MANAGEMENT’S DISCUSSION AND ANALYSIS 2014-Q2... · 2015-04-24 · MANAGEMENT’S DISCUSSION AND...

MANAGEMENT’S DISCUSSION AND ANALYSIS For the three and six months ended June 30, 2014 August 7, 2014

PIRET – MD&A June 30, 2014

TABLE OF CONTENTS

SECTION I 1

FORWARD-LOOKING DISCLAIMER ........................................................................................................................ 1 BASIS OF PRESENTATION ......................................................................................................................................... 2 OVERVIEW ................................................................................................................................................................... 2 OUTLOOK ..................................................................................................................................................................... 4

SECTION II 9

RESULTS OF OPERATIONS ...................................................................................................................................... 9 DISTRIBUTABLE INCOME ....................................................................................................................................... 11 STANDARDIZED DISTRIBUTABLE CASH ............................................................................................................. 13 SEGMENTED INFORMATION .................................................................................................................................. 13 LIQUIDITY AND CAPITAL RESOURCES ............................................................................................................... 19 CAPITAL STRUCTURE ............................................................................................................................................. 22 FINANCIAL INSTRUMENTS ..................................................................................................................................... 23 OFF-BALANCE SHEET ITEMS ................................................................................................................................ 23

SECTION III 23

SUMMARY OF QUARTERLY RESULTS .................................................................................................................. 23

SECTION IV 24

CRITICAL ACCOUNTING ESTIMATES .................................................................................................................. 25 CHANGES IN ACCOUNTING POLICIES ................................................................................................................. 26 INTERNAL CONTROL OVER FINANCIAL REPORTING ...................................................................................... 26 DISCLOSURE CONTROLS AND PROCEDURES ..................................................................................................... 26

SECTION V 26

RISKS AND UNCERTAINTIES .................................................................................................................................. 26 RELATED PARTY TRANSACTIONS ........................................................................................................................ 29 OUTSTANDING UNIT DATA .................................................................................................................................... 30

SECTION VI 30

SIGNIFICANT EVENTS AND SUBSEQUENT EVENTS .......................................................................................... 30 ADDITIONAL INFORMATION .................................................................................................................................. 30


Page 1

SECTION I

FORWARD-LOOKING DISCLAIMER

Management’s discussion and analysis (“MD&A”) of the financial position and the results of operations of Pure Industrial Real Estate Trust (the “Trust” or “PIRET”) for the three and six months ended June 30, 2014 and 2013 should be read in conjunction with PIRET’s consolidated condensed interim financial statements for the three and six months ended June 30, 2014, and 2013. Historical results, including trends which might appear, should not be taken as indicative of future operations or results.

Certain information in this MD&A contains forward-looking information within the meaning of applicable securities laws (also known as forward-looking statements) including, among others, statements made or implied under the headings “Results of Operations”, “Financial Condition”, “Liquidity and Capital Resources”, “Risks and Uncertainties” and “Outlook” relating to PIRET’s objectives, strategies to achieve those objectives, beliefs, plans, estimates, projections and intentions; and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Forward-looking statements generally can be identified by words such as “outlook”, “believe”, “expect”, “may”, “anticipate”, “should”, “intend”, “estimates” and similar expressions.

In particular, certain statements in this document discuss PIRET’s anticipated future events. These statements include, but are not limited to: (i) the accretive acquisition of properties and the anticipated extent of the accretion of any acquisitions, which

could be impacted by demand for properties and the effect that demand has on acquisition capitalization rates and changes in the cost of capital;

(ii) the maintaining of occupancy levels and rental revenue, which could be impacted by changes in demand for PIRET’s properties, tenant bankruptcies, the effects of general economic conditions and supply of competitive locations in proximity to PIRET’s locations;

(iii) the overall indebtedness levels, which could be impacted by the level of acquisition activity PIRET is able to achieve and future financing opportunities;

(iv) the tax exempt status, which can be impacted by regulatory changes enacted by governmental authorities; (v) the anticipated distributions and payout ratios, which could be impacted by capital expenditures, results of

operations an capital resource allocation decisions; and (vi) the anticipated replacement of expiring tenancies, which could be impacted by the effects of general economic

conditions and the supply of competitive locations.

Forward-looking statements are provided for the purpose of presenting information about management’s current expectations and plans relating to the future and readers are cautioned that such statements may not be appropriate for other purposes. Forward-looking statements involve significant risks and uncertainties and should not be read as guarantees of future performance or results. Those risks and uncertainties include, among other things, risks related to: unit prices; liquidity; credit risk and tenant concentration; interest rate and other debt related risk; tax risk; ability to access capital markets; lease rollover risk; competition for real property investments; environmental matters; changes in legislation and indebtedness of PIRET. Management believes that the expectations reflected in forward-looking statements are based upon reasonable assumptions and information currently available which include, management’s current expectations, estimates and assumptions that: the proposed acquisitions will be completed on the terms and basis agreed to by PIRET, property acquisition and disposition prospects and opportunities will be consistent with PIRET’s experience over the past 12 months, the industrial real estate market in Canada will remain stable, the global economic environment will remain stable, interest rates will remain at current levels, and PIRET’s business strategy, plans, outlook, projections, targets an operating costs will be consistent with PIRET’s experience over the past 12 months, PIRET will be able to maintain occupancy at current levels, PIRET’s tenants will not default on lease terms, governmental regulations and taxation will not change to adversely affect PIRET’s business and financial results, and PIRET will be able to obtain adequate insurance and financing; however, management can give no assurance that actual results will be consistent with these forward-looking statements.

Readers are cautioned that the foregoing list of factors that may affect future results is not exhaustive. When relying on forward-looking statements to make decisions with respect to PIRET, investors and others should carefully consider the foregoing factors and other uncertainties and potential events.

These forward-looking statements are made as of August 7, 2014 and PIRET assumes no obligation to update or revise them to reflect new events or circumstances, except as required by law.


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BASIS OF PRESENTATION

Unless otherwise noted, all financial information has been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The financial information included in this MD&A for the three and six months ended June 30, 2014 includes material information up to August 7, 2014.

OVERVIEW

About PIRET

PIRET is an internally managed publicly traded real estate investment trust (“REIT”) that focuses exclusively on investing in industrial properties and its primary objectives are (a) to generate stable and growing cash distributions on a tax efficient basis from investments in income producing industrial properties in primary markets across Canada and key distribution markets the United States (the “U.S.”), (b) to enhance the value of PIRET’s assets and maximize the long-term value of the properties through active management, and (c) to expand its asset base and increase its distributable income through an accretive acquisition program.

PIRET is an unincorporated open-ended trust formed under and governed by the laws of the Province of British Columbia and created pursuant to the Declaration of Trust dated June 24, 2007, and amended on November 18, 2010 (the “Declaration of Trust”). PIRET was established for the purposes of acquiring, owning and operating a diversified portfolio of income producing industrial properties. In order to continue to meet its growth and investment goals, the Trust may consider investment opportunities outside of Canada. The Class A units (the “Class A units” or “Units”) of the Trust trade on the Toronto Stock Exchange (“TSX”) under the symbol “AAR.UN”. The Trust’s head office is located at Suite 910, 925 West Georgia Street, Vancouver, British Columbia, V6C 3L2, Canada and its asset management office is located at 150 King Street West, Suite 2420, P.O. Box 72, Toronto, Ontario, M5H 1J9, Canada.

Management Comments

The first half of 2014 has been busy for PIRET, and we have made progress on a few of our key objectives for the year, namely:

• Increase rents and grow NOI per unit and on a same property basis; • Reduce leverage; • Improve the quality of our real estate and cash flow; and • Enhance our disclosure.

PIRET made two key acquisitions so far in 2014 and the latter, as announced on June 18th, involved 10 properties in the US and one in Canada totaling approximately two million square feet of newly constructed ground distribution facilities, fully leased to Fedex for a lease term of 10 years. The acquisition represents our entry to the US Industrial market, and, more importantly, provides us with exposure at scale to the growing e-commerce sector with one of the world’s leading distribution and e-commerce services provider. We look forward to continuing to grow this relationship.

As part of the acquisitions and bought deals announced in January and June, the over allotment options were fully exercised to, in part, pay down debt. As a result, our loan to GBV decreased from 54.1% at the end of 2013 to less than 47% at June 30. Although this will increase slightly after we complete our acquisition of the 10 US assets and the one property in Canada with the accompanying closing of third-party financings, we believe it is an important step towards our goal of reducing our leverage to approximately 40% by the end of 2016. We plan to achieve this goal by: over-equitizing on equity issues; organically paying down principal on existing mortgages as all of our current mortgage debt is amortizing, applying lower levels of debt financing on new acquisitions and refinancings, and retiring existing mortgages on non-core assets when they are sold. By lowering our leverage, we reduce our exposure to rising interest rates in future and improve balance sheet flexibility to support the continued growth of our business without necessarily having to issue new equity.

Operationally, the portfolio performed as expected during the three months ended June 30, 3014, as positive gains in rental rates and occupancy in BC and Alberta were offset by weaker leasing activity in Winnipeg and the GTA East markets. For the most part, leasing matched expiries in the quarter, as rents increased on average by 2.6% and occupancy remained stable.


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The 152,000 square foot expansion of our asset at 16133 Blundell Road in Richmond, BC, was completed slightly ahead of schedule and the tenant assumed occupancy of the space in late June, 2014. Rent commenced on August 1, 2014 and the expansion is expected to increase rental revenue from the property by approximately $1.2 million annually. Development will continue to play an increasing role in our growth as we capitalize on opportunities to grow with our tenants.

Finally, as we hope you will agree after reading our MD&A for this quarter, we have improved our disclosure and provided more detailed information to better explain our performance. Over the past two quarters, our team has invested considerable time and resources to upgrade our accounting and reporting systems, and we will continue to enhance our reporting through the remainder of 2014.

We anticipate a busy and exciting second half of the year, as fundamentals continue to improve in our core markets, particularly in Western Canada, and we continue to see a healthy pipeline of off-market and alternative opportunities to accretively grow our business.

Operational and Financial Highlights

June 30,

2014 December

31, 2013

Number of properties 161 156 GLA (000s) 14,124 12,578 Occupancy – including committed 97.3% 97.7% Occupancy 96.4% 97.4%

Investment properties ($000s)

$ 1,451,056

$ 1,312,181 Mortgages payable and bank loans ($000s) $ 759,857 $ 727,706 Weighted average debt term to maturity on mortgages (years) 5.2 5.7 Loan to gross book value 46.6% 54.1% Debt to EBITDA 8.3 8.7

($000s, except per unit basis) Six months ended June 30

Three months ended June 30

2014 2013 2014 2013

Weighted average effective cost of debt 4.39% 4.25% 4.42% 4.16% Debt service coverage 1.72 2.00 1.69 2.12 Interest coverage 2.67 2.96 2.66 3.00

Six months ended June 30


($000s, except per unit basis) 2014 2013 2014 2013

Revenue $ 66,944 $ 45,000 $ 33,972 $ 25,775

Net operating income 47,641 33,475 24,241 19,215

Distributions 24,905 17,389 12,957 9,836 Per unit 0.16 0.16 0.08 0.08

Distributable income (1) 29,419 21,621 14,798 12,571 per Class A Unit (fully diluted) 0.19 0.20 0.10 0.10 Payout ratio 84.7% 80.4% 87.6% 78.2%


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Funds from operations (1) 29,139 21,547 14,696 12,565 per Class A Unit (fully diluted) 0.19 0.19 0.09 0.10 Payout ratio(2) 81.3% 80.2% 82.4% 78.5%

Adjusted funds from operations (1) 24,303 19,331 11,963 11,321 per Class A Unit (fully diluted) 0.16 0.17 0.08 0.09 Payout ratio(2) 97.4% 89.4% 101.1% 87.1% (1) IFRS to non-IFRS reconciliation is performed in Section II Distributable Income, and Liquidity and Capital Resources. (2) FFO and AFFO payout ratios are calculated based on the ratio of distribution rate to fully diluted FFO and AFFO per unit.

PIRET has been active on the acquisitions front so far in 2014, and although the acquisitions are accretive to our existing portfolio returns on a stabilized basis, the equity issues in January and June, 2014 have had a dilutive impact on our quarterly and year-to-date returns, as summarized below.

Adjusted Funds from Operations (“AFFO”) per unit for the three months ended June 30, 2014 was 7.7 cents, a decrease of 1.2 cent from the same period in 2013, due primarily to the disposition of seven assets totaling 304,911 square feet and the issue of 38,755,000 units on June 27, 2014. Excluding these impacts, AFFO per unit was 9.1 cents, a 1.3% increase over the prior year comparative quarter, resulting from accretive acquisitions in 2013 and YTD 2014, and offset by a 1.1% decrease in occupancy from 97.5% to 96.4% over that period. On a quarter over quarter basis and excluding the factors mentioned above, AFFO per unit decreased by 0.5 cents, or 6% over the three months ended March 31, 2014, due primarily to significant one-time releasing costs of $1.5 million related to 83,080 square feet of new leasing at 5055 Satellite Drive and 420 and 425 Skymark Avenue in Mississauga, all flex office space. The average lease term achieved on those transactions was 10.5 years with an average year 1 rental rate of $14.89 psf.

Funds from Operations (“FFO”) per unit for the three months ended June 30, 2014 was 9.5 cents, a decrease of 4.8% over the prior year comparative period. Excluding the dispositions and the June equity issue outlined above for AFFO per unit, FFO per unit was 10.0 cents, a 1.0% increase over the prior year comparative period and 1.0 % over the previous three months ended March 31, 2014.

Net Operating Income (“NOI”) for the three months ended June 30, 2014 was $24.2 million, an increase of approximately $840,000 over the previous three months ended June 30. 2013, due primarily to the full impact of acquisitions made in the first quarter of 2014, offset by the disposition of four assets totaling approximately 118,000 SF in the first half of 2014. On a per unit basis, NOI for the three months ended June 30, 2014 was 16 cents, an increase of 3% over the prior year comparative quarter, resulting from accretive acquisitions made in 2013 and the first half of 2014, offset by dispositions made over that period and a 1.1% decrease in occupancy. NOI per unit decreased from the previous three month period ended March 31, 2014 by 0.6%. Adjusting for the factors outlined above for AFFO per unit, NOI per unit increased by 1.0%. Despite only a 10 basis point decrease in occupancy quarter over quarter, our vacancy loss still increased by approximately $109,000 for the current quarter, due to the loss of higher-rent tenancies and 3 months of gross rent on a new 20,880 square foot lease at one of our Vancouver properties. Occupancy and leasing continue to be a challenge for PIRET in Winnipeg and the GTA East markets, which account for approximately 50% of our current availability.

Same property NOI increased 0.6% from the prior year comparative quarter, driven by rental rate increases offset by a 2.0% decrease in occupancy. The same property NOI involved 91 properties totaling 8.0 million square feet, representing approximately 57.0% of the total portfolio.

Rental rates increased on average by 2.6% from the previous quarter, due to a 3.0% increase in rents on approximately 141,000 square feet of renewals and a 1.4% increase on approximately 65,000 square feet of committed new leases in the quarter. Management estimates that our average in-place rent of $6.72 per square feet (“psf”) is approximately 4.5% (3.8% excluding cross-dock facilities) below the average market rent of $7.02 psf (refer to the table on page 14 for a detailed comparison of in-place versus market rents).

The Trust continued in the second quarter to focus on reducing leverage, fully exercising the over allotment in June, 2014 as part of the announced acquisitions, and using those funds in part to pay down debt. As a result, our loan to gross book value decreased from 54.1% at December 31, 2013 and 52.9% at March 31, 2014, to 46.6% at the end of


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the current quarter. Although the ratio will increase slightly after financing the acquisition of the 10 properties in the US, management believes that the continued focus of reducing leverage will better protect the Trust against future interest rate hikes and improve balance sheet flexibility to fund the growth of our business without having to access the capital markets for equity.

OUTLOOK

Overall, demand for Industrial space continues to strengthen in our core markets, particularly in western Canada. In the GTA, which represents approximately 45% of our portfolio NOI, rental rate increases have been more gradual but steady, with rates for modern, functional warehouse and distribution space currently reaching $5.75 to the low $6.00’s. However, with the vacancy rate for the GTA now below 3% according to CBRE’s Q2 2014 Industrial Marketview, rental growth is expected to accelerate, particularly in the mid-bay space (80,000 sf – 200,000 sf) where levels of new supply are expected to remain virtually non-existent over the near term.

The Trust’s acquisition of 8 critical-use, ground distribution facilities in the US on August 5, 2014 and the pending acquisition of the 2 remaining properties in the US and 1 in Canada, as announced on June 18th, 2014, was a transformational one for PIRET. It provides a suitable entry to the US industrial market with scale and, more significantly, adds critical mass to the portfolio in the growing e-commerce sector with Fedex, a leading, Fortune 100, e-commerce services provider. Fedex was an existing tenant at the time of acquisition and, upon completion by February, 2015 of the 5 properties under development, will represent approximately 15% of our portfolio by NOI. As the 5 properties under development are delivered and occupied by the tenant, beginning on August 1, 2014 until February, 2015, the transaction returns will increase but will be dilutive over the majority of that time period. Further, as the 15% over-allotment option was fully exercised on the bought deal which closed on June 27, 2014, FFO and AFFO per unit will be negatively impacted until those funds are fully deployed.

Following the acquisitions and equity issues announced in January and June of 2014, PIRET believes that it has the asset quality, balance sheet flexibility and management expertise to withstand market turbulence and grow returns for its investors. The Trust continues to see a robust pipeline of off-market acquisition opportunities, but management intends to be very targeted in deploying capital for future acquisitions, focusing on growth opportunities, including development, where we can add value for our investors and continue to improve the quality of our portfolio and cash flow. With the exception of development projects, where the use of higher leverage on a temporary basis may be required, the trust intends to finance no more than 50% of the purchase price on new acquisitions.

PIRET’s geographic areas of focus continue to be the Greater Toronto Area, the lower mainland of the Greater Vancouver Area, Calgary and Edmonton, with a secondary focus on the other major Canadian centers on an opportunistic basis. With respect to our US strategy, PIRET will focus on adding critical mass in or around its existing markets, particularly Texas, Florida and the Carolinas, as well as potentially adding two to three other target markets, and having a dedicated US management team in place in the next 12 to 18 months.

For the remainder of 2014, PIRET will continue to focus on asset management of the portfolio, including driving NOI growth through targeted leasing initiatives and asset repositioning, intensification of the existing portfolio through selective development, disposition of non-core assets, debt repayment and refinancing, and assessing potential joint venture opportunities.


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Acquisitions – 2014

Description Location # of

Properties GLA (sf)

(000s) Price

($000s) Going-in

Cap Rate Loan to

Value Occupancy

Calgary Property Edmonton, AB 1 28 $ 12,140 7.25% - 100% First Ontario ON 5 1,229 93,000 6.99% 61% 100% Second Ontario ON 3 246 25,800 6.51% 52% 100%

9 1,503 $ 130,940 6.92% 53% 100%

Acquisitions – 2013

Description Location # of

Properties GLA (sf)

(000s) Price

($000s) Going-in

Cap Rate Loan to

Value Occupancy

Bear Creek Surrey, BC 1 38 $ 4,600 5.97% - 100% HBC Richmond, BC 1 412 44,100 6.21% 65% 100% Edmonton Portfolio Edmonton, AB 3 265 21,800 6.76% 60% 100% Hopewell Richmond, BC 1 280 32,320 6.04% 68% 100% PFB Portfolio BC, AB, SK, ON 4 264 25,326 8.10% 65% 100% Wagon Wheel Calgary, AB 1 59 8,850 6.97% 68% 100% Steeles Halton Hills, ON 1 124 9,800 6.63% - 100% Ontario Portfolio ON 59 3,663 360,000 6.31% 60% 98% Calgary Portfolio Calgary, AB 4 720 72,000 5.91% 65% 100% Porter Edmonton, AB 1 111 9,350 6.95% 60% 100% MTE – 128th Ave Edmonton, AB 1 98 7,620 7.57% 66% 100%

77 6,034 $ 595,766 6.37% 60% 99%

During the six months ended June 30, 2014, PIRET sold its interest in four investment properties, located in Brampton, Toronto, and Vaughan, Ontario for gross proceeds of $13.6 million, less standard closing costs and adjustments of $0.8 million resulting in net proceeds of $12.8 million and a total gain on sale of $0.5 million.

The weighted average occupancy rate was 96.4% for all properties owned as at June 30, 2014 (97.3% with committed leases). The lease terms extend up to twenty-five years and most of the leases that will expire within the next three years have at least one renewal option for another five years.

The geographic diversification of PIRET’s portfolio as at June 30, 2014 and December 31, 2013 is outlined below: Number of properties GLA (sf) (000s) 2014 2013 2014 2013 British Columbia 14 14 2,497 2,346 Alberta 38 37 2,864 2,834 Saskatchewan 4 4 179 179 Manitoba 7 7 649 647 Ontario 94 90 7,609 6,246 Quebec 2 2 214 214 New Brunswick 2 2 112 112

161 156 14,124 12,578


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January 2014 Offering

On January 28, 2014, PIRET completed a bought deal offering of 16,445,000 Class A Units, inclusive of 2,145,000 Units issued pursuant to the exercise in full of the over-allotment option, on a bought deal basis, at a price of $4.55 per Unit, for total gross proceeds of $74,824,750 (the “January 2014 Offering”).

Proceeds from the January 2014 Offering were used to acquire properties located at 40 Technology Way, Edmonton Alberta (“Calgary Property”), 210 Constellation Drive, Stoney Creek, Ontario, 1175 Barton Street, Stoney Creek, Ontario, 4240 Harvester Road, Burlington, Ontario, 1000 Ridgeway Road, Woodstock, Ontario, 86 Pillsworth Road, Bolton, Ontario (collectively “First Ontario Portfolio”), 365 Passmore Avenue, Scarborough, Ontario, 385 Passmore Avenue, Scarborough, Ontario, and 4350 Castleton Road, London, Ontario (collectively “Second Ontario Portfolio”) as identified in PIRET’s short form prospectus dated January 21, 2014, available on SEDAR at www.sedar.com.

The following tables provide a description about PIRET’s previous disclosure regarding the proposed use of proceeds of the January 2014 Offering, as described in PIRET’s short form prospectus dated January 21, 2014, available on SEDAR at www.sedar.com, and its actual use of such proceeds, including purchase prices (before closing adjustments), mortgage proceeds and balance of funds to complete the acquisitions.

Proposed Use of Proceeds ($000s)

Purchase Price (Before Closing

Adjustments) Estimated

Mortgage Proceeds

Estimated Balance Required to Close

Assuming Exercise of Over-Allotment

Option

Proposed property purchases $ 130,940 $ 72,017 $ 58,923

Unallocated working capital - - 12,068

Totals $ 130,940 $ 72,017 $ 71,532

British Columbia

16.8%

Alberta 20.5%

Saskatchewan 1.3% Manitoba

4.6%

Ontario 54.4%

Quebec 1.5%

New Brunswick

0.8%

June 2014 GLA Percentage

British Columbia

18.6%

Alberta 22.5%

Saskatchewan 1.4% Manitoba

5.1%

Ontario 49.7%

Quebec 1.7%

New Brunswick

0.9%

December 2013 GLA Percentage


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Actual Use of Proceeds ($000s)


Adjustments) Mortgage Proceeds Balance Required to

Close

Property purchases $ 130,940 $ 69,800 $ 61,140


Totals $ 130,940 $ 69,800 $ 71,532

June 2014 Offering

On June 27, 2014, PIRET completed a bought deal offering of 38,755,000 Class A Units, inclusive of 5,055,000 Units issued pursuant to the exercise in full of the over-allotment option, on a bought deal basis, at a price of $4.60 per Unit, for total gross proceeds of $178,273,000 (the “June 2014 Offering”).

The Company intends to use the net proceeds from the June 2014 Offering to fund the acquisition of 11 light industrial properties, fund prospective acquisitions of income producing industrial properties, for repayment of indebtedness and for general working capital purposes. The proposed acquisitions will consist of 10 properties located in the U.S. in major strategic markets within the tenant’s national distribution network and one property located in Montreal, Canada.

The following table provides a description about PIRET’s previous disclosure regarding the proposed use of proceeds of the June 2014 Offering, as described in PIRET’s prospectus supplement dated June 20, 2014, available on SEDAR at www.sedar.com.

Proposed Use of Proceeds ($000s)


Adjustments) Estimated

Mortgage Proceeds

Estimated Balance Required to Close

Assuming Exercise of Over-Allotment

Option

Proposed property purchases $ 254,380 $ 127,190 $ 127,190


Totals $ 254,380 $ 127,190 $ 170,392


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SECTION II

RESULTS OF OPERATIONS




Revenues:

Rental and recoveries $ 66,944 $ 45,000 $ 33,972 $ 25,775

Property recoverable operating expenses:

Insurance 354 258 178 138

Management fees 2,073 1,175 1,155 728

Recoverable operating costs 4,461 2,304 2,044 1,082

Property taxes 12,414 7,788 6,354 4,613

19,303 11,525 9,731 6,560

Net operating income 47,641 33,475 24,241 19,215

Other income (expense)

General and administrative expense (2,420) (1,633) (1,332) (943)

Fair value adjustment to investment properties (1,452) (12,608) (266) (11,762)

Gain (loss) on disposal of properties 478 (273) (543) -

(3,394) (14,514) (2,141) (12,705)

Net earnings before net finance costs 44,247 18,961 22,100 6,509

Finance income 228 373 113 301

Finance cost (16,948) (10,749) (8,611) (6,083)

Net finance cost (16,720) (10,376) (8,498) (5,782)

Net earnings and comprehensive income $ 27,527 $ 8,585 $ 13,601 $ 727

Class A Units – Weighted average (000s) 149,090 108,113 152,391 123,697 Basic net earnings per unit $ 0.18 $ 0.08 $ 0.09 $ 0.01

Class A Units – Diluted weighted average (000s) 151,894 110,765 155,304 126,413

Basic net earnings per unit $ 0.18 $ 0.08 $ 0.09 $ 0.01

During the six months ended June 30, 2014, PIRET reported net earnings of $27.5 million from 161 properties, compared to net earnings of $8.6 million for the same period in 2013 from 161 properties. The Trust’s indebtedness ratio decreased to 46.6% at June 30, 2014 from 54.1% at December 31, 2013 and its distribution payout ratio on Distributable Income of 84.7% for the six months ended June 30, 2014 is higher than 78.0% at December 31, 2013 due primarily to the disposition of nine industrial properties as well as the bought deal financing that closed on June 2014. For further clarity, the Trust’s indebtedness ratio is defined as the ratio between the Trust’s indebtedness, meaning any obligation of the Trust for borrowed money but excluding trade accounts payable, distributions to unitholders and short term acquisition credit facilities, and the gross book value of the assets of the Trust. This ratio is further defined under the Capital Structure section. The Trust defines distribution payout ratio as the percentage of Distributable Income that is paid out to unitholders.

Due to the new acquisitions, both rental revenue and recoverable expenses increased during the six months ended June 30, 2014 compared with those in the same period of the prior year. Earnings from property operations increased by 42.3% during the six months ended June 30, 2014 compared with net operating earnings during the six months ended June 30, 2013. Investment properties and mortgages payable also increased accordingly mainly due to the new acquisitions.


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Rental and Recoveries Revenue

Rental and recoveries revenue from investment properties includes all amounts earned from tenants related to lease agreements, such as basic rent, operating cost recoveries, management fee recoveries, and property tax recoveries. Property management fees are based on either a fixed or variable percentage of basic rent, operating costs, or property taxes and are recognized when earned in accordance with the lease agreements.

Finance Income

Finance income includes interest revenue which was earned from bank deposits at the Trust and the property level. Interest revenue increased due to the increase in cash balances held during the period.

Property Recoverable Operating Expenses

Property recoverable operating expenses include costs relating to such items as cleaning, building repairs and maintenance, elevator, HVAC, insurance, property taxes, utilities and property management fees among other items, which can be recovered from tenants. The following table illustrates recoverable operating expenses as a percentage of total property recoverable operating expenses:



2014 2013 2014 2013

Insurance 1.8% 2.2% 1.8% 2.4% Management fees 10.7% 10.2% 11.9% 9.0% Recoverable operating costs 23.1% 20.0% 21.0% 24.6% Property taxes 64.4% 67.6% 65.3% 64.0%

100.0% 100.0% 100.0% 100.0%

Interest Expense

Interest expense is included in finance costs. The weighted average interest rate on the mortgages is 4.30% per annum as at June 30, 2014 (December 31, 2013 – 4.41%) and the mortgages mature between 2014 and 2032 with a weighted average mortgage term of 5.2 years (December 31, 2013 – 5.7 years).

PIRET intends to refinance any mortgages which mature within the year.

Income Taxes

PIRET is subject to tax under Part I of the Income Tax Act (Canada) (the “Tax Act”) on its income for tax purposes for the year, including net realized taxable capital gains, less the portion thereof that it deducts in respect of the amounts paid or payable in the period to Trust unitholders. The trustees (the “Trustees”) of the Trust intend to distribute all taxable income to unitholders and to deduct such distribution for Canadian income tax purposes. Therefore, no provision for income taxes is required on income earned by the Trust.

General and Administrative Expenses

General and administrative expenses are primarily comprised of compensation expense, trustee fees, directors’ and officers’ liability insurance, professional fees, legal fees, filing fees, and administrative expenses. Compensation expense includes trustee fees, non-cash compensation from the restricted unit plan, as well as the salaries and bonuses of the Trust’s employees. The increase in compensation expense is primarily due to a net increase in headcount as at June 30, 2014. Professional fees include audit fees, and internal control service fees paid to third parties. Administrative expenses include office rent, office related expenditures, and bank charges. For the six months ended June 30, 2014, total general and administrative expenses amounted to 3.6% of rental revenue (2013 – 3.6%). The future growth of the Trust, including the number of properties and personnel, are expected to result in increased salaries and management fees. Management fees represent property recoverable operating expenses for the Trust. The Trust’s tenant leases provide that its tenants will pay the Trust management fees based on fixed values and/or variable costs relating to square footage, gross revenue, etc., depending on that particular tenant. As the Trust’s portfolio grows, management fees are expected to increase accordingly.


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Unit based compensation expense in the amount of $286,794 was recorded in the statement of net earnings and comprehensive income in relation to the restricted units and distribution restricted units issued for the six months ended June 30, 2014, compared to a unit based compensation expense of $79,090 being recorded in the same period of the prior year. The unit based compensation payable represents the fair value of the restricted units granted to the independent Trustees since the commencement of the Trust in August 2007 to March 2010 and restricted units granted to employees in August 2012. Commencing 2011, Trustees received cash compensation every quarter.

The following table illustrates Trust expenses as a percentage of overall general and administrative expenses:



2014 2013 2014 2013

Compensation expenses 66.3% 43.5% 64.9% 41.8% Admin expenses 11.8% 10.8% 10.9% 10.0% Legal and filing fees 7.4% 13.9% 6.5% 15.0% Professional fees 7.3% 18.4% 10.1% 17.8% Others expenses 5.8% 12.2% 6.7% 14.3% Insurance 1.3% 1.2% 0.8% 1.1%

Total 100.0% 100.0% 100.0 100.0% As a percentage of rental revenue 3.6% 3.6% 3.9% 3.7%

Compensation expense for the quarter and year to date increase in headcount from approximately 17 full time employees in 2013 compared to 37 throughout 2014.

Fair value adjustment to investment properties

As the Trust revalues its investment properties at fair value each reporting date, it records the fair value adjustments as an income or expense item. For the six months ended June 30, 2014, the Trust recorded a fair value loss adjustment of $1.5 million (June 30, 2013 – loss of $12.6 million). The decrease in fair value adjustment to investment properties was due to $2.4 million in standard acquisition costs and $2.9 in million straight line rental revenues offset by valuation gains on the investment properties of $3.9 million for the six months ended June 30, 2014.

Offering costs

Offering costs are the costs incurred by the Trust that relate to the issuance of Class A Units. During the six months ended June 30, 2014, the Trust incurred offering costs of $11.1 million (2013 – $11.3 million). Offering costs are charged to equity.

Distributions

The Trust announced monthly distributions of $0.026 per Unit for the six months ended June 30, 2014. During the six months ended June 30, 2014, distributions totaled $24.5 million to Class A unitholders and $0.4 million to Class B unitholders (June 30, 2013 - $17.0 million to Class A, $0.4 million to Class B).

DISTRIBUTABLE INCOME

PIRET uses Distributable Income (“DI”) to measure its ability to earn and distribute cash to unitholders. DI is a non-IFRS1 measurement and should not be construed as an alternative to net earnings determined in accordance with IFRS as an indicator of the Trust’s performance. DI as computed by PIRET may differ from similar computations as reported by other similar business entities and, accordingly, may not be comparable to DI as reported by such business entities. DI does not have any standardized meaning prescribed by IFRS. Management calculates DI by

1 Non-IFRS measures do not have any standardized meaning prescribed by PIRET’s IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers.


Page 12

adding to or deducting the following items from net cash from operating activities: non-cash working capital items, proceeds or repayment of notes payable, and interest expenses.

Six months ended

June 30 Three months ended

June 30


Net cash provided from operating activities $ 43,819 $ 41,407 $ 18,815 $ 28,054 Adjustment:

Changes in non-cash operating working capital (554) (11,090) 3,034 (10,691) Straight line rent adjustment 2,874 1,680 1,447 989 Interest expense (16,720) (10,376) (8,498) (5,782)

Distributable Income $ 29,419 $ 21,621 $ 14,798 $ 12,571 Class A Units 28,951 21,130 14,572 12,318 Class B Units 467 492 226 253

Distributions to Unitholders Class A Units $ 24,510 $ 16,993 $ 12,759 $ 9,638 Class B Units 395 395 198 198

Total distributions paid $ 24,905 $ 17,389 $ 12,957 $ 9,836

Total distributions paid as a % of Distributable Income 84.7% 80.4% 87.6% 78.2%

Weighted average number of units (000s) Class A Units 149,090 108,113 152,391 123,698 Class B Units 279 279 279 279

Diluted weighted average number of units (000s) Class A Units 151,894 110,765 155,304 126,413 Class B Units 279 279 279 279

Basic DI per unit Class A Units $ 0.19 $ 0.20 $ 0.10 $ 0.10 Class B Units 1.67 1.76 0.81 0.91

Diluted DI per unit Class A Units 0.19 0.20 0.10 0.10 Class B Units 1.67 1.76 0.81 0.91

Distributions paid per unit Class A Units 0.16 0.16 0.08 0.08 Class B Units 1.42 1.42 0.71 0.71

PIRET may distribute to unitholders on each distribution date such percentage of the DI of PIRET for the month immediately preceding the month in which the distribution date falls, as the Trustees may determine at their discretion. Currently, the Trustees intend to make an annual cash distribution to unitholders of $0.312 per unit. Monthly distributions will be paid on the distribution date to unitholders of record on the last business day of such month.

The Trustees look beyond quarter-to-quarter fluctuations in working capital when making decisions regarding monthly distributions. As a result, management believes that the measure of DI, which excludes the impact of changes in non-cash working capital, is a better measure for determining operating performance. Management believes that the calculation of Standardized Distributable Cash, defined as cash flow from operations, distorts the Trust’s quarter-to-quarter distributable cash and payout ratios, as non-cash operating working capital fluctuates.

For the purpose of this MD&A, management defines “Diluted DI per unit” as Distributable Income divided by the diluted weighted average number of units outstanding.


Page 13

STANDARDIZED DISTRIBUTABLE CASH

The following is a reconciliation of the Trust’s DI to standardized distributable cash.



($000s) 2014 2013 2014 2013

Distributable income $ 29,419 $ 21,621 $ 14,798 $ 12,571 Straight line rent adjustment (2,874) (1,680) (1,447) (989) Interest expense 16,721 10,376 8,498 5,782 Decrease in amounts receivable and prepaid expenses (1,977) (2,515) (452) (528) Increase in rental deposits 908 3,177 89 2,751 Increase in accounts payable and accrued liabilities 1,622 10,428 (2,671) 8,468

Standardized Distributable Cash (net cash from operating activities) $ 43,819 $ 41,407 $ 18,815 $ 28,054

SEGMENTED INFORMATION

The Trust has 7 reportable segments, which are: British Columbia (BC), Alberta (AB), Saskatchewan (SK), Manitoba (MB), Ontario (ON), Quebec (QC), and New Brunswick (NB). For each of the geographic locations, the Co-Chief Executive Officers (“Co-CEOs”) reviews operations based on earnings from property operations by geographic location, which is presented below.

Statement of net income and comprehensive income

Sic months ended June 30, 2014 ($000s) BC AB SK MB ON QC NB Corp Total

Revenues Rental and recoveries $ 13,198 $ 17,002 $ 936 $ 2,411 $ 31,560 $ 1,194 $ 553 $ - $ 66,944

Property recoverable operating expenses Insurance 134 43 5 14 150 6 1 - 354 Management fees 260 379 7 100 1,311 8 4 - 2,073 Recoverable operating costs 936 875 2 350 2,231 63 34 - 4,461 Property taxes 2,171 2,195 105 485 6,945 144 74 - 12,415

3,501 3,492 119 949 10,637 217 113 - 19,303

Earnings from property operations 9,697 13,510 817 1,462 21,013 806 336 - 47,641

Other income (expense): General and administrative - - - - - - - (2,420) (2,420) Gain on sale of investment properties - - - - 478 - - - 478 Fair value adjustment to investment properties (635) (988) (111) (20) 333 (24) (7) - (1,452) (635) (988) (111) (20) 811 (24) (7) (2,420) (3,394)

Net earnings before finance costs 9,062 12,522 706 1,442 21,824 782 329 (2,420) 44,247

Finance costs Finance income - - - - - - - 228 228 Finance costs (3,598) (4,600) (239) (544) (7,208) (327) (48) (384) (16,948) Net finance costs (3,598) (4,600) (239) (544) (7,208) (327) (48) (156) (16,720)

Net income and comprehensive income $ 5,464 $ 7,922 $ 467 $ 898 $ 14,616 $ 455 $ 281 $ (2,576) $ 27,527


Page 14

Six months ended June 30, 2013 ($000s) BC AB SK MB ON QC NB Corp Total

Revenues Rental and recoveries $ 11,900 $ 11,872 $ 872 $ 2,580 $ 16,015 $ 1,185 $ 576 $ - $ 45,000

Property recoverable operating expenses

Insurance 94 36 3 19 96 7 3 - 258 Management fees 249 229 6 98 575 8 10 - 1,175 Recoverable operating costs 843 303 - 240 860 - 58 - 2,304 Property taxes 1,609 1,457 89 447 3,681 362 143 - 7,788

2,795 2,025 98 804 5,212 377 214 - 11,525

Earnings from property operations 9,105 9,847 774 1,776 10,803 808 362 - 33,475

Other income (expense): General and administrative - - - - - - - (1,633) (1,633) Loss on sale of investment properties (273) - - - - - - - (273) Fair value adjustment to investment properties (732) (1,939) (124) (17) (10,187) (24) 415 - (12,608) (1,005) (1,939) (124) (17) (10,187) (24) 415 (1,633) (14,241)

Net earnings before finance costs 8,100 7,908 650 1,759 616 784 777 (1,633) 18,961

Finance cost Finance income - - - - - - - 373 373 Finance cost (3,338) (3,025) (216) (551) (3,127) (328) (46) (118) (10,749) Net finance cost (3,338) (3,025) (216) (551) (3,127) (328) (46) 255 (10,376)

Net earnings and comprehensive income $ 4,762 $ 4,883 $ 434 $ 1,208 $ (2,511) $ 456 $ 731 $ (1,378) $ 8,585

The following pie charts illustrate the continued diversification in the geographic contribution of the Trust’s earnings from property operations from 2013 to 2014 with an increase in the percentages for British Columbia, Alberta, and Ontario.

Other information from statement of financial position

June 30, 2014 ($000s) BC AB SK MB ON QC NB Corp Total

Investment properties $ 303,870 $ 373,739 $ 14,407 $ 48,464 $ 682,691 $ $ 20,180 $ 9,880 $ $ 1,453,231 Total assets 306,871 377,493 14,509 49,684 695,623 20,427 10,012 156,645 1,631,264

Mortgages payable and bank loans 160,141 205,680 8,837 22,918 349,009 11,884 1,388 - 759,857 Total liabilities 162,056 211,167 8,842 23,492 363,803 12,168 1,520 13,404 796,452

December 31, 2013 ($000s) BC AB SK MB ON QC NB Corp Total

Investment properties $ 288,192 $ 361,056 $ 14,407 $ 48,464 $ 570,002 $ $ 20,180 $ 9,880 $ - $ 1,312,181 Total assets 288,740 363,529 14,489 49,630 580,616 20,398 9,956 16,555 1,343,913

Mortgages payable and bank loans 158,528 208,602 8,992 23,325 287,922 12,050 1,413 26,874 727,706 Total liabilities 160,309 214,005 8,998 24,985 301,842 12,336 1,470 32,967 756,912

British Columbia

20.4%

Alberta 28.4%

Saskatchewan 1.7%

Manitoba 3.1%

Ontario 44.1%

Quebec 1.7%

New Brunswick

0.7%

YTD 2014 Earnings from Operations

British Columbia

30.8%

Alberta 31.9%

Saskatchewan 2.5%

Manitoba 6.4%

Ontario 24.3%

Quebec 2.9%

New Brunswick

1.3%

YTD 2013 Earnings from Operations


Page 15

Comparative Analysis of In-place and Market Rents

The following table analyses PIRET’s in-place base rent compared to market as at June 30, 2014.

GLA

(000s)

Average in-place

Rent

Average Market

Rent

Avg Market Rent/Avg in

place rent By Province, excludes cross-dock facilities

British Columbia 2,315 $ 7.36 $ 7.81 6.1% Alberta 2,711 8.33 8.61 3.3% Saskatchewan 179 7.20 10.69 48.6% Manitoba 649 5.28 5.42 2.7% Ontario 7,490 5.49 5.61 2.3% Quebec 164 6.25 5.25 -16.0% New Brunswick 112 5.53 5.68 2.8%

Total, excluding cross-dock facilities 13,621 6.38 6.62 3.8%

Cross-dock facilities 503 15.73 17.71 12.6%

14,124 $ 6.72 $ 7.02 4.5%

Same Property Net Operating Income

Same property net operating income for the 3 months ended June 30, 2014 consisted of properties that were acquired by PIRET before March 31, 2013 and have not been disposed of by June 30, 2014. PIRET’s same property NOI for the quarter increased 0.6% from 91 properties, totaling 8.0 million square feet, representing 57.0% of PIRET’s overall portfolio. The increase in NOI of the 91 same properties is a result of increases in rental rates offset by a 2.0% drop in occupancy from June 30, 2013.

British Columbia

20.8%

Alberta 25.8%

Saskatchewan 1.0%

Manitoba 3.3%

Ontario 47.0%

Quebec 1.4%

New Brunswick

0.7%

June 2014 Investment Properties

British Columbia

22.0%

Alberta 27.5%

Saskatchewan 1.1%

Manitoba 3.7%

Ontario 43.4%

Quebec 1.5%

New Brunswick

0.8%

December 2013 Investment Properties


Page 16

# of

Properties

Three months ended June 30 Change

NOI ($000s) 2014 2013 ($) (%) British Columbia 14 $ 4,461 $ 4,496 $ (34) -0.8% Alberta 31 4,966 4,602 364 7.9% Saskatchewan 4 363 356 7 1.9% Manitoba 7 731 897 (166) -18.5% Ontario 31 3,185 3,247 (61) -1.9% Quebec 2 391 392 (1) -0.3% New Brunswick 2 161 179 (18) -10.1%

Same properties 91 14,259 14,169 90 0.6%

Properties owned at April 1, 2013 and subsequently sold 7 23 766 (743) -96.9%

New properties acquired after March 31, 2013 74 8,511 3,290 5,221 158.7%

Straight-line rents - 1,447 989 458 46.2%

172 $ 24,241 $ 19,125 $5,026 26.2%

Occupancy of same property at the end of the quarter 95.5% 97.5%

FINANCIAL CONDITION

Assets

Investment Properties

Investment properties are stated at fair value. Fair value adjustments to investment properties arising from changes in fair values are included in the statement of net earnings and comprehensive income in the year which they arise.

The current properties remain relatively new with estimated useful lives between 20 to 58 years and should require minimal capital expenditures in the near future.

The mortgages and bank loans are secured by the investment properties and held by separate legal entities. The mortgage obligations are satisfied by rent received from each property.

Straight Line Rent Receivable

Certain leases call for rental payments that increase over their terms. Straight line rent receivable records the rental revenue from these leases on a straight-line basis, resulting in accruals for rents that are not billable or due until future years. During the six months ended June 30, 2014, PIRET accrued $2.9 million in rental revenue (June 30, 2013 - $1.7 million). Straight line rent receivable is included within investment properties on the balance sheet.

Leasing Costs

Leasing costs include leasing commissions and lease related costs, which were paid to real estate brokers or lawyers for leasing services. They are capitalized to the carrying amount of investment properties when incurred and then considered in the fair value adjustment of the investment properties at the next reporting date. Leasing costs for the quarter were approximately $528,000 due mainly to 242,000 square feet of leasing at 927 Brock Road and 2400 Skymark in Ontario, 80th Avenue in British Columbia, and 132nd Avenue and 48th Street SE in Alberta, among others.

Mortgage reserve fund

The mortgage reserve fund consists of cash on deposit that was requested by lenders to be retained in escrow either pending expiry of the right to terminate in-place leases or to pay for any and all reasonable leasing costs. These funds will be released once certain conditions are met, but no later than the maturity of the mortgages. As at June 30, 2014, the term for the current mortgage reserve fund is less than 4 years. The amortized cost of the mortgage reserve fund is $1.2 million as at June 30, 2014 (2013 - $1.2 million).


Page 17

Prepaid expenses

Prepaid expenses consist of insurance and property taxes.

Liabilities

PIRET’s Declaration of Trust limits the indebtedness of the Trust to a maximum of 70% of the gross book value of the Trust. The gross book value is defined as the total book value of the assets plus accumulated depreciation and amortization in respect of such assets. The indebtedness is 46.6% of the gross book value as at June 30, 2014 (December 31, 2013 – 54.1%).

Mortgages Payable

The mortgages bear interest at a weighted average effective rate of 4.30% as at June 30, 2014 (December 31, 2013 – 4.37%) and mature between 2014 and 2032. The scheduled mortgage payments, principal maturities and weighted average effective rate are as follows:

June 30, 2014 ($000s)

Weighted Average

Effective Rate

Scheduled Principal

Repayments Principal

Maturities Total

Repayments Remainder of 2014 6.56% $ 10,684 $ 1,384 $ 12,068 2015 4.95% 20,782 52,981 73,763 2016 4.16% 19,846 66,570 86,416 2017 3.71% 17,908 73,726 91,634 2018 4.40% 15,701 66,761 82,462 2019 3.95% 13,333 107,383 120,716 2020 4.50% 9,519 124,647 134,166 2021 4.84% 6,077 56,170 62,247 2022 4.08% 5,024 22,245 27,269 2023 4.49% 1,873 60,164 62,037 Thereafter 4.84% 9,177 142 9,319

4.30% $ 129,924 $ 632,173 762,097

Unamortized mortgage transaction costs (4,726) Unamortized mark to market mortgage adjustment 2,540

$ 759,912

1.6% 9.7% 11.3% 12.0% 10.8% 8.2%

3.6% 8.1%

1.2%

6.56%

4.95% 4.16% 3.71%

4.40% 3.95% 4.50% 4.84%

4.08% 4.49% 4.84%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

0.0%

5.0%

10.0%

15.0%

20.0%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Therea1er

Scheduled Maturity Weighted Avg Interest Rate

17.6% 15.8%


Page 18

Class A Units and Class B Units

As at June 30, 2014, PIRET has 189,410,770 Class A Units and 278,947 Class B Units outstanding. The following table illustrates the changes in Class A Units for 2014.

Date Issuance Class A Units Price per

Unit Total Gross

Proceeds

January 1, 2014 Class A Units outstanding 134,209,856 January 28, 2014 Issue Class A Units – 2,145,000 over-allotment 16,445,000 $ 4.55 $ 74,824,750 March 31, 2014 Employee redemption of vested restricted units 914 4.51 4,122 June 27, 2014 Issue Class A Units – 5,055,000 over-allotment 38,755,000 4.60 178,273,000

June 30, 2014 Class A Units outstanding 189,410,770

Normal Course Issuer Bid

On August 28, 2013, the Trust announced its intention to purchase, by way of a normal course issuer bid, for cancellation purposes, up to 3,000,000 Class A Units in total, representing approximately 2.21% of the Trust’s then outstanding Class A Units. Purchases will be made on the open market through the facilities of the Toronto Stock Exchange (“TSX”), Alpha or alternate trading systems in Canada at market prices prevailing at the time of purchase and may take place over a 12-month period beginning on September 3, 2013 and ending on September 2, 2014. The daily purchase restriction for the Class A Units is 88,503 units, which represents 25% of the average daily trading volume of the Trust’s Units on the TSX for the six months ended July 31, 2013.

The Trust believes that the purchase of units may from time to time be an appropriate use of available resources and benefit remaining unitholders by increasing their proportionate equity interest in the Trust. Unitholders may obtain a copy of the notice with respect to the NCIB, without charge, by contacting the Director of Investor Relations of the Trust.

For the six months ended June 30, 2014, the Trust purchased and cancelled nil Class A Units under its NCIB program. (For the six months ended June 30, 2013 - $nil).

Unit Based Compensation

The Trust has a restricted unit plan (the “Plan”) for the Trustees and employees. The Plan provides for the grant of restricted units to participants (who may be Trustees, key management, key employees or consultants). Each restricted unit will give the participant the right to receive, upon vesting, an amount equal to the fair market value of the units on the payment date, either by way of a cash payment or by the Trust acquiring units in the open market, or from treasury, and distributing them to the participant, at the Trust’s option. As distributions are paid on Units, additional restricted units will be credited to the participants in an amount determined by dividing the dollar amount of the distributions payable by the fair market value per Unit on the date of the distribution. As well, the number of restricted units granted to a participant may be increased by a “performance factor” established by the Trustees at the time of grant. The “performance factor” was designed to reward participants based on the performance of the Trust’s Units relative to a comparable REIT index, such as the S&P/TSX Capped REIT Index. Unless otherwise determined by the Trustees, restricted units will vest and become available for redemption on the third anniversary of their being granted, or on a change of control or take-over bid for the Trust. Restricted units vested must be redeemed not later than December 31 in the year of vesting. However, the restricted units granted to a participant and any associated distribution restricted units shall not vest, and the participant shall not be entitled to such restricted units or associated distribution restricted units if the performance criteria, which are specified in the grant agreements, are not met.

The Trust has an incentive option plan (the “Option Plan”). The purpose of the Option Plan is to provide eligible participants with compensation opportunities that will encourage ownership of Units, enhance the Trust’s ability to attract, retain and motivate key personnel, and reward Trustees, officers, employees and service providers for significant performance and growth of the Trust. The Option Plan provides for the grant of options to participants (trustees, officers, employees and consultants of the Trust). The price at which an option holder may purchase a Unit upon exercise of an option will be will be the fair market value for a Unit determined by the board of trustees as at the date of the grant in accordance with applicable rules and regulations of all regulatory authorities to which the


Page 19

Trust is subject, including the Toronto Stock Exchange (the “TSX”). The Option Plan also includes provisions relating to the cashless exercise of options and cash payment in lieu of receiving Units. The Board of Trustees determines the time or times when any option will vest and be exercisable and to determine when it is appropriate to accelerate such vesting.

Under IFRS, liabilities related to PIRET’s restricted unit plan are included in the unit based compensation accrual account and measured at fair value at the grant date and re-measured each reporting date. The fair value changes are recorded within general and administrative expenses on the statements of net income and comprehensive income. The unit based compensation accrual has a $1,776,252 balance as at June 30, 2014 (December 31, 2013 - $450,723). PIRET expensed $286,794 (June 30, 2013 - $79,090) in compensation expense during the six months ended June 30, 2014 under the restricted unit plan.

Bank loans

On January 11, 2010, PIRET established a revolving operating line of credit with a lender in the amount of $250,000, bearing interest at the lender’s prime rate plus 1.75%, with a minimum of 4% per annum. The line of credit is secured by 90 Park Lane, Winnipeg, Manitoba. In April 2010, the bank increased the operating line of credit to $750,000, with the same rate and terms.

In April 2011, PIRET secured three separate operating lines with a financial institution. First, PIRET established a demand operating credit line with a bank, secured by 310 De Baets Street, Winnipeg, Manitoba, with a credit limit of $5.0 million, bearing interest at prime rate plus 1% per annum. The second demand operating credit line was secured by 1 Rutherford Court, Guelph, Ontario, with a credit limit of $3.9 million, bearing interest at prime rate plus 1% per annum. Lastly, PIRET established a demand operating credit line, secured by 80 Rooney Crescent, Moncton, New Brunswick with a credit limit of $3.3 million, bearing interest at prime rate plus 1% per annum.

In November 2012, PIRET secured a demand operating line with a financial institution, secured by 7830 Vantage Way, Richmond, British Columbia, with a credit limit of $2,800,000, bearing interest at prime rate plus 1% per annum.

On August 30, 2013, the Trust entered into a $41,000,000 secured revolving operating loan facility secured by a portfolio of 12 properties. The loan bears interest at prime rate plus 1% or the lender’s banker’s acceptance rate plus 2.0% and matures on September 11, 2014.

As at June 30, 2014, included in the bank loan balance outstanding of $nil (December 31, 2013– $26,951,552) are the related unamortized transaction costs of $117,425 (December 31, 2013 – $96,169).

LIQUIDITY AND CAPITAL RESOURCES

Funds from Operations and Adjusted Funds from Operations

Funds from operations (“FFO”) is a non-IFRS measure and should not be construed as an alternative to net earnings determined in accordance with IFRS. However, FFO is an operating performance measure which is widely used by the real estate industry and the Trust has calculated FFO in accordance with the recommendations of the Real Property Association of Canada (“REALpac”). PIRET’s method of calculating FFO may differ from other companies and accordingly may not be comparable to similar measures presented by other companies.

The use of FFO, combined with the required IFRS presentations, has been presented for the purpose of improving the understanding of operating results of REITs by the investing public and in making comparisons of REIT operating results more meaningful.

As FFO excludes depreciation, amortization, future income taxes and gains and losses from property dispositions, it provides a performance measure that, when compared period over period, reflects the impact on operations of trends in occupancy levels, rental rates, operating costs and realty taxes; acquisition activities; and interest costs, and provides a perspective of financial performance that is not immediately apparent from net earnings determined in accordance with IFRS.

FFO is a widely accepted supplemental measure of financial performance for real estate entities; however, it does not represent amounts available for capital programs, debt service obligations, commitments or uncertainties. FFO should not be interpreted as an indicator of cash generated from operating activities and is not indicative of cash


Page 20

available to fund operating expenditures, or for the payment of cash distributions. FFO is simply one measure of operating performance.

Adjusted funds from operations (“AFFO”) is also a non-IFRS measure and should not be construed as an alternative to net earnings determined in accordance with IFRS. However, AFFO is widely accepted as a performance measurement tool in the real estate industry. AFFO is calculated by adjusting the FFO for accrued rental revenue relating to straight-line rents, non-cash compensation items, and non-recoverable capital expenditures. PIRET’s method of calculating AFFO may differ from other companies and accordingly may not be comparable to similar measures presented by other companies.

The following table provides the analysis of PIRET’s FFO and AFFO performance:

Six months ended


June 30


Net earnings $ 27,527 $ 8,585 $ 13,601 $ 727 Adjustment:

Amortization of mortgage transaction costs (427) (327) (220) (156) Amortization of mark to market mortgage 1,065 408 506 231 Fair value adjustment to investment properties 1,452 12,608 266 11,762 Gain on sale of investment property (478) 273 543 -

Funds from operations $ 29,139 $ 21,547 $ 14,696 $ 12,565

Unit based compensation expenses 611 79 252 8 Straight line rent adjustment (2,874) (1,680) (1,447) (989) Capital expenditures (2,553) (614) (1,518) (261)

Adjusted funds from operations $ 24,323 $ 19,331 $ 11,983 $ 11,321

Six months ended


June 30


Weighted average number of units (000s) Class A Units 149,090 108,113 152,391 123,698 Class B Units 279 279 279 279

Diluted weighted average number of units (000s) Class A Units 151,894 110,765 155,304 126,413 Class B Units 279 279 279 279

FFO per unit - Basic Class A Units $ 0.19 $ 0.19 $ 0.09 $ 0.10 Class B Units 1.66 1.76 0.80 0.91

FFO per unit - Diluted Class A Units 0.19 0.20 0.09 0.10 Class B Units 1.66 1.76 0.80 0.91

Payout Ratio on FFO(1) 81.3% 80.2% 82.4% 78.5%

AFFO per unit - Basic Class A Units $ 0.16 $ 0.17 $ 0.08 $ 0.09 Class B Units 1.38 1.58 0.65 0.82

AFFO per unit – Diluted Class A Units 0.16 0.17 0.08 0.09 Class B Units 1.38 1.58 0.65 0.82


Page 21

Payout Ratio on AFFO(1) 97.4% 89.4% 101.1% 87.1%

(1) FFO and AFFO payout ratios is calculated based on ratio of distribution rate to fully diluted FFO and AFFO per unit.

FFO per unit for the three months ended June 30, 2014 was 9.5 cents, a decrease of 4.8% over the prior year comparative period. Excluding the factors outlined above for AFFO per unit, FFO per unit was 10.0 cents, a 1.0% increase over the prior year comparative period and 1.0 % over the previous three months ended March 31, 2014.

AFFO per unit for the three months ended June 30, 2014 was 7.7 cents, a decrease of 1.2 cent from the same period in 2013, due primarily to the disposition of seven assets totaling 304,911 square feet and the issue of 38,755,000 units on June 24, 2014. Excluding these impacts, AFFO per unit was 9.1 cents, a 1.3% increase over the prior year comparative quarter, resulting from accretive acquisitions in 2013 and YTD 2014, and offset by a 1.1% decrease in occupancy from 97.5% to 96.4% over that period. On a quarter over quarter basis and excluding the factors mentioned above, AFFO per unit decreased by 0.5 cents, or 6% over the three months ended March 31, 2014, due primarily to significant one-time releasing costs of $1.5 million related to 83,080 square feet of new leasing at 5055 Satellite Drive and 420 and 425 Skymark Avenue in Mississauga, all flex office space. The average lease term achieved on those transactions was 10.5 years with an average year 1 rental rate of $14.89 psf.

The following is a reconciliation of the Trust’s FFO to cash provided by operations:



($000s) 2014 2013 2014 2013

Funds from operations $ 29,139 $ 21,547 $ 14,696 $ 12,565 Amortization of discount on mortgage reserve fund (7) (5) - (2) Unit based compensation expense 287 79 102 8 Straight line rent adjustment (2,874) (1,680) (1,447) (989) Increase in amounts receivable and prepaid expenses (1,976) (2,515) (452) (528) Increase in rental deposits 908 3,177 89 2,751 Increase in accounts payable and accrued liabilities 1,622 10,428 (2,671) 8,468 Net finance cost 16,720 10,376 8,498 5,783

Net cash provided from operating activities $ 43,819 $ 41,407 $ 18,815 $ 28,054

Capital Resources

The cash collected from issuing Class A Units and Class B Units, and the cash generated by investment properties represent the primary source of funds to fund total distributions to unitholders of $24.9 million for the six months ended June 30, 2014 (2013 - $17.4 million).

For the six months ended June 30, 2014, cash provided by operations was more than cash distributions paid or payable. Management expects that cash provided by operating activities will exceed cash distributions paid or payable. However, management expects cash distributions to continually exceed net earnings due to non-cash items which are deducted in determining net earnings.

There are no significant working capital requirements that currently exist and there are no pending items that may affect liquidity. There are no legal or practical restrictions on the ability of the Trust’s properties to transfer funds to the Trust.

Proceeds from the issuance of Units and conventional mortgage financing have been used mainly to fund property acquisitions. PIRET intends to refinance any mortgages which mature within a year.

Management expects to be able to meet all of the Trust’s ongoing obligations and to finance future growth through the issuance of units as well as by using conventional mortgages, short term financing from the bank and the Trust’s cash flow. The Trust is not in default or arrears on any of its obligations including distribution payments, interest or principal payments on debt.


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In accordance with National Instrument 41-201, the Trust is required to provide additional disclosure relating to cash distributions.



($000s) 2014 2013 2014 2013

Cash provided by operating activities $ 43,819 $ 41,407 $ 18,815 $ 28,054 Actual cash distributions paid or payable 24,905 17,389 12,957 9,836

Excess of cash provided by operating activities over cash distributions paid $ 18,914 $ 24,018 $ 5,858 $ 18,218



($000s) 2014 2013 2014 2013

Net earnings $ 27,527 $ 8,585 $ 13,601 $ 727 Actual cash distributions paid or payable 24,905 17,389 12,957 9,836

Surplus (deficiency) of net earnings over cash distributions paid $ 2,622 $ (8,804) $ 644 $ (9,109)

CAPITAL STRUCTURE

The Trust defines capital as the aggregate of unitholders’ equity and long-term debt. The Trust’s objectives in managing capital are to maintain a level of capital that: complies with investment and debt restrictions pursuant to the Declaration of Trust, complies with existing debt covenants, funds its business strategies and builds long-term unitholders’ value. The Trust’s capital structure is approved by its unitholders as related to the Trust’s Declaration and by its board of trustees through its periodic reviews. Capital adequacy is monitored by the Trust by assessing performance against the approved annual plan throughout the year and by monitoring adherence to investment and debt restrictions contained in the Declaration and debt covenants.

The Declaration of Trust provides for a maximum indebtedness level of up to 70% of the gross book value. The term "indebtedness" means any obligation of the Trust for borrowed money (including the face amount outstanding under any convertible debentures and any outstanding liabilities of the Trust arising from the issuance of subordinated notes but excluding any premium in respect of indebtedness assumed by the Trust for which the Trust has the benefit of an interest rate subsidy), but excludes trade accounts payable, distributions payable to unitholders, accrued liabilities arising in the ordinary course of business and short-term acquisition credit facilities. The Declaration of Trust defines “gross book value” as the book value of the assets of the Trust plus the amount of accumulated depreciation and amortization in respect of such assets (and related intangible assets), the amount of future income tax liability arising out of indirect acquisitions and excluding the amount of any receivable reflecting interest rate subsidies on any debt assumed by the Trust. The Trust’s indebtedness is 46.6% as at June 30, 2014 (December 31, 2013 –54.1%).

Having a relatively low indebtedness ratio is important in current economic conditions, which allows PIRET to access additional financing if necessary.

The Declaration of Trust allows the Trustees, at their discretion, to distribute to the Trust’s unitholders in each year all or a portion of the Trust’s income for the year, as calculated in accordance with the Tax Act after all permitted deductions under the Act have been taken. The board of trustees also reviews the cash distribution paid to unitholders on a regular basis. The distribution to Trust unitholders was $0.026 per unit per month from January 1 to June 30, 2014. (January 1 to June 30, 2013 – $0.026 per Unit per month)

The Trust is in compliance with all restrictions during the period ended June 30, 2014 and the year ended December 31, 2013.


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The capital structure consisted of the following components at June 30, 2014 and December 31, 2013.

($000s) June 30,

2014 December 31,

2013

Units based compensation accrual $ 1,776 $ 451 Mortgages payable 759,912 700,755 Class A Units 821,799 579,785 Class B Units 1,116 1,116

Accumulated earnings 9,722 7,100

$ 1,594,325 $ 1,289,207

The total capital of PIRET increased due to the issuance of new Class A Units and the proceeds of new mortgages related to acquisitions, offset by the repayment of mortgage principal and distributions to unitholders during 2014.

FINANCIAL INSTRUMENTS

For certain of the Trust’s financial instruments, including cash, cash held in trust, amounts receivable, accounts payable and accrued liabilities, and the bank loans, the carrying amounts approximate their fair values due to the immediate or short-term maturity of these financial instruments.

The fair value of the mortgage reserve fund is determined by discounting the future contractual cash flow under current mortgage agreements at a discount rate which represents the investment return rate that the Trust can earn.

The fair values of amounts due for mortgages payable and notes payable are determined by discounting the future contractual cash flow under current financing arrangements at discount rates which represent borrowing rates presently available to the Trust for loans with similar terms and maturity. Discount rates are either provided by the lenders or are observable on the open market.

June 30, 2014 December 31, 2013

($000s) Carrying Amount Fair Value

Carrying Amount Fair Value

Mortgage reserve fund $ 1,202 $ 1,174 $ 1,235 $ 1,131 Mortgages payable 759,912 764,006 700,755 700,634

OFF-BALANCE SHEET ITEMS

PIRET does not have any off-balance sheet items.

SECTION III

SUMMARY OF QUARTERLY RESULTS

Total investment properties decreased in the three months ended June 30, 2014 due to the disposition of 3 investment properties for $9.2 million. Prepaid expenses increased in the three months ended June 30, 2014 due to the prepayment of property taxes. Cash held in trust increased due to new deposits paid for potential acquisitions. The Trust’s cash balance increased in the three months ended June 30, 2014 to $158.5 million due to the bought deal financing completed on June 27, 2014, proceeds from the disposition of 3 investment properties, proceeds from two new mortgage financing transactions and operating cash flow from 161 properties generative positive cash, offset by scheduled principal payments on mortgages.

The Trust’s net earnings increased significantly in the three months ended June 30, 2014 compared to June 30, 2013 as a result of the overall increase in the Trust’s earnings from property operations. PIRET earned rental revenue from 161 properties in the three months ended June 30, 2014 and 2013. The Trust’s rental revenue increased by 32% during the period due to the timing of the acquisitions ended June 30, 2013. During the three months ended


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June 30, 2014, other expenses increased due to the fair value adjustment of investment properties, loss on disposal of investment properties and additional general and administrative expenses related to the Vancouver and Toronto offices.

There are no fundamental changes in PIRET’s operations and all properties generate positive cash flows.

Quarter ended ($000s, except per unit basis)

June 30, 2014

Mar 31, 2014

Dec 31, 2013

Sep 30, 2013

Jun 30, 2013

Mar 31, 2013

Dec 31, 2012

Sep 30, 2012

Basic rent $ 25,330 $ 24,447 $ 23,834 $ 24,136 $ 19,477 $ 14,943 $ 12,132 $ 10,061

Recoveries 8,642 8,525 7,353 8,438 6,298 4,283 3,361 3,277

Total rental revenue from properties $ 33,972 $ 32,972 $ 31,187 $ 32,574 $ 25,775 $ 19,226 $ 15,493 $ 13,338

Property recoverable operating expenses $ (9,731) $ (9,571) $ (9,214) $ (9,082) $ (6,560) $ (4,966) $ (3,983) $ (3,190)

Other income (expenses) (2,141) (1,253) (1,832) (1,389) (12,705) (1,809) (2,090) 838 Net earnings and comprehensive

income 13,601 13,926 12,022 14,574 727 7,858 5,600 7,753

Basic net earnings per unit

Class A Units 0.10 0.09 0.09 0.11 0.01 0.08 0.07 0.11

Class B Units 0.93 0.84 0.79 0.96 0.05 0.75 0.65 1.00

As at ($000s)

June 30, 2014

Mar 31, 2014

Dec 31, 2013

Sep 30, 2013

Jun 30, 2013

Mar 31, 2013

Dec 31, 2012

Sep 30, 2012

Total assets $ 1,629,089 $ 1,474,721 $ 1,343,913 $ 1,344,206 $1,336,652 $ 894,628 $ 759,138 $ 618,430

Total liabilities 796,452 813,280 755,912 753,165 747,195 472,045 406,153 316,897

Unitholders’ equity 832,637 661,441 588,001 591,041 589,457 422,583 352,985 301,533

Investment properties 1.451,056 1,448,272 1,312,181 1,319,405 1,311,966 873,337 743,868 587,455

Mortgages and bank loans payable 759,857 779,754 727,706 723,340 720,531 457,415 393,875 308,044

NOI for the three months ended June 30, 2014 was $24.2 million, an increase of approximately $840,000 over the previous quarter, due primarily to the full impact of acquisitions made in the first quarter of 2014, offset by the disposition of four assets totaling approximately 118,000 SF in the first half of 2014. On a per unit basis, NOI for the quarter was 16 cents, an increase of 3% over the prior year comparative quarter, resulting from accretive acquisitions made in 2013 and the first half of 2014, offset by dispositions made over that period and a 1.1% decrease in occupancy. NOI per unit decreased from the previous quarter by 0.6%. However, adjusting for the factors outlined on page 4 for AFFO per unit, NOI per unit increased by 1.0%. Despite only a 10 basis point decrease in occupancy quarter over quarter, vacancy loss still increased by approximately $109,000 for the current quarter, due to the loss of higher-rent tenancies and three months of gross free related to a new 20,880 square foot lease at one of our Vancouver properties. Occupancy and leasing continue to be a challenge for PIRET in Winnipeg and the GTA East markets, which account for approximately 45% of our current availability.

Same property NOI increased 0.6% from the prior year comparative quarter, driven by rental rate increases offset by a 2.0% decrease in occupancy. The same property NOI involved 91 properties totaling 8.0 million square feet, representing approximately 57.0% of the total portfolio.


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SECTION IV

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Trust’s significant accounting policies are described in note 3 to the December 31, 2013 audited financial statements

The policies that are most subject to estimation and judgment are outlined below.

Business combinations

The Trust acquires real estate properties in its normal course of business. At the time of acquisition, the Trust considers whether or not the acquisition represents the acquisition of a business. The Trust accounts for an acquisition as a business combination where an integrated set of activities is acquired in addition to the property. More specifically, consideration is made to the extent to which significant processes are acquired and, in particular, the extent of ancillary services provided by the property (e.g., maintenance, cleaning, security, bookkeeping, etc.).

When the acquisition of a property does not represent a business, it is accounted for as an acquisition of a group of assets and liabilities. The cost of the acquisition, including transaction costs, is allocated to the assets and liabilities acquired based upon their relative fair values, and no goodwill or deferred tax is recognized.

All acquisitions to date by the Trust have been deemed to be asset acquisitions.

Lease contracts

The Trust has entered into property leases on its investment property portfolio. The Trust makes judgments in determining whether certain leases, in particular those leases with long contractual terms where the lessee is the sole tenant in a property and the Trust is lessor, are operating or finance leases. The Trust must assess each lease separately and has determined that all of its leases of investment properties are operating leases.

Deferred income taxes

Deferred income taxes are not recognized in the Trust`s financial statements on the basis that the Trust can deduct distributions paid such that its liability for income taxes is substantially reduced or eliminated for the year, and the Trust intends to continue to distribute its taxable income and continue to qualify as a real estate investment trust for the foreseeable future.

Unit based compensation expense

The Trust’s unit based compensation expense consists of units granted under its Restricted Unit Plan and options granted under its Incentive option Plan. The units granted are measured at fair value each reporting period and recognized as a general and administrative expense over the vesting period. Fair value is estimated by using the closing price of the unit and taking in account of expected forfeitures and the performance factor as defined in the Restricted Unit Plan.

Valuation of investment properties

The fair value of the investment properties is determined by management, in conjunction with independent real estate valuation experts using recognized valuation techniques.

The determination of the fair value of investment property requires the use of estimates such as future cash flows from assets (i.e. tenant profiles, future revenue streams and overall repair and condition of the property), discount rates applicable to those assets’ cash flows and capitalization rates. These estimates are based on market conditions existing at the reporting date.


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CHANGES IN ACCOUNTING POLICIES

There have been no changes to accounting policies that impacted the financial statements for the three and six months ended June 30, 2014.

INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for the establishment and maintenance of internal controls over financial reporting (“ICFR”) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements in accordance with IFRS. The Trust uses the Committee of Sponsoring Organizations of the Treadway Commission’s ("COSO") internal control framework to design ICFR. The Trust believes its internal controls and procedures are designed to provide reasonable assurance that financial information is recorded, processed, summarized and reported in a timely manner.

There have been no changes in PIRET’s internal control over financial reporting during the six months ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

DISCLOSURE CONTROLS AND PROCEDURES

Management is also responsible for the establishment and maintenance of disclosure controls and procedures. The Company believes that these controls and procedures have been designed to provide reasonable assurance that the information required to be disclosed by the Trust in reports it files is recorded, processed, summarized and reported, within the appropriate time period.

SECTION V

RISKS AND UNCERTAINTIES

All income producing property investments are subject to a degree of risk and uncertainty. They are affected by various factors including general market conditions and local market circumstances. An example of general market conditions would be the availability of long-term financing whereas local conditions would relate to factors affecting specific properties in a particular geographic location, such as changes in market lease rates as a result of an over- supply of space or a reduction in demand for real estate. Management attempts to manage these risks through geographic diversification in the Trust’s portfolio.

In the normal course of business, the Trust is exposed to a number of risks that can affect its operating performance. These risks, and the actions taken to manage them, are as follows:

Interest Rate and Financial Risk

Interest rate risk arises from the possibility that the value of, or cash flows related to, a financial instrument will fluctuate as a result of changes in market interest rates. The Trust is exposed to financial risk from the interest rate differentials between the market rate and the rates used on these financial instruments.

The Trust manages its financial instruments and interest rate risks based on its cash flow needs. The Trust minimizes interest rate risk by obtaining long-term, fixed rate mortgages whenever possible. It targets a conservative ratio of debt (including the face amount of any outstanding convertible debentures and any outstanding subordinated notes) to gross book value within the range of 60% to 65% and is restricted under the Declaration of Trust to a maximum of 70%. Mortgages payable bear interest at fixed rates; therefore the Trust is not exposed to significant interest rate risk.

Credit Risk

The Trust is exposed to some credit risk with respect to the collection of rental revenue, but minimizes the risk by a thorough review of tenants’ credit histories and requesting adequate security deposits. As at June 30, 2014, trade receivables in the amount of $251,155 (December 31, 2013 – $360,291) were 30 days past due. Current receivables


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totaled $636,732 (December 31, 2013 - $856,958) due to billings to new tenants and will be collected during the next few months.

Reliance on Single Tenant and Tenant Concentration Risk

Most of PIRET’s properties are single tenant properties. The table below illustrates the Trust’s top 10 tenants as at June 30, 2014 by revenue:

Tenant Percentage of Revenue

GLA (000s)

Average Lease Term

(years) 1 TransForce 5.8% 307 15.9 2 ContainerWorld 4.5% 635 10.1 3 Best Buy Canada 3.7% 628 3.9 4 Tervita 3.6% 237 18.3 5 HBC 2.9% 412 8.5 6 Advance 2.6% 268 20.9 7 Acklands-Grainger Inc. 2.5% 303 5.5 8 PFB Corporation 2.2% 264 18.7 9 Weldco-Beales 1.7% 184 17.9

10 RSAC 1.6% 238 6.8 Top 10 Tenants 31.1% 3,476 12.6 Other 68.9% 10,648 4.3

TOTAL 100.0% 14,124 6.9

In the event that the above-listed tenants were to terminate their tenancies or become insolvent, the financial results of PIRET would be materially and adversely affected. PIRET has been able to diversify its tenant base in the past 2 years and become less reliant on any one single tenant. Management has taken certain steps to mitigate any credit risk by closely monitoring the tenants’ compliance with the terms of their respective leases and to remedy any issues as soon as they are identified.

Currency Risk

The Trust is not exposed to currency risk since there are no foreign subsidiaries and the Trust does not enter into foreign currency transactions.

Lease Rollover Risk

Lease rollover risk arises from the possibility that the Trust may experience difficulty renewing leases as they expire or in re-leasing space vacated by tenants upon lease expiry. Management tries to sign long term leases to tenants to minimize lease rollover risk. The occupancy rate is 96.4% as at June 30, 2014 (December 31, 2013 – 97.4%) and lease terms are between one to twenty five years. With committed leases, the occupancy increases to 97.3% as at June 30, 2014 (December 31, 2013 – 97.7%). The leases which will expire over the next 3 years represent 30.6% of total square footage. However, most of the leases expiring over the next 3 years have at least one renewal option for another 5 years.


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PIRET’s lease expiries for all properties as at June 30, 2014 are as follows:

GLA (000s)

% of Net leasable

area

Remainder of 2014 549 3.9% 2015 1,566 11.1% 2016 2,160 15.3% 2017 1,292 9.1% 2018 1,577 11.2% 2019 1,266 9.0% 2020 565 4.0% 2021 1,009 7.1% 2022 993 7.0% 2023 361 2.6% Thereafter 2,281 16.1%

Occupied 13,619 96.4% Vacant 505 3.6%

Total 14,124 100.0%

Restrictions on Redemptions

It is anticipated that the redemption right will not be the primary mechanism for Trust unitholders to liquidate their investments. PIRET notes or debt securities which may be issued or distributed in specie to Trust unitholders in connection with redemption will not be listed on any stock exchange and no established market is expected to develop for such securities. Such securities may be subject to an indefinite “hold period” or other resale restriction under applicable securities laws. PIRET notes and debt securities so issued or distributed may not be qualified investments for deferred income plans. Regulatory approvals will be required in connection with an issuance or distribution of PIRET notes or debt securities in specie to holders of units in connection with the redemption of units. There are no notes or debt securities issued to unitholders as at June 30, 2014 or June 30, 2013.

Unit Prices

It is not possible to predict the price at which units will trade. The units will not necessarily trade at values determined solely by reference to the value of the properties of PIRET. Accordingly, the units may trade at a premium or discount to the value implied by the value of PIRET’s properties. The market price for the units may be affected by changes in general market conditions, fluctuations in the markets for equity securities and numerous other factors beyond PIRET’s control.

3.90%

11.10% 15.30%

9.10% 11.20% 9.00%

4.00% 7.10% 7.00%

2.60%

16.10%

0.0%

5.0%

10.0%

15.0%

20.0%

Remainder of 2014

2015 2016 2017 2018 2019 2020 2021 2022 2023 Thereafter


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Environmental Risk

As an owner of real property, PIRET is subject to various federal, provincial and municipal laws relating to environmental matters. Such laws provide that PIRET could be liable for the costs of removal of certain hazardous substances and remediation of certain hazardous locations. The failure to remove or remediate such substances or locations, if any, could adversely affect PIRET’s ability to sell such real estate or to borrow using such real estate as collateral and could potentially result in claims against PIRET.

Management carries out environmental inspections before a property is purchased. In addition, most leases require tenants to conduct their businesses in accordance with environmental regulations and be responsible for liabilities arising out of any infractions. Management is not aware of any material non-compliance with environmental laws with respect to the current portfolio and is not aware of any pending or threatened investigations or actions by environmental regulatory authorities in connection with the current portfolio.

Liquidity Risk

Real property investments tend to be relatively illiquid, with the degree of liquidity generally fluctuating in relation to demand for and the perceived desirability of such investments. Such illiquidity may tend to limit PIRET’s ability to vary its portfolio promptly in response to changing economic or investment conditions. If PIRET were required to liquidate a real property investment, the proceeds to PIRET might be significantly less than the aggregate carrying value of such property.

The Trust diligently monitors the repayment dates of its mortgages and intends to refinance all mortgages due within the next 12 months. The mortgage due dates range from 2014 to 2032, with a weighted average remaining term of 5.2 years (December 31, 2013 – 5.7 years).

The Trust’s scheduled payments are:

June 30, 2014 ($000s)

Accounts payable

and other Rental

Deposits Unit Based

Compensation

Mortgage payments and

maturities Total Remainder of 2014 $ 27,910 $ 833 $ 455 $ 57,815 $ 87,013 2015 - 569 210 103,983 104,762 2016 - 699 32 108,552 109,283 2017 - 823 996 109,008 110,827 2018 - 1,166 20 95,931 97,117 Thereafter - 2,819 63 437,791 440,673

$ 27,910 $ 6,909 $ 1,776 $ 913,080 $ 949,675

For the six months ended June 30, 2014, PIRET financed the acquisition of seven investment properties with new mortgages.

Tax Risk

PIRET currently qualifies as a real estate investment trust (“REIT”) for Canadian income tax purposes. Thus, PIRET is not subject to income tax as long as the Trust distributes all income earned by the Trust to unitholders annually. If PIRET does not qualify or ceases to qualify as a REIT under the REIT exception, adverse consequences could arise including a non-deductible distribution amount being taxable to PIRET (with the result that the amount of cash available for distribution by PIRET would be reduced) and such amount also being included in the income of unitholders for purposes of the Tax Act as taxable dividends.

There can be no assurances that Canadian federal income tax laws respecting the treatment of mutual fund trusts and of REITs will not be changed, or that administrative and assessing practices of the Canada Revenue Agency will not develop in a manner which adversely affects PIRET or its unitholders.

RELATED PARTY TRANSACTIONS

PIRET is related to Sunstone Realty Advisors (2005) Inc., Sunstone Realty Advisors (2006) Inc., Sunstone Industrial Investments Inc., and Sunstone Industrial Advisors Inc. by virtue of having an officer and trustee (Stephen


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Evans) in common. There were no transactions among the above related parties and PIRