning on or after October 1, 2008.
The new accounting pronouncement is not expected to have any material
impact to the consolidated financial statements on adoption.
4. REVENUE PRODUCING PROPERTIES
Acquisitions
3 months 3 months
ended ended
March 31, March 31,
-------------------------
2008 2007
Cash paid $ - $ 160,191
Debt assumed - 31,209
---------------------------------------------------------------------
Total purchase price - 191,400
Fair value adjustments to debt - 376
---------------------------------------------------------------------
Book value $ - $ 191,776
-------------------------
-------------------------
Allocation of book value to revenue
producing properties $ - 185,949
Allocation of book value to other assets $ - 5,827
---------------------------------------------------------------------
$ - $ 191,776
-------------------------
-------------------------
Multi-family units acquired - 1,543
-------------------------
-------------------------
Dispositions
3 months 3 months
ended ended
March 31, March 31,
2008 2007
-------------------------
Cash received $ 8,381 $ -
Cost of dispositions - -
---------------------------------------------------------------------
Total proceeds 8,381 -
Net book value 6,114 -
---------------------------------------------------------------------
Gain on dispositions $ 2,267 $ -
-------------------------
-------------------------
Multi-family units sold 24 -
-------------------------
-------------------------
Included in dispositions are the sales and closings of 24 units in a
90-unit property located in Calgary, Alberta that is being developed
into condominium units for sale (see NOTE 6). Under the percentage of
completion method, sales of $8.4 million for the three months ended
March 31, 2008 were recorded against cost of sales of $6.1 million.
5. OTHER ASSETS
As at March 31, December 31,
2008 2007
-------------------------
Corporate technology assets
(net of accumulated amortization) $ 3,138 $ 3,100
Head office building
(net of accumulated amortization) 2,421 2,307
Deposits on potential property acquisitions 250 -
Prepaid parts and supplies 2,701 2,791
In-place lease and customer relationship
intangibles (net of accumulated
amortization) 1,747 3,686
Prepaid property taxes 3,143 1,312
Prepaid and other 3,103 2,580
---------------------------------------------------------------------
$ 16,503 $ 15,776
-------------------------
-------------------------
6. DISCONTINUED OPERATIONS
During the end of the third quarter of 2006, a revenue producing
property consisting of 90 units in Calgary was classified as
discontinued operations as a result of the Trust initiating an active
program to dispose of this property. This property is being
developed into condominium units for sale at a price that is
reasonable in relation to its current fair value (See NOTE 4). This
Calgary property formed part of our Alberta segment in our segmented
information disclosure.
During the first quarter of 2007, the Trust acquired a property in
Edmonton, Alberta, consisting of two buildings totalling
51 apartments. Prior to the closing of the acquisition, the Trust
received an unsolicited offer to sell this property to an unrelated
third party, which the Trust accepted. This property was, therefore,
classified as discontinued operations upon acquisition.
The following tables set forth the results of operations as well as
the assets and liabilities associated with the discontinued
operations.
3 months 3 months
ended ended
March 31, March 31,
2008 2007
--------------------------
Revenue
Rental income $ - $ 188
---------------------------------------------------------------------
Expenses
Revenue producing properties:
Operating expenses - 87
Utilities - 45
Utility rebate - (5)
Property taxes - 23
Administration - 53
Financing costs - 13
Amortization of capital assets - 24
---------------------------------------------------------------------
- 240
--------------------------
- (52)
Gain on dispositions 2,267 -
---------------------------------------------------------------------
Earnings (loss) from
discontinued operations $ 2,267 $ (52)
--------------------------
--------------------------
March 31, December 31,
2008 2007
--------------------------
Discontinued Assets
Properties held for
redevelopment and sale $ 7,577 $ 6,293
--------------------------
--------------------------
7. DEBENTURES
On January 21, 2005, Boardwalk REIT completed the issuance of
unsecured debentures in a public offering in the aggregate amount of
$120 million. The debentures are rated "BBB" with a stable trend by
Dominion Bond Rating Services, carry a coupon rate of 5.31% and will
mature on January 23, 2012. Net proceeds of approximately
$119 million were used to fund acquisitions, repay operating lines of
credit and for general trust purposes. In conjunction with the
debenture issue, the Trust also entered into a bond forward contract
to hedge the risk of interest rate fluctuations prior to the final
pricing of the debenture. The bond forward contract was settled when
the debentures were issued for the settlement amount of $0.7 million.
The settlement amount will be amortized over the term of the
unsecured debentures. At March 31, 2008 the Trust was in compliance
with all the covenants reported in the debenture, the covenants are
discussed in NOTE 13(c).
8. DEFERRED UNIT PLAN
During 2006, the Trust implemented a deferred unit plan. The plan
entitles trustees and officers, at the participant's option, to
receive deferred units in consideration for trustee fees or executive
bonuses, respectively, with the Trust matching the number of units
received. The deferred units vest 50% on the third anniversary and
25% on each of the fourth and fifth anniversaries, subject to
provisions for earlier vesting in certain events. The deferred units
earn additional deferred units for the distributions that would
otherwise have been paid on the deferred units (i.e., had they
instead been issued as Trust Units on the date of grant). Once
vested, participants are entitled, at their option, to receive an
equivalent number of Trust Units or the equivalent value in cash of
the vested deferred units and the corresponding additional deferred
units. The deferred unit plan was approved by unitholders on May 10,
2006. The deferred units had a weighted average fair value of
$38.87 per unit at the grant dates in 2008 (2007 - $45.87; 2006 -
$25.48). For the quarter ended March 31, 2008, total compensation
costs of $0.5 million (2007 - $0.6 million) were recognized in income
related to employee awards under the deferred unit plan.
The status of the outstanding deferred units is as follows:
Summary of Deferred Unit Plan Outstanding Vested
December 31, 2006 73,746 -
Deferred units granted 51,722 -
Additional deferred units
earned on unvested units 3,487 -
Deferred units cancelled (10,478) -
---------------------------------------------------------------------
December 31, 2007 118,477 -
Deferred units granted 24,781 -
Additional deferred units
earned on unvested units 1,548 -
---------------------------------------------------------------------
March 31, 2008 144,806 -
---------------------------------------------------------------------
---------------------------------------------------------------------
9. UNITHOLDERS' CAPITAL
The Plan of Arrangement (the "Arrangement") to convert Boardwalk
Equities Inc. from a share corporation to a real estate investment
trust was completed on May 3, 2004. Under the Arrangement, the former
shareholders of Boardwalk Equities Inc. received Boardwalk REIT units
or Class B Limited Partnership ("LP Class B") units of a controlled
limited partnership of the Trust, Boardwalk REIT Limited Partnership.
The LP Class B units are non-transferable, except under certain
circumstances, but are exchangeable, on a one-for-one basis, into
Boardwalk REIT units at any time at the option of the holder. Prior
to such exchange, distributions will be made on the exchangeable
units in an amount equivalent to the distributions which would have
been made had the units of Boardwalk REIT been issued. Each LP
Class B unit was accompanied by a Special Voting unit, which will
entitle the holder to receive notice of, attend and vote at all
meetings of unitholders. There is no value assigned to the Special
Voting units. The LP Class B units issued are included in the
unitholders' capital contributions on the balance sheet. The changes
in unitholders' capital contribution are as follows:
Summary of Unitholders' Capital
Contributions Units Amount
December 31, 2006 56,351,783 $ 365,744
Units issued under distribution
reinvestment plan 205,185 8,917
Issue costs - (151)
Deferred unit plan - 1,750
Units issued for vested deferred
units (NOTE 8) 8,413 400
Units purchased and cancelled (NOTE 8) (856,447) (38,576)
--------------------------
December 31, 2007 55,708,934 $ 338,084
Units issued under distribution
reinvestment plan 56,718 2,121
Deferred unit plan (NOTE 8) - 461
Units purchased and cancelled (620,800) (23,009)
--------------------------
March 31, 2008 55,144,852 $ 317,657
--------------------------
--------------------------
In August of 2007 Boardwalk REIT filed an application for a normal
course issuer bid (the "Bid"), which received regulatory approval
from the Toronto Stock Exchange on August 10, 2007. The Bid allows
Boardwalk REIT to purchase and cancel up to 4,267,048 trust units,
representing 10% of the public float of its trust units at the time
of the TSX approval. The Bid will terminate on the earlier of one
year from the date of commencement of the Bid on August 17, 2007 or
at such time as purchases under the Bid are complete.
Under the Bid, the Trust has purchased and cancelled 620,800 REIT
units in the first quarter of 2008, representing a total market value
of approximately $23.0 million, or an average of $37.06 per trust
unit.
The Declaration of Trust authorizes Boardwalk REIT to issue an
unlimited number of units for the consideration and on terms and
conditions established by the Trustees without the approval of any
unitholders. The interests in Boardwalk REIT are represented by two
classes of units: a class described and designated as "REIT Units"
and a class described and designated as "Special Voting Units". The
beneficial interest of the two classes of units is as follows:
(a) REIT Units
REIT Units represent an undivided beneficial interest in Boardwalk
REIT and in distributions made by Boardwalk REIT. The REIT Units are
freely transferable, subject to applicable securities regulatory
requirements. Each REIT Unit entitles the holder to one vote at all
meetings of unitholders. Except as set out under the redemption
rights below, the REIT Units have no conversion, retraction,
redemption or pre-emptive rights.
REIT Units are redeemable at any time, in whole or in part, on demand
by the holders. Upon receipt by Boardwalk REIT of a written
redemption notice and other documents that may be required, all
rights to and under the REIT Units tendered for redemption shall be
surrendered and the holder shall be entitled to receive a price per
REIT Unit equal to the lesser of:
i) 90% of the "market price" of the REIT Units on the principal
market on which the REIT Units are quoted for trading during the
twenty - day period ending on the trading day prior to the day on
which the REIT Units were surrendered to Boardwalk REIT for
redemption; and
ii) 100% of the "closing market price" of the REIT Units on the
principal market on which the REIT Units are quoted for trading
on the redemption date.
(b) Special Voting Units
The Declaration of Trust provides for the issuance of an unlimited
number of Special Voting Units that will be used to provide voting
rights to holders of LP Class B units or other securities that are,
directly or indirectly, exchangeable for REIT Units.
Each Special Voting Unit entitles the holder to the number of votes
at any meeting of unitholders, which is equal to the number of REIT
Units that may be obtained upon surrender of the LP Class B unit to
which the Special Voting Unit relates. The Special Voting Units do
not entitle or give any rights to the holders to receive
distributions or any amount upon liquidation, dissolution or winding-
up of Boardwalk REIT.
The breakdown of trust units of Boardwalk REIT by class is as
follows:
Units Amount
Boardwalk REIT Units 50,669,852
Special Voting Units issued to holders
of LP Class B units 4,475,000
--------------------------
Total trust units 55,144,852 $ 317,657
--------------------------
--------------------------
10. DISTRIBUTABLE INCOME AND PER UNIT INFORMATION
Distributable income per unit
Boardwalk REIT makes distributions to unitholders on a monthly basis
on or about the 15th day of the following month. The reported
distributable income is defined under the Trust's Declaration of
Trust ("DOT"). Under the DOT, as amended and restated, the Trust is
required to distribute, at a minimum, its reported taxable income.
The reconciliation of distributable income and per unit information
begins with total operating cash flows calculated in accordance with
Canadian generally accepted accounting principles and as defined in
the Declaration of Trust for Boardwalk REIT. However, distributable
income and the per unit information are non-GAAP measures that do not
have any standardized meaning prescribed by Canadian GAAP and they
are, therefore, unlikely to be comparable to similar measures
presented by other real estate companies and trusts.
3 months 3 months
ended ended
March 31, March 31,
2008 2007
--------------------------
Total operating cash flows $ 23,879 $ 23,881
Net change in operating working capital 5,273 155
Deduct:
Deferred financing costs
amortization post May 2, 2004 (731) (326)
Amortization of net premium on long-term
debt assumed after May 2, 2004 (124) (89)
---------------------------------------------------------------------
Distributable income $ 28,297 $ 23,621
--------------------------
Distributions declared to unitholders $ 24,958 $ 20,861
Distributable income withheld $ 3,339 $ 2,760
--------------------------
$ 28,297 $ 23,621
--------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average units outstanding -
basic and diluted 55,424,413 56,387,144
Distributable income earned per unit $ 0.511 $ 0.419
Actual distributions declared per unit $ 0.450 $ 0.370
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings per unit
3 months 3 months
ended ended
March 31, March 31,
2008 2007
--------------------------
Numerator
Earnings from continuing operations $ 3,365 $ 3,683
Earnings (loss) from discontinued
operations $ 2,267 $ (52)
---------------------------------------------------------------------
Denominator
Denominator for basic earnings per unit
- weighted average units 55,424,413 56,387,144
---------------------------------------------------------------------
Denominator for diluted earnings per
unit adjusted for weighted average
units and assumed conversion 55,424,413 56,387,144
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings per unit from continuing
operations
Basic $ 0.06 $ 0.06
Diluted $ 0.06 $ 0.06
---------------------------------------------------------------------
Earnings per unit from discontinued
operations
Basic $ 0.04 $ 0.00
Diluted $ 0.04 $ 0.00
---------------------------------------------------------------------
---------------------------------------------------------------------
11. INCOME TAXES
Boardwalk REIT is a "mutual fund trust" as defined under the Income
Tax Act (Canada) and, accordingly, is not taxable on its income to
the extent that its income is distributed to its unitholders. This
exemption does not extend to the corporate subsidiaries of Boardwalk
REIT that are subject to income tax. On June 22, 2007, Bill C-52
received royal assent (see Note 3 for further details). As such, the
Trust, to be in compliance with Canadian GAAP, was required to
estimate what the impact of the reported tax amount would be on
January 1, 2011. This estimate is reviewed quarterly and adjusted, if
necessary.
3 months 3 months
ended ended
March 31, March 31,
2008 2007
--------------------------
Continuing operations $ 2,381 $ (232)
---------------------------------------------------------------------
Total future income taxes (recovery) $ 2,381 $ (232)
--------------------------
--------------------------
Future income taxes (recovery)
consist of the following:
3 months 3 months
ended ended
March 31, March 31,
2008 2007
--------------------------
Tax expense based on expected rate $ 60 $ 109
Adjustment to future income
tax liabilities 2,321 (341)
---------------------------------------------------------------------
Future income taxes (recovery) $ 2,381 $ (232)
--------------------------
--------------------------
The future income tax liability
is calculated as follows:
As at March 31, December 31,
2008 2007
--------------------------
Tax asset (liability) related
to operating losses $ 334 $ (90)
Tax liability related to differences
in tax and book basis (103,002) (100,197)
---------------------------------------------------------------------
Future income tax liability $ (102,668) $ (100,287)
--------------------------
--------------------------
12. CAPITAL MANAGEMENT
The Trust defines capital resources as the aggregate of unitholders'
equity, debt (both secured and unsecured), internally generated funds
and cash on hand. The Trust's capital management framework is
designed to maintain a level of capital that allows it to implement
its business strategy while complying with investment and debt
restrictions pursuant to Boardwalk's DOT as well as existing debt
covenants while continuing to build long-term Unitholder value. The
main components of the Trust's capital allocation are approved by its
unitholders as stipulated in the Trust's DOT and on a regular basis
by its Board of Trustees ("Board") through their annual review of the
Trust's strategic plan and budget, supplemented by periodic Board and
Board Committee meetings. Capital adequacy is monitored by the Trust
by assessing performance against the approved annual plan throughout
the year, which is updated accordingly, and by monitoring adherence
to investment and debt restrictions contained in the DOT and debt
covenants. Boardwalk REIT's DOT provides for maximum total debt
levels up to 70% of Gross Book Value ("GBV") as defined in the DOT as
total assets plus accumulated amortization of income properties as
recorded by the Trust (and calculated in accordance with GAAP) and to
this amount an additional amount of $231 million ("Bump") is added as
was previously approved by the Trust's Unitholders. As a matter of
internal policy the Trust has a target of total debt levels not to
exceed 65% of GBV, however, subsequent to the current quarter ended
the Trust has requested its Unitholders to vote and approve an
additional bump to its existing GBV (see NOTE 17). The following
table highlights Boardwalk REIT's existing leverage ratio:
As at March 31, December 31,
2008 2007
--------------------------
Total assets $ 2,277,925 $ 2,195,888
Amortization 533,123 513,514
Exchange value bump 231,460 231,460
---------------------------------------------------------------------
$ 3,042,508 $ 2,940,862
--------------------------
--------------------------
Mortgages payable $ 1,892,239 $ 1,770,015
Unsecured debentures 118,844 118,768
Adjustment to debt 8,005 10,560
--------------------------
$ 2,019,088 $ 1,899,343
--------------------------
--------------------------
Adjusted Debt-to-GBV 66% 65%
--------------------------
--------------------------
With a DOT limit not to exceed 70% on Adjusted Debt-to-Gross Book
Value, Boardwalk REIT has the ability to add additional leverage on
its existing portfolio. Additionally, the Trust's DOT contains
provisions that have the effect of limiting capital expended by the
Trust.
As outlined in NOTE 13(d), both the debenture agreement and the
credit facility agreement contain financial covenants.
Boardwalk REIT's available capital is comprised of long-term fixed
rate debt (both secured and unsecured), unitholders' capital and
drawings under lines of credit and totalled $2.3 billion as at March
31, 2008 (December 31, 2007 - $2.3 billion). As at March 31, 2008,
the Trust was in compliance with all covenants in both its DOT and
all existing debt facilities.
13. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The Trust's financial instruments consist of mortgages and accounts
receivable, tenants' security deposits, cash or bank indebtedness,
mortgages payable, debentures and accounts payable and accrued
liabilities. All of the Trust's financial instruments were classified
as either held for trading (cash), loans and receivables (carried at
amortized cost) or other financial liabilities (carried at amortized
cost using the effective interest rate method). The fair values of
the Trust's financial instruments were determined as follows:
i) The carrying amounts of mortgages and accounts receivable,
tenants' security deposits, cash or bank indebtedness and
accounts payable and accrued liabilities approximate their fair
values due to their short-term nature.
ii) The fair values of the Trust's mortgages payable and debentures
are estimates made at a specific point in time, based on
relevant market information. These estimates are based on
quoted market prices for the same or similar issues or on the
current rates offered to the Trust for similar financial
instruments subject to similar risks and maturities. These
estimates are subjective in nature and involve uncertainties
and matters of significant judgement and therefore cannot be
determined with precision. Changes in estimates could
significantly affect fair values. The significant financial
instruments of Boardwalk REIT and their carrying values as at
March 31, 2008 are as follow:
As at March 31,
2008
------------
Mortgages and accounts receivable
Carrying value $ 10,067
Fair market value $ 10,067
---------------------------------------------------------------------
Mortgages payable and debentures
Carrying value $ 2,011,083
Fair market value $ 2,060,062
At January 1, 2008 and for the three months ended March 31, 2008, the
Trust had no embedded derivatives requiring separate recognition.
The nature of these financial instruments and the Trust's operations
expose the Trust to certain principal financial risks. The main
objective of the Trust's risk management process is to properly
identify financial risks and minimize the exposure to potential
losses arising from those risks. The principal financial risks to
which the Trust is exposed are described below.
Risk Management
a) Interest rate risk
The Trust is exposed to interest rate risk as a result of its
mortgages payable, debentures and credit facilities, however this
risk is minimized through the Trust's current strategy of having the
majority of its mortgage payable and debentures in fixed terms
arrangements. As such, the Trust's cashflows are not significantly
impacted by a change in market interest rates. In addition, the Trust
structures its financings so as to stagger the maturities of its
debt, thereby minimizing the Trust's exposure to interest rates in
any one year. The majority of the Trust's mortgages are also insured
by CMHC under the NHA mortgage program. This added level of insurance
offered to lenders allows the Trust to receive the best possible
financing and interest rates, and significantly reduces the potential
for a lender to call a loan prematurely. In addition, management is
constantly reviewing its credit facility (floating-rate debt) and, if
market conditions warrant, the Trust has the ability to convert its
existing floating-rate debt to fixed rate debt.
As at March 31, 2008, the Trust had zero credit facility debt
outstanding and as such of the Trust's total debt at March 31, 2008,
100% is fixed-rate debt and 0% is floating-rate debt. For the three
months ended March 31, 2008, all else being equal, the increase or
decrease in net earnings for each 1% change in interest rates amounts
to $0.
b) Credit risk
The Trust is exposed to credit risk as a result of its mortgages and
accounts receivable. This balance is comprised of mortgage holdbacks
and refundable mortgage fees, accounts receivable from significant
customers and tenant receivables. As at March 31, 2008, no balance
relating to mortgage holdbacks, refundable mortgage fees or accounts
receivable from significant customers was past due.
In relation to mortgage holdbacks and refundable mortgage fees, the
Trust's exposure to credit risk is low given the nature of these
balances. These funds will be advanced when the Trust has met the
conditions pursuant to the mortgage agreement (in the case of the
mortgage holdback) or when financing is completed (in the case of
refundable mortgage fees), both of which are expected to occur.
Similar to mortgage holdbacks and refundable mortgage fees, the Trust
assesses the credit risk on accounts receivable to be low due to the
assured collection of these balances. The majority of the balance
relates to money owing from an energy provider as a result of the
Alberta government natural gas rebate program and the Trust's revenue
sharing initiatives. Given the Trust's collection history and the
nature of these customers, credit risk is assessed as low. An amount
was owing pursuant to the unit sales (see NOTE 4) all of which was
collected subsequent to March 31, 2008. Additionally, an amount is
owed by insurance companies in relation to current outstanding
claims. In all circumstances, the insurance deductible has been paid
and amounts incurred and owing for reimbursement are due to an
insurable event. Recoverability may differ from the amount owing
solely due to discrepancies between the Trust and the insurance
provider regarding the value of replacement costs. The remainder of
the balance relates to a property tax adjustment which was collected
subsequent to March 31, 2008.
With tenant receivables, credit risk arises from the possibility that
tenants may experience financial difficulty and be unable to fulfill
their lease term commitments. The maximum exposure to credit risk is
equal to the carrying value of the financial assets.
As stated above, the carrying amount of tenant receivables reflects
management's assessment of the credit risk associated with its
tenants; however, the Trust mitigates this risk of credit loss by
geographically diversifying its existing portfolio, by limiting its
exposure to any one tenant and by conducting thorough credit checks
with respect to all new rental leasing arrangements. In addition,
where legislation allows, the Trust obtains a security deposit from a
tenant to assist in the recovery of monies owed to the Trust.
Past due receivables are reviewed by management on a monthly basis
and tenant receivables are considered for impairment on a case-by-
case basis. The Trust takes into consideration the tenant's payment
history, their credit worthiness and the current economic environment
however tenant receivable balances exceeding 60 days are typically
written off to bad debt expense as the Trust does not utilize an
allowance for doubtful accounts. The amount of the loss is recognized
in the consolidated statement of earnings and comprehensive income
within operating expenses. Subsequent recoveries of amounts
previously written off are credited against operating expenses during
the period of settlement. As tenant receivables are typically written
off after 60 days, none of the balance is considered to be past due
by the Trust.
c) Liquidity risk
Liquidity risk is the risk that the Trust will not be able to meet
its financial obligations as they become due. The Trust maintains
what it believes to be a conservatively leveraged balance sheet and
can finance any future growth through one or a combination of
internally generated cash flows, borrowing under existing credit
facility, the issuance of debt or the issuance of equity, according
to its capital management objectives. In addition, the Trust
structures its financings so as to stagger the maturities of its
debt, thereby minimizing the Trust's exposure to liquidity risk in
any one year. In addition, cash flow projections are completed on a
regular basis to ensure the Trust has sufficient cash flows to make
its monthly distributions to its Unitholders. Given the Trust's
currently available liquid resources (from both financial assets and
on-going operations) as compared to its contractual obligations,
management assesses the Trust's liquidity risk to be low.
d) Debt covenants
As outlined in its mortgages payable agreements, the Trust is
required to make equal monthly payments of principal and interest
based on the respective amortization period. Additionally, the Trust
must ensure that all property taxes have been paid in full when they
become due and that no arrears exist.
CMHC provides mortgage loan insurance in connection with mortgages
made to Boardwalk REIT. In an agreement dated September 13, 2002 and
as amended and restated on January 19, 2005 and April 25, 2006, the
Trust agreed to provide certain financial information to the CMHC and
be subject to certain restrictive covenants, including limitation on
additional debt, payment of distributions in respect to unitholders'
capital in the event of default, and maintenance of certain financial
ratios. In the event of default, the Trust'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.
Per the debenture agreement, the Trust is required to pay semi-annual
interest instalments on January 23 and July 23 of each year. The
Trust is also required to maintain in good condition, repair and
working order all of the properties owned by it or any or its
Subsidiaries while maintaining property and liability insurance.
The debenture agreement contains three financial covenants as
follows:
i) the Trust will maintain a Consolidated Earnings Before
Interest, Taxes, Depreciation and Amortization ("EBITDA") to
Consolidated Interest Expense of not less than 1.50 to 1. As at
March 31, 2008, this ratio was 2.1 to 1 and as such the Trust
is in compliance.
ii) the Trust will not incur or assume any indebtedness unless the
quotient obtained by dividing the Adjusted Consolidated
Indebtedness by the Adjusted Gross Book Value would be less
than or equal to 70%. As outlined in NOTE 12, as at March 31,
2008, this amount was 66% and as such the Trust is in
compliance.
iii) the Trust will maintain at all times, an Adjusted Unitholders'
Equity of at least $300 million. Adjusted Unitholders' Equity
was $859 million as at March 31, 2008.
The Trust has a credit facility in the form of an acquisition and
operating line with a major financial institution. This credit
facility was secured by a first or second mortgage charge of specific
real estate assets (carrying value of $292 million). The maximum
amount varies with the value of the pledged assets to a maximum not
to exceed $200 million.
The credit facility contains three financial covenants as follows:
i) the Trust will maintain an overall Debt Service Coverage Ratio
of at least 1.20. As at December 31, 2007, this ratio was 1.68
and as such the Trust is in compliance.
ii) the Trust will maintain a Debt Service Coverage Ratio, specific
to the Security Portfolio of at least 1.15. As at December 31,
2007, this ratio was 1.29 and as such the Trust is in
compliance.
iii) Total indebtedness of the Trust will not exceed 70% of the GBV
of all assets as defined in the DOT. As outlined in NOTE 12, as
at March 31, 2008, this amount was 66% and as such the Trust is
in compliance.
As at March 31, 2008, the Trust was in compliance with all covenants.
e) Utility risk
The trust is exposed to utility risk as a result of fluctuations in
the prices of natural gas and electricity service charges. As
outlined in NOTE 14, the Trust has committed to utility contracts to
reduce the risk of exposure to adverse changes in commodity prices.
14. COMMITMENTS AND CONTINGENCIES
At March 31, 2008, the Trust had a long-term supply arrangement with
one electrical utility company to supply the Trust with its
electrical power needs for its southern Alberta properties for the
next nine months at a blended rate of approximately $0.068/kwh. The
agreement provides that the Trust purchase its power for all southern
Alberta properties under contract for the upcoming months.
Beginning in November 2003, the Alberta government implemented a
natural gas rebate program covering the winter usage months of
November through March. In October 2005, the natural gas rebate
program was extended to cover the month of October. In January of
2006, the Alberta government announced a three-year extension to the
program covering the winter months of October through March. The
extension of the natural gas rebate program will end March 31, 2009.
The rebate program becomes active when the natural gas consumer price
charged by two of the three major gas companies in Alberta exceeds
$5.50/GJ for any individual winter usage month. For January through
March 2007, Boardwalk REIT was eligible for estimated rebates
totalling approximately $0.9 million. For January to March 2008,
Boardwalk REIT was eligible for rebates totalling approximately
$1.3 million.
The Trust also entered into one natural gas supply contract, which
provides a degree of price certainty for natural gas usage in the
province of Saskatchewan. The contract covers between 75 - 100% of
the Trust's natural gas requirements for this province. The physical
supply agreement for Saskatchewan covered the period from November 1,
2006 to October 31, 2007, and has been extended to October 21, 2008.
The supply contract provides the commodity at a price of $8.95/GJ.
Boardwalk REIT, in the normal course of operations, will become
subject to a variety of legal and other claims against the Trust.
Management and the Trust'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 Trust or its
predecessor will not be material to Boardwalk REIT.
15. GUARANTEES
In the normal course of business, various agreements may be entered
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 an entity 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, a mortgage assumed by the
purchaser will have an indirect guarantee provided to the lender
until the mortgage is refinanced by the purchaser. In the event of
default by the purchaser, the seller would be liable for the
outstanding mortgage balance. Boardwalk REIT's maximum exposure at
March 31, 2008 is approximately $4.9 million (March 31, 2007 -
$5.4 million). In the event of default, Boardwalk REIT's recourse for
recovery includes the sale of the respective building asset.
Boardwalk REIT expects that the proceeds from the sale of the
building will cover, and in most likelihood exceed, the maximum
potential liability associated with the amount being guaranteed.
Therefore, at March 31, 2008, no amounts have been recorded in the
consolidated financial statements with respect to the above noted
indirect guarantees.
16. SEGMENTED INFORMATION
Boardwalk REIT specializes in multi-family residential housing and
operates primarily within one business segment in five provinces
located in Canada. The following summary presents segmented financial
information for Boardwalk REIT's business by geographic location.
3 months 3 months
ended ended
March 31, March 31,
2008 2007
--------------------------
Alberta
Revenue $ 61,119 $ 49,166
--------------------------
Expenses
Operating 10,483 7,536
Utilities 8,865 6,648
Utility rebates (1,255) (922)
Property taxes 3,491 3,196
---------------------------------------------------------------------
21,584 16,458
--------------------------
Net operating income $ 39,535 $ 32,708
--------------------------
Saskatchewan
Revenue $ 10,682 $ 9,212
--------------------------
Expenses
Operating 1,664 1,594
Utilities 2,363 1,725
Property taxes 1,132 1,171
---------------------------------------------------------------------
5,159 4,490
--------------------------
Net operating income $ 5,523 $ 4,722
--------------------------
Ontario
Revenue $ 9,435 $ 9,376
--------------------------
Expenses
Operating 1,593 1,515
Utilities 2,012 2,028
Property taxes 1,573 1,756
---------------------------------------------------------------------
5,178 5,299
--------------------------
Net operating income $ 4,257 $ 4,077
--------------------------
British Columbia
Revenue $ 2,966 $ 2,771
--------------------------
Expenses
Operating 620 621
Utilities 497 401
Property taxes 150 148
-------------------------------------
1,267 1,170
--------------------------
Net operating income $ 1,699 $ 1,601
--------------------------
Quebec
Revenue $ 17,470 $ 17,014
--------------------------
Expenses
Operating 3,563 2,965
Utilities 2,892 2,994
Property taxes 1,303 1,889
---------------------------------------------------------------------
7,758 7,848
--------------------------
Net operating income $ 9,712 $ 9,166
--------------------------
Total
Net operating income $ 60,726 $ 52,274
Unallocated revenue(*) 537 31
Unallocated expenses(xx) (55,631) (48,674)
---------------------------------------------------------------------
Net earnings for the period $ 5,632 $ 3,631
--------------------------
--------------------------
March 31, December 31,
As at 2008 2007
--------------------------
Alberta
Identifiable assets
Revenue producing properties $ 1,242,355 $ 1,244,328
Mortgages and accounts receivable 5,378 5,863
Tenants' security deposits 10,579 10,385
--------------------------
$ 1,258,312 $ 1,260,576
--------------------------
Saskatchewan
Identifiable assets
Revenue producing properties $ 167,885 $ 168,581
Mortgages and accounts receivable 189 202
Tenants' security deposits 2,264 2,096
--------------------------
$ 170,338 $ 170,879
--------------------------
Ontario
Identifiable assets
Revenue producing properties $ 205,203 $ 206,366
Mortgages and accounts receivable 205 237
--------------------------
$ 205,408 $ 206,603
--------------------------
Quebec
Identifiable assets
Revenue producing properties $ 419,958 $ 421,473
Mortgages and accounts receivable 1,444 800
--------------------------
$ 421,402 $ 422,273
--------------------------
British Columbia
Identifiable assets
Revenue producing properties $ 104,817 $ 104,491
Mortgages and accounts receivable 1,064 1,049
Tenants' security deposits 456 444
--------------------------
$ 106,337 $ 105,984
--------------------------
Total assets
Identifiable assets $ 2,161,797 $ 2,166,315
Unallocated assets(xxx) 116,128 29,573
--------------------------
$ 2,277,925 $ 2,195,888
--------------------------
--------------------------
(*) 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, corporate administration, financing costs,
amortization, income taxes and other provisions.
(xxx) Unallocated assets include discontinued assets, cash and cash
equivalents and other assets.
17. SUBSEQUENT EVENT
Subsequent to March 31, 2008, Boardwalk REIT acquired a property in
Calgary, Alberta, totaling 297 apartment units from an unrelated
third party for an aggregate purchase price of $48.8 million. The
transaction is scheduled to close June 13, 2008 and will be funded
using cash-on-hand.
>>
%SEDAR: 00020684E
For further information please contact:
Boardwalk REIT
Sam Kolias,
CEO,
(403) 531-9255;
Roberto Geremia,
President,
(403) 531-9255;
