Management s Discussion and Anallysis of Financial Results For the three and six months ended June 30, 2015 and 2014

Transcription

1 Management s Discussion and Analysis of Financial Results For the three and six months ended June 30, and

2 ADVISORIES The following Management s Discussion and Analysis of Financial Results ( MD&A ), dated Augustt 6,, should be read in conjunction with the cautionary statement regarding forwardlooking information below, as well as the Northern Property Real Estate Investment Trust (the REIT or NPR ) unaudited condensed consolidated financial statements and notes thereto for the threee and six months ended June 30,, and, and the audited consolidated financial statements and notes thereto for thee years ended December 31,, and The unaudited condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). This MD&A is intended to provide readers with management s assessment of the performance of NPR, as well as its financial position and future prospects. All amounts in the following f MD&A are in Canadian Dollars unless otherwise stated. Reference to we, us, or our mean NPR and its subsidiaries. Additional information relating to NPR, including periodic quarterly and annual reports and Annual Information Forms ( AIF ), filed with the Canadian securities regulatory authorities, is available on SEDAR at Cautionary statement regarding forwardlooking information Certain information contained in this MD&A may constitute forwardlooking statements within thee meaning of securities laws relating to the business and financial outlook of NPR. Statements which reflect NPR s current objectives, plans, goals, and strategies are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from future results expressed, projected, or implied by such forwardlooking statements. In some instances, forwardlooking information can be identified by the use of terms such as may, should, expect, will, anticipate, believe, intend, estimate, predict, potentially, starting, beginning, begun, moving, continue, or other similar expressions concerning matters that are not historical facts. Forwardlooking statements include, but are not limited to, statements related to acquisitions or dispositions, development activities, future maintenance expenditures, financing and the availability of financing, tenant incentives, and vacancy levels. Such statements involve significant risks and uncertainties and are not meant to provide guarantees of future performance or results. All of the statements and information contained in this MD&A incorporatingg forwardlooking information are qualified by these cautionary statements. Forwardlooking statements are made as of August 6,, and are based on information available to management as of that date. Management believes thatt the expectations reflected in forwardlooking statements are based upon information and reasonable assumptions available at the time they are made; however, management can give no assurance that the actual results will be consistent with these forwardlooking statements. Factors that could cause actual results, performance, or achievements to differ materially from those expressed or implied by forwardlooking statements include, but are not limited to, general economic conditions, the availability of new competitive supply of real estate which may become available through construction, NPR s ability to maintain occupancy and thee timely lease or release of residential and execusuite and hotel units and commercial space at current market rates, tenant defaults, changes in interest rates, changes in operating costs, governmental regulations and taxation, fluctuations in commodity prices, and the availability of financing. Additional risks and uncertainties not presently known to NPR, or those risks and uncertainties that NPR currently believes to be not material, may also adversely affect NPR. NPR cautions readers that this list of factors is not exhaustive and thatt should certain risks or uncertainties materialize, or should underlying estimates or assumptions prove incorrect, actual events, performance, and results may vary materially from those expected. Except as specifically required by applicable Canadian law, NPR assumes noo obligation to update or revise publicly any forwardlooking statements to reflect new events or circumstances that may arise after August 6,. NonGAAP and additional GAAP measures Certain measures in this MD& &A do not have any standardized meaning as prescribed by generally accepted accounting principles ( GAAP ) and therefore, are considered nongaap measures. These measures are provided to enhance the reader s overall understanding of our current financial condition. They are included to provide investors and management with an alternative method for assessing our operating results in a manner that is focused on the performance of our ongoing operations and to provide a more consistent basis for comparison between periods. These measures include widely accepted measures of performance for Canadian real estate investment trusts; however, the measures are not defined by IFRS. In addition, the definitions of these measures are subject to interpretation by the preparers of financial statements and may not be applied consistently between real estate entities. Please refer to t page 23 of this MD&A for definitions of nongaap and additional GAAP measures, including net operating income ( NOI ), funds from operations ( FFO ), debt to gross book value, debt service coverage, and interest coverage. NPR Second Quarter 2

3 BUSINESS OVERVIEW NPR is primarily a multifamily residential real estate investor and operator providing a broad spectrum of rental accommodations, predominantly in Canadian secondary markets. NPR focuses on communities with strong economic fundamentals where capitalization rates are generally higher and competition is somewhat restrained. NPR s residential portfolio is comprised of a multifamily segment: apartments, town homes, and single family rental units; and an execusuites and hotel segmentt where the rentall period ranges from a few days to several months. NPR also has a portfolio of commercial buildings focused on government and quality corporate tenancies predominantly located in the Northwest Territories, Nunavut, and Newfoundland and Labrador. Geographically,, NPR operates inn Alberta, British Columbia, Newfoundland and Labrador, the Northwest Territories, Nunavut, Québec, and Saskatchewan. NPR s investment strategy is based on the following criteria: High growth markets with economically growing communities; Strong core economies including government and services with leveragee to natural resources; Long term growth potential in rental rates and vacancy improvements; and Accretive expansionn through development and acquisition activities. OUTLOOK NPR s financial results for the first half of were the strongestt in its history. Thee positive financial results were driven by successful leasing of new developments which came online in the past twelve months, growth in the commercial business segment, lower utility costs due to less severe weather conditions, and continued strong performance in nonoil and gas based markets suchh as Iqaluit, NU, and St. John s, NL. NPR s positive operational performance is expected to continue through its growth initiatives and diversified operations, which include approximately 50% of its income being generated from northernn Canada. These are expected to offset the potential negative impact of the sustained low price of crude oil which does not appear to be improving in the short to medium term. Managementt will continue the significant CAPEX program for the rest of through its Street to Suite program. The program emphasis is on improving the exteriors, signage, common areas and providing residents a high level of customer service. Management is seeing positive results from the capital investment, as there are early signs of improvement in Yellowknife, NT, and Fort McMurray, AB. NPR expects continued growth through developments and acquisitions at a similarr pace to the first half of the year. Late in the first quarter of, NPR started its first development in Airdrie, AB. The development will be 140 units, costingg approximately $170,000 per unit and is scheduled to be completed in the fourth quarter of. The Calgary development is due too start in the third quarter of once developmentt permits have been obtained from the City of Calgary. Phase one of the development iss expected to be 261 units, of the 400 unit project. Sufficient liquidity through upfinancing and credit facilities exists to complete the CAPEX and growth initiatives without having to access the capital markets while the unit price is trading at a significant discount to Net Asset Value. Interest rates remain at alltime lows providing NPR with both interest savingss and opportunities to extend terms on its mortgages. NPR is currently renewing its Normal Course Issuer Bid ( NCIB ), as the current trading price of NPR Trust units is well below its Net Asset Value. Management believes that t over the first half of the trading price of itss units has been too highly correlated to the price of oil and ignores the underlying financial strength of the REIT, as evidenced by the strong financial results over this period. The NCIB provides NPR the flexibility to repurchase units as an investmentt in its own high quality portfolio, which management believes will deliver strong returns for unitholders and represents an effective use of capital. NPR Second Quarter 3

4 SECOND QUARTER HIGHLIGHTS FFO for the three months ended June 30,, was $20.3 million, compared to $19.4 millionn for the same period of. On a per unit basis, FFO for the three months ended June 30,, increased by 4.9% to a record high $0.64 per unit, compared to $0.61 per unit for the second quarter of. Same door NOI for the three months endedd June 30,, increased by 1.2% % from, compared to the 2.0% decline for the same period of. Stabilized vacancy loss for f the three months ended June 30,, was 9.0% %, compared to 9..5% for the first quarter of and 7.1% for the second quarter of. Total vacancy loss for the second quarter of was 10.1%, compared to 10.6% in the first quarter of and 8.2% for the same period of. NPR completed development of 118 units in Fort St. John, BC, which are leasing up within expectations. Total cost was $18.1 million at an expected Cap Rate ranging from 7.0% to 7.5%. As at June 30,, NPR had 250 multifamily units under construction with 110 units in Bonnyville, AB, and 140 units in Airdrie, AB. Debt to gross book value was 51.3% at June 30,, compared to 49.9% at t March 31,, and 48.6% at December 31,. Select financial information (thousands of dollars, except per unit amounts) Total revenue NOI NOI margin Net and comprehensive income Net and comprehensive income per Trust Unit, basic and diluted Three months ended June 30 Six months ended June 30 49,401 30, % 6,289 $ ,102 27, % 14,937 $ ,222 56, % 20,907 $ ,510 51, % 33,050 $1.03 FFO FFO per Trust Unit, basic and diluted FFO payoutt ratio 20,327 $ % 19,432 36,901 $0.61 $ % 70.1% 35,010 $ % Distributionss declared to Trust Unit holders Distributionss declared per Trust Unit 12,940 $ ,591 25,880 $0.40 $ ,211 $0.79 (thousands of dollars, except per unit amounts) Total assetss Total liabilities Mortgages payable June 30, December 31, 1,724, , ,817 1,666, , ,553 June 30, 1,606, , ,311 Debt to gross book value Interest coverage ratio (times) Debt servicee coverage ratio (times) 51.3% % % Weighted average mortgage interest rate Weighted average term to maturity (years) Weighted average capitalization rate 3..53% % 3.67% % 3.78% % Number of residential units Commercial square feet (rounded to nearest thousand) 11,184 1,174,000 10,910 1,142,000 10,681 1,141,000 Please refer to t page 23 of this MD&A for the definitions of nongaap measures. NPR Second Quarter 4

5 Portfolio Summary (including joint ventures at 100%) June 30, (Commercial square footage roundedd to the nearest thousand) Province Alberta British Columbia Newfoundland and Labrador Northwest Territories Nunavut Saskatchewan Québec Total Multifamily 3,047 2,975 1,728 1,329 1, ,765 Execusuitess & Hotel Portfolio reconciliation (including joint ventures at 100%) June 30, (Commercial square footage rounded to t the nearest thousand) Multifamily Execusuites & Hotel Balance, December 31, Acquisitionss Developments completed Dispositions Total net change for the period Balance, June 30, 10, (54) , Total Residential (units) 3,047 2,975 1,870 1,489 1, ,184 Total Residential (units) 10, (54) ,184 Commercial (sq. ft.) 83,000 86, , , ,000 1,174,000 Commercial (sq. ft.) 1,142,000 32,000 32,000 1,174,000 Development activity NPR s growth strategy includes both development of new properties and the acquisition of existing properties. Development activity is focused in areas with high asking prices for f existing apartments, and long term potential for loww vacancy and increasing rents. New developments tend to be in our existing markets wheree NPR leverages its local presencee and internal knowledge of the region. New properties have a modern design, command better rental rates, and have lower initial ongoing capital maintenance requirements, all of which allow NPR to generate returns 100 to 200 basis points higher than those associated with acquiring existing apartments. NPR s extensive inhouse development expertise provides the flexibility to adjust development activities as market conditions change. Units constructed are typically four storey wood frame buildings with large balconies, elevators, and six appliances, including insuite laundry. The strategy off developing similar buildings in different regions provides NPR with design and cost efficiencies. NPR s longterm goal is to start construction of between 600 and 800 multifamily units per year. In light of the current economic conditions, development activities have been reduced in. Development will be focused on larger centres, mostly in Calgary, AB, and the surrounding areas, with an expectation to start 400 multifamily units in. During the quarter ended June 30,, NPR purchased 3.9 acres of land in Regina, SK, for $3.6 million for development purposes. NPR also sold a 4.9 acre parcel of land that was held for development in St. John s, NL, for $2.0 million andd the settlement of a $1.7 million vendor take back loan, as the city denied the request to rezone the land for multifamily residential development. As of June 30,, NPR has 44.2 acres of land held for future development which allows for approximately 1,600 units. During the second quarter of, NPR completed the first phase of a development in Fort St. John, BC, totalling 118 units, and it is leasing up within expectations. The development has approval for 189 multifamily units. Projects under development June 30, (thousands of dollars, except per unit amounts) Property Type Multifamily Multifamily Location Bonnyville, AB Airdrie, AB Units Start Date Q3 Q1 Expected Completion Date % Complete Expected Total Costs Expected Cap Rate Q3 85% 17, % to 8.5% Q4 30% 24, % to 7.5% 41,000 The development project in Bonnyville, AB, has approval for 181 multifamily units and will be constructed in two phases, with the first phase comprised of two buildings totalling 110 units and expected completion in Q3. NPR Second Quarter 5

6 During the first quarter of, NPR started a development in Airdrie, AB. The project consists of 140 units and is expected to be completed in the fourth quarter of and cost approximately $170,000 per unit. The Airdrie project will be built with additional amenities to give a competitive edge in the larger market. NPR s Calgary development is currently in the permitting stage and construction iss expected to commence in the third quarter of. The total project is expected to have 4000 units, with the first phase of development consistingg of 261 units. Acquisition activity For the threee months ended June 30,, NPR acquired a commercial building in Yellowknife, NT, for its own use as administration and warehouse space. As mentioned in previous quarters, acquisition activity has slowed over the past few years. NPR is not actively pursuing many of the acquisition opportunities being presented, as cap rates remain low and pricess remain at or near replacement cost. During the first quarter of, NPR acquired 139 multifamily units in St. John s, NL, for an average cost of $84,000 per unit with an expected going in Cap Rate of 7.0%. Additionally, the fifth and final building in the Bristol Court office park was purchased and is fully leased. Acquisitions for f the six months ended June 30, Property Type Commercial Multifamily Commercial Location Yellowknife, NT St. John s, NL St. John s, NL Acquisition Date May 13, March 20, January 14, Units/ Commercial sq. ft. 2,, , / 32,200 Total Costs ,732 6,646 19,062 During the first quarter of, NPR sold the last seniors property for gross proceeds of $2.3 million. SECOND QUARTER RESULTS OF OPERATIONS The following section provides a comparison of the financial results for the three and six months ended June 30,, with the same period of. Operations include residential, commercial, and execusuitess and hotel business segments. Rental revenue Three months ended June 30 Six months ended June 30 Residentiall Multifamily Execusuites and hotel Commercial Total 37,916 2,954 40,870 8,531 49,401 35,509 2,979 38,488 7,614 46, % (0.8%) 6.2% 12.0% 7.2% 75,506 5,721 81,227 16,995 98,222 70,352 5,963 76,315 15,195 91, % (4.1%) 6.4% 11.8% 7.3% Total rental revenue for the three months ended June 30,, increased 7.2% compared to, from increases in both the multifamily and commercial business segments, and partially offset by higher residential vacancy. Multifamily revenue increased by 6.8% in the current quarter when compared to the second quarter of. The increase was related to multifamily developments and acquisitions completed in and early. The developments and acquisitions added to the portfolio since June producedd $2.4 million of multifamily revenue in the second quarter of. Execusuites and hotel revenue remained consistent in the second quarter of compared to the same period of, as government and industry travel to the north has not yet returned to historic levels. The increase in commercial revenue is mainly due to the additional office buildings in St. John s, NL. NPR Second Quarter 6

7 Business Segments as a % of Revenue Geographic Segments as a % of Revenue Commercial 17% NL 13% QC 1% BC 14% Execusuites and hotel 7% NU 25% AB 23% Multifamily 76% NT 21% SK 3% Operating expenses Operating expenses Utilities Property taxes Salaries and benefits Maintenance Cleaning Other expenses Total Three months ended June 30 % of Total Operating Expense 4, % 4,581 3, % 2,878 2, % 2,797 2, % 2,458 1, % 1,457 4, % 4,318 19, % 18,489 % of Total Operating Expense Six months ended June 30 % of Total % of Total Operating Operating Expensee Expense 24.8% 11, % 12, % 15.1% 13.3% 7.9% 23.4% 100.0% 6,396 6,234 4,843 3,068 9,864 41, % 14.9% 11.6% 7.3% 23.6% 100.0% 5,566 5,671 5,146 2,789 8,649 40, % 13.9% 14.2% 12.9% 7.0% 21.6% 100.0% Operating expenses as a percentage of revenues were 39.2% for the three months ended June 30,, consistent with 40.1% in the second quarter of. For the six months ended June 30,, operating expenses were 42.6% of revenues compared to 43.7% for the same period of. Utilities decreased to 23.8% off total operating costs in the second quarter of, from 24.8% in the second quarter of. For the six months ended June 30,, utility costs decreased to 27.3% from 30.5% for the samee period of. The more moderate weather experienced in winter and spring compared to is the main reason for the decreasee for both the three and six month periods endedd June 30. Additionally, lower utility rates have contributed to the decreased utility costs. Property taxes as a percentage of total operating costs for the three and six months ended Junee 30,, increased to 17.4% and 15.3%, respectively, from 15.6% and 13.9% for the comparable periods of. The increase is mainly due to being a reassessment year for Iqaluit, NU; Grande Prairie, AB; and Fort McMurray, AB; resulting in higher propertyy tax in those regions. NPR Second Quarter 7

8 Net operating income NPR uses NOI as a key indicator to measure the financial performance of a region or business segment. NOI is an additional GAAP measure. Refer to the condensed consolidated statementt of net and comprehensive incomee for NOI calculation. See page 23 for details about nongaap and additional GAAP measures. Three months ended June 30 Six months ended June 30 Residentiall Multifamily Execusuites and hotel Commercial Total 23,390 1,393 24,783 5,258 30,041 22,174 1,044 23,218 4,395 27, % 33.4% 6.7% 19.6% 8.8% 43,546 2,366 45,912 10,469 56,381 40,716 2,068 42,784 8,701 51, % 14.4% 7.3% 20.3% 9.5% For the threee months ended June 30,, NPR reported an NOI increase of 8.8% from the samee period of. Management has increased efforts to reduce certain controllable expenses across all business segments and the results are starting to show in the current reporting period with positive NOI growth across all business segments. Multifamily NOI increased 5.5% for the three months ended June 30,, drivenn mainly by developments and acquisitions, and partially offset by increased vacancy and property tax. Developments and acquisitions added to the portfolio since the second quarter of added $1.9 million in incremental NOI in. Commercial NOI increased by 19.6% compared to due to developments inn Iqaluit, NU, andd St. John s, NL, and lease renewals on the warehouse properties in St. John s, NL. Execusuites and hotel NOI increased by 33.4% compared to, as the operating expenses forr the execusuites in Yellowknife, NT, and St. John s, NL, were considerably lower, while revenues remained consistent. Operationally, wass a difficult year for the execusuitee and hotel business segment with expenses incurred being higher than normal, making for a favourable comparison. The charts below provide the breakdown of the NOI by businesss and geographical segments for the three months ended June 30,. Multi segment family continued to be the majority at 79% of total NOI for the three months ended June 30,, consistent with. The commercial accounted for 17% of NOI for the t three months ended June 30,, while the execusuites and hotel segment remained at 4% of overall NOI. Business Segment as a % of NOI Geographic Segments as a % of NOI Commercial 17% NL 12% QC 1% BC 14% Execusuites and hotel 4% NU 29% AB 24% Multifamily 79% NT 17% SK 4% NPR Second Quarter 8

9 Same door performance Same door performance is calculated on properties that have been owned by NPR for both the current and previous reporting periods. For the purpose of this discussion, properties that were owned by NPR on or before January 1,, are included in the calculation. Same door revenue for the three months ended June 30,, increased $0.4 million or 0.8%, led by an 8.6% increase in Nunavut from renewals of long term leases that were expiring, and a 3.8% improvement in the Northwest Territories due to lower vacancy. Same door revenue improvements were also realized in Newfoundland and Labrador, Saskatchewan, and Québec. The three months ended June 30,, marks the second consecutive quarter to have positive same door growth, ncreasing 1.2% compared to the same period of. The improvement in same door results in was attributable to the growth in the commercial segment in St. John s, NL, and Iqaluit, NU, and lower utility costs from more moderate weather and lowerr utility rates. This was partially offset by higher vacancy in Fort McMurray, AB; Lloydminster, AB; and northeastern British Columbia. Commercial same door NOI increased as a result of two Bristol Court buildings in St. John s, NL, being fully leased in mid and lease renewals beingg completed in for the warehouses in St. John s, NL. From a business segment perspective, multifamily same door NOI decreased 2.6% %, commercial increased 14.1%, and the execusuitess and hotel increased 33.4% for the three months ended June 30,. Same door NOI quarterly change 2.0% 1.4% 1.0% 0.9% 1.2% 0.0% 1.0% 0.2% 0.2% 2.0% 3.0% 4.0% 2.5% 2.0% 1.7% 2.6% 5.0% 6.0% 7.0% 8.0% Q Q % Q1 Q2 Q3 Q4 4 Q1 Q2 Multifamily operations Total vacancy loss Total vacancy loss for the second quarter of was 10.1%, compared to 10.6% % in the first quarter of and 8.2% for the same period of. The decrease from the first f quarter of can be attributed mainly to the significant improvement in vacancy in Yellowknife, NT, and the increase in vacancy from the second quarter of is due to the weakened economic conditionss in Alberta and other natural resource based regions. Stabilized vacancy loss Stabilized vacancy is a measure used by management to evaluate the vacancy performance of its stabilized properties on a comparable basis. A property is considered stabilized at least six months and no longer than 18 months after an acquisition. For new developments, it is considered no sooner than six months after the first building is completed and no longer than 12 months afterr the final building is completed. In addition, properties considered held for sale and properties that require significant capital improvement are excluded from stabilized vacancy. Stabilized vacancy for the three months ended June 30,, was 9.0%, up from 7.1% for the same period of, and down from 9.5% in the first quarter of. With weak economic conditions in a number of regions, NPR has experienced a higher than normal amount of tenant move outs in.. Through dedicated leasing teams, select rental rate reductions, and the organizationwide focus on customer service, most regions have experienced slight vacancy decreases in the second quarter of. The efforts of the Street to Suite capital program have had a direct impact in lowering vacancy in Yellowknife, NT, and stabilizing vacancy in Fort McMurray, AB. NPR Second Quarter 9

10 Stabilized residential vacancy loss l by province and territory Province and Territory Alberta Q1 6.5% Q2 Q3 Q % 7.7% 9.2% 7.6% Q1 13.0% Q2 14.0% British Columbia 14.0% 11.2% 11.7% 11.1% 12.0% 12.3% 14.0% Newfoundland and Labrador and Québec 5.0% 4.1% 3.7% 3.9% 4.2% 5.3% 6.2% Northwest Territories 11.9% 12.2% 12.7% 11.4% 12.1% 11.2% 6.1% Nunavut 1.8% 1.7% 2.4% 2.1% 2.0% 3.6% 2.1% Saskatchewan 6.5% 5.6% 5.1% 6.9% 6.2% 7.8% 7.6% Overall 7.8% 7.1% 7.6% 7.6% 7.5% 9.5% 9.0% Alberta operations Stabilized vacancy loss Fort McMurray Grande Prairie Lloy dminster Slave Lake Jasper Bonnyville & St. Paul Alberta Total number of units Q1 12.6% 2.8% 0.9% n/a 1.2% 4.5% 6.5% 2,468 Q2 Q3 Q4 Q1 14.0% 15.8% 20.0% 24.3% 1.7% 1.8% 1.7% 2.3% 1.7% 2.5% 2.7% 10.6% n/a n/a n/a 1.3% 0.3% 0.2% 0.2% 0.0% 2.0% 1.3% 1.6% 4.0% 6.8% 7.7% 9.2% 13.0% 2,747 2,747 2,976 3,047 Q2 22.8% 5.6% 15.9% 2.0% 0.2% 5.7% 14.0% 3,047 Number of Units ,047 Stabilized vacancy for Alberta was 14.0% for the three months ended June 30,, comparedd to 13.0% in the first quarter of. The increase in Alberta vacancy is primarily due to Lloydminster. As with Fort McMurray, the economy in Lloydminster is directly tied to the price of crude oil, with the recent period of lower crude oil prices having a negative impact on both regions, resulting in increased vacancy. In this current period of higher than normal vacancy, NPR is nvesting in the Street to Suite program which will focus on ensuring properties are well maintained, safe, and renovated. NPR has increased its regular annual CAPEX spending in Fort McMurray for to ensure that when the market recovers, NPR will be well positioned to be the first choice for new residents. NPR has been aggressive with lease incentives and rental rates to retain and generate as much business as possible, helping stabilize the vacancy in its Fortt McMurray properties, which is now in line with the reported CMHC Spring market vacancy data and lower than the first quarter of. Fort McMurray and Lloydminster s recoveries will be tied to crude oil prices increasing to historical levels and the associated sustainable economic growth. The recently completed 150 unit development in Lloydminster is currently 87% leased. Grande Prairie is starting to show the impacts of the sustained low crude oil and natural gas prices. Vacancy increased to 5.6% for the second quarter of, and this trend is expected to continue into the third quarter. The recently completed 142 units have leased up well and are currently 85% occupied. Three months ended June 30 Six months ended June 30 Revenue Operating expenses Net operating income 10,841 (4,131) 6,710 9,901 (3,225) 6, % 28.1% 0.5% 21,835 (9,155) 12,680 19,594 (6,900) 12, % 32.7% (0.1%) Both revenuee and operating expenses increased when comparing the second quarter of to thee same period of resulting in no change in NOI. The increase i in revenue was due to new properties acquired in Slave Lake, and developedd in Lloydminster and Grande Prairie, partially offset by lower revenues in Fort McMurray and Lloydminster. These newly acquired and developed properties also accounted for 49% of the increase in operating expenses, while the remainder of the increase resulted fromm higher property taxes, leasing incentives, and security costs throughout the rest of the Alberta portfolio. In addition, there was an increase in badd debts experienced in the second quarter as a result of higher turnover and vacancy. NPR Second Quarter 10

11 British Columbia operations Stabilized vacancy loss Southern British Columbia Nanaimo Abbotsford Campbell River and Courtenay Prince George N ortheastern n British Columbia Fort St. Johnn and Tay lor Dawson Creek Fort Nelson Chetwy nd British Columbia Total numberr of units Q1 11.7% 6.6% 25.4% 0.6% 1.2% 22.2% 28.1% 21.3% 14.0% 2,613 Q2 Q3 Q4 Q1 9.4% 9.2% 5.8% 4.6% 6.3% 6.6% 3.9% 2.7% 19.1% 17.5% 20.9% 16.9% 0.9% 1.2% 1.3% 3.7% 0.7% 0.4% 0.2% 1.3% 20.2% 19.2% 15.7% 19.1% 24.8% 26.8% 34.0% 40.2% 8.8% 16.5% 17.1% 22.0% 11.2% 11.7% 11.1% 12.3% 2,613 2,613 2,613 2,613 Q2 5.5% 2.4% 8.4% 3.5% 5.4% 26.1% 44.4% 20.7% 14.0% 2,731 Number of Units ,731 Stabilized vacancy for British Columbia was 14.0% for the three months ended June 30,, an increase from 12.3% in the first quarter of due to higher vacancy in northeastern British Columbia. Southern British Columbiaa has seen significant improvements in vacancy for the second quarter of compared to, with the exception of Prince George, which has seen vacancyy increase to 3.5% %. These areas have more stable economies that are not directly tied to natural resources. Vacancy in northeastern n British Columbia has experienced an overall increase from the first quarter of. Dawson Creek, Fort Nelson, and Chetwynd continue to experience high vacancy, while Fort St. John has experienced a moderate increase in the current quarter. These regions remain linkedd to the price of natural resources and are expected to experience fluctuating vacancy inn the short to medium term. Three months ended June 30 Six months ended June 30 Revenue Operating expenses e Net operating income 6,728 (3,060) 3,668 6,744 (3,082) 3,662 (0.2%) (0.7%) 0.2% 13,432 (6,481) 6,951 13,251 (6,369) 6, % 1.8% 1.0% Newfoundland and Labradorr and Québec operations Stabilized vacancy loss St. John's Gander Labrador City SeptIles Newfoundland and Labrador and Quebec Total number of units Q1 4.6% 5.1% 7.7% 0.0% 5.0% 1,750 Q2 Q3 Q4 Q1 2.8% 3.5% 10.5% 0.0% 4.1% 1, % 2.6% 7.8% 0.0% 3.7% 1, % 2.0% 10.4% 0.0% 3.9% 1, % 3.5% 17.5% 0.0% 5.3% 1,889 Q2 3.1% 3.7% 25.1% 0.0% 6.2% 1,889 Number of Units 1, ,889 Stabilized vacancy for Newfoundland and Labrador and Québec was 6.2% for the three months ended June 30,, compared to 5. 3% for the first quarter of o, as a result of higher vacancy in Labrador City. In Labrador City, stabilized vacancy increased in the second quarter of compared too the first quarter. The Labrador City economy is linked to the iron ore industry, which has seen lower prices over the last year, resulting in mine m closures and layoffs. The rental market in St. John s continues to perform well, with vacancy levels fluctuating around 3%. NPR Second Quarter 11

12 Newfoundland and Labradorr and Québec operations (continued) Three months ended June 30 Six months ended June 30 Revenue Operating expenses Net operating income 4,610 (1,880) 2,730 4,479 (1,814) 2, % 3.6% 2.4% 9,089 (4,071) 5,018 8,941 (4,029) 4, % 1.0% 2.2% Northwest Territories operations Stabilized vacancy loss Yellowknife Inuvik Northwest Territories Total number of units Q1 13.4% 5.4% 11.9% 1,305 Q2 Q3 Q4 Q1 14.2% 14.6% 13.5% 13.1% 2.6% 3.7% 1.5% 2.2% 12.2% 12.7% 11.4% 11.2% 1,329 1,329 1,329 1,329 Q2 7.0% 1.9% 6.1% 1,329 Number of Units 1, ,329 Stabilized vacancy for the Northwest Territories was 6.1% for the three months ended June 30,, compared to 11.2% in the first quarter of. Yellowknife vacancy had significant improvement from the first quarter of. During the second quarter of, NPR signed a new lease with a government tenant, securing long term leases for an additional net 35 units. Construction and mining projects are starting to emerge in Yellowknife and the local economy is improving. Yellowknife is another regionn that is undergoing a significant CAPEX program, as in Fort McMurray, AB. The focus is on improving the overall condition of the buildings, specifically the exteriors, landscaping, and common areas, and the work completed to date has had a positive impact on vacancy in the region. Three months ended June 30 Six months ended June 30 Revenue Operating expenses Net operating income 6,000 (2,659) 3,341 5,657 (2,804) 2, % (5.2%) 17.1% 11,864 (6,528) 5,336 11,342 (6,689) 4, % (2.4%) 14.7% Revenues for the second quarter of increased by 6.1% from the same period of due to the 24 unit development coming online in Yellowknife and lower vacancy. Operating cost decreased from lower utility costs,, as the winter and spring weather was not as severe as. Nunavut operations Stabilized vacancy loss Iqaluit Nunavut Communities Nunavut Total number of units Q1 2.0% 0.7% 1.8% 1,096 Q2 Q3 Q4 Q1 1.5% 2.7% 2.3% 3.8% 2.6% 0.7% 1.2% 2.5% 1.7% 2.4% 2.1% 3.6% 1,096 1,096 1,096 1,096 Q2 2.1% 1.8% 2.1% 1,096 Number of Units ,096 Stabilized vacancy for Nunavut was 2.1% for the three months ended June 30,, compared to 3.6% in the first quarter of. The Nunavut region continues to be a strong and consistent performer for NPR, with long term vacancy expected to remain in the 2% to 3% range. Three months ended June 30 Six months ended June 30 Revenue Operating expenses Net operating income 8,253 (2,552) 5,701 7,551 (2,397) 5, % 6.5% 10.6% 16,332 (5,248) 11,084 14,920 (5,292) 9, % (0.8%) 15.1% NPR Second Quarter 12

13 Revenues for the second quarter of increased by 9.3% compared to the same period of due to the renewal of a significant number of long term residential lease agreements with a government tenant. Operating expenses for the periodd increased due to higher property taxes, bad debts, and maintenance. Saskatchewan operations Stabilized vacancy loss Saskatoon Regina Saskatchew wan Total number of units Q1 6.5% n/a 6.5% 429 Q2 Q3 Q4 Q1 5.6% 5.1% 6.6% 9.1% n/a n/a 7.5% 5.7% 5.6% 5.1% 6.9% 7.8% Q2 8.3% 5.4% 7.6% 429 Number of Units Stabilized vacancy for Saskatchewan was 7.6% for the three months ended June 30,, compared to 7.8% in the first quarter of. Residential vacancy for Saskatoon for the second quarter of was 8.3%, down from 9.1% in the first quarter. Three months ended June 30 Six months ended June 30 Revenue Operating expenses Net operating income 1,504 (454) 1,050 1,198 (420) % 8.1% 35.0% 2,999 (966) 2,033 2,236 (993) 1, % (2.7%) 63.6% Revenues in the second quarter of increased by 25.5% compared to thee same period of due to the final phase of the Regina developmentt coming online late in Q1, and stabilizing later in the year. The increase in operating costs associated with the additional units were offset by lower utility costs due to the winter and spring being less severe than. Commercial operations NPR s commercial properties are located primarily in regions where it has existing multifamily operations. Commercial properties consist of office, warehouse, retail, and mixed use buildings. Commercial properties are largely leased to federal or territorial governments and other quality commercial tenants t under long term leases. Commercial rental revenue for the three months ended June 30,, was $8.5 million, 12.0% higher than the t $7.6 million for the corresponding period of. The increase in revenue was duee primarily to the lease up of the Bristol Court Office Park in St. John s, NL, the lease renewals of the warehouses in St. John s,, NL, the leaseupp of the Qilaut building in Iqaluit, NU, and the transfer of the Navigator Hotel in Iqaluit, NU, to commercial operations. Commercial vacancy was 29,500 square feet or 2.5% at June 30,, compared to 48,000 square feet or 4.1% vacancy at March 31,, and 43,000 square feet or 3.7% at June 30,. The decrease from March 31,, was due to the lease up of the fifth and final Bristol Court office park building, which was purchased early in the first quarter of, and the fit up of the tenant space not being completed for move in until later in March. There is approximately 54,000 square feet of commercial space up for lease renewal in. Commercial portfolio summary (including joint ventures at 100%) June 30 Province Commercial sq. ft. $ Average Rent/sq. ft. (i) Alberta British Columbia Newfoundland and Labrador Northwest Territories Nunavut Total / Average (i) Average rent per square foot is for the three months ended June ,000 86, , , ,000 1,174,000 83,000 86, , , ,000 1,141, The increasee in the average rent per square foot in Newfoundland and Labrador was due to the additional Bristol Court office building being leased and the increases obtained on the renewal of the warehouse leases. The increase in Nunavut was due to the leaseup of the Qilaut building in Iqaluit, NU. NPR Second Quarter 13

14 Execusuitess and hotel operations NPR operates five execusuite and hotel properties: one in Yellowknife, NT; two in Iqaluit, NU; one inn St. John s, NL; and a 50% joint venture in Inuvik, NT. The execusuite properties consist of four execusuite apartment style properties which aree rented for both short and long term stays. The hotel property, located in Iqaluit, NU, is a full service hotel with food and beverage operations that are leased to an independent operator. For the three months ended June 30,, the execusuites and hotel operated at an average occupancy of 49.6%, compared to 50.9% for the same period of. The execusuite properties in Yellowknife, NT, and St. John s, NL, had a large number of unavailable units due to the extensive capital improvements that are currently underway, which contributed to the lower occupancy. The ongoingg CAPEX and rebranding program in the t execusuite properties in Yellowknife, NT, and St. John s, NL, is expected to yield improvements in operating results. Execusuites and hotel rental revenue for the three months endedd June 30,, was $3.0 million,, consistent with $3.0 million in the second quarter of. There were revenue decreasess in the execusuitee properties in Yellowknife, NT, andd Iqaluit, NU, which were offset by revenue increases in the execusuite property in St. John s, NL, and the hotel in Iqaluit, NU. During the second quarter of, the execusuites and hotel experienced lower maintenance and utility costs compared to, contributing to the higher NOI in the period. Additionally, the transfer of the hotel property to the commercial segment in the second quarter of has reduced operatingg costs in subsequent periods. Other expenses (income) Financing costs Administration Depreciation and amortization Loss (gain) on sale of property, plant and equipment Equity income from joint ventures Unrealized fair value changes Total Three months ended June 30 Six months ended June 30 8,093 6, % 15,649 13, % 1,831 1, % 4,313 3, % 1,189 1, % 2,362 2, % 371 (229) (202) n/ /m 13.4% 392 (507) (341) (484) (215.0%) 4.8% 12,497 (3,487) 258.4% 13,265 (189) n/m 23,752 12, % 35,474 17, % Financing costs Financing costs consist of mortgage interest, deferred financing costs, interest expense on operating facilities, interest expense on NPR Limited Partnership Class B units ( NPRLP Class B units ), and other interest expense. Financing costs were $8.1 million and $15.6 million for the three and six months ended June 30,, respectively, an increase of 20.0% and 15.9% from the comparable periods of. The increase was a result of higher borrowings on operating facilities and additional mortgages in, partially offset by the decrease in the weighted average interest rate to 3.53% at June 30,, from 3.78% at June 30,. Included in the amount were costs of $0.6 million incurred on the early renewal of a number of mortgages to access upfinancing capacity at historically loww rates for 10 year terms. The mortgages payable balance was $781.8 million at June 30, (June 30, $693.3 million), and there was a higher average balance outstanding on the operating facilities. The additional funds from the mortgages were used to fund growth through development and acquisition activities and pay down the operating facility. Administration Administration expense for the three and six months ended June 30,, increased by 19.8% andd 42.0%, respectively, when compared to the same period of, due mainly to having lower than usual salary and benefit expenses, and variable incentive costs. There were also increases in professional fees incurred for IT projects and bank charges related too the increase in the operating facility limit. Variable incentive costs decreased by $0.5 million compared to the first quarter of as a result of the new long term incentive plan that was approved by unitholders on May 6,. Under the new plan, performance units granted to individuals now have up to a three year vesting period, with the expense being recognized proportionately each year. Unrealized fair value changes Expense ( income) Unrealized fair value change to investment properties Sustaining CAPEX Unit based payments NPRLP Class B units Net unrealized fair value decrease (increase) Three months ended June 30 Six months ended June 30 1,706 (1,651) (203.3%) (2,869) (8,322) 10,926 (54) (81) 12,497 5, , % n/m (220.9%) % 16,298 (70) (94) 13,265 8, (189) (65.5%) 102.8% (638.5%) (211.9%) n/m NPR Second Quarter 14

15 Managementt monitors certain trigger events that could substantiate a change in ann investment property s fair market value, such as a change in market conditions, added competition through new supply, an other than temporaryy increase or decrease in market vacancy or rental rates, recent transactions at Cap Rates different than ones previously experienced, independentt appraisals, or ann other than temporary change in a property s NOI. Sustaining CAPEX representss ongoing expenditures required to maintain or improve the productivee capacity of NPR s portfolio. NPR s focus on improving and maintaining the quality of its multifamily buildings is the reason for the increase in sustaining CAPEX for the three months ended June 30,, when compared to the same period of. The largest increases in the current year were noted in Fort McMurray, AB, and Yellowknife, NT, where the majority of the Street to Suite CAPEX program spending is being utilized. Income tax status NPR is a mutual fund trust for Canadian income tax purposes. In accordance with the Declarationn of Trust ( DOT ), distributions to Trust Unit holders are declared at the discretion of the Board of Trustees ( Trustees ). Pursuant to the DOT, the Trustees may, at their sole discretion, determine distributions or designate that all taxable income earned, including the taxable part of nett realized capital gains, be distributed to Trust Unit holders and will deduct such distributions and designations for income tax purposes. The Tax Act contains rules (the SIFT Rules ) that impose tax on certain mutual fund trusts and their Trust Unit holders at rates that approximate corporate and dividend income tax rates. The SIFT Rules do not apply to any mutual fund trust that qualifies as a real estate investment trust (a Tax REIT ) as defined in the Tax Act (the Tax REIT Exemption ). A REIT must hold less than 10% of nonqualifying assets and earn less than 10% of nonqualifying revenue to keep its status as a Tax REIT. As of June 30,, the REIT met all the requirements related to the qualification of the REIT as a real estate investment trust for tax purposes. The Tax REIT Exemption does not apply to corporate subsidiaries of NPR, which are therefore subject to Canadian income taxes. NPR does not currently hold any income producing property or operations in taxable corporate subsidiaries. As such, there is currently no provision for current or deferred income tax expense required in the current reporting period. Income tax expense incurred in related to the stapled security structure still inn place for part off the year. The securities were unstapled and NorSerCo was dissolved during the first quarter of. FFO NPR measures its performance by using industry accepted nongaap performance metrics such as FFO, which has been calculated in accordance with the Real Property Association of Canada s ( RealPAC ) White Paper. The IFRS measurement most comparable to FFO is net income (for which reconciliation is provided below). See page 23 for additional information on nongaap measures. FFO for the three t months ended June 30,, was $20.3 million, an increase off 4.6% compared to $19.4 million for the same period of. On a per unitt basis, FFO was $0.64 and $0.61 for the second quarters of and, respectively, an increase of 4.9%. For the six months ended June 30,, FFO was $36.9 million or $1.16 per unit, compared to $35. 0 million or $1.10 per unit for the same period of. The increasee in FFO was a result of higher NOI driven by the contribution from newly acquired andd developed properties, and lower utility costs throughout the portfolio. This was partially offset by higher than normal vacancy, mainly in Fort McMurray, AB, and Lloydminster, AB; an increase in financing costs due to the higher mortgage balance and operating facilities; and higher administration costs. NPR s FFO payout ratio was 63.7% for the three months ended June 30,, compared to 64.8% for the same period of as a result of 4.6% FFO growth. NPR Second Quarter 15

16 FFO calculation (thousands of dollars, except per unit amounts) Net and comprehensive income from operations Adjustments Noncontrolling interests Depreciation of property, plant and equipment Amortization of intangible assets Deferred income tax expense Amortization of tenant inducements Loss (gain) on sale of property, plant and equipment Unrealized fair value changes NPRLP Class B unit distributions recorded as interest Fair value adjustments for noncontrolling interest and equity investments FFO FFO per Trust Unit basic and diluted FFO payout ratio Three months ended June 300 Six months ended June 30 6,289 (53) , ,327 $ % 14,937 (56) , (115) 19,432 $ % (57.9%) (5.4%) 8.3% (8.6%) n/m (20.6%) n/m 258.4% 0.0% (118.3%) 4.6% 4.9% (1.1%) 20,907 (105) 1, , ,901 $ % 33,050 (114) 1, (341) (189) 54 (102) 35,010 $ % (36.7%) (7.9%) 4.1% (3.9%) (100.0%) 12.1% (215.0%) n/m 1.9% (142.2%) 5.4% 5.5% (3.7%) Distributions declared to Trust Unit holders Distributions declared to Trust Unit holders per unit 12,940 $ , % 25,880 $ % $ ,211 $ % 2.5% SUMMARY OF QUARTERLY RESULTS The table below summarizes NPR s financial results for the last eight fiscal quarters: (thousands of dollars, except per unit amounts) Q2 Q1 Total revenue NOI Net and comprehensive income per unit Basic Diluted Distributions to Trust Unit holders Distributions per Trust Unit 49,401 30,041 $0.20 $ ,940 $ ,821 26,340 $0.46 $ ,940 $0.41 Q4 48,091 27,473 $0.72 $ ,820 $0.40 Q3 48,240 Q2 46, 102 Q1 45,408 30,649 27,613 23,872 $0.57 $0.47 $0.57 $0.57 $0.47 $ ,584 12,591 12,620 $0.40 $0.40 $ Q4 45,082 25,971 $1.12 $ ,628 $0.40 Q3 45,607 29,130 $0.59 $ ,362 $0.39 FFO 20,327 16,574 FFO per Trust Unit basic and diluted $0.64 $0.52 FFO payout ratio 63. 7% 78.1% 19,043 $ % 21,482 19,432 15,493 $0.67 $0.61 $ % 64..8% 81.5% 16,512 $ % 20,904 $ % Excluding SIFT and Trust Unit current income taxes FFO FFO per Trust Unit basic and diluted FFO payout ratio 20,327 $ % 16,574 $ % 19,043 $ % 21,482 19,432 15,493 $0.67 $0.61 $ % 64..8% 81.5% 17,845 $ % 20,904 $ % NPR s quarterly financial results have a seasonal component resulting from higher utility costs in the first and fourth quarters of each year. NPR Second Quarter 16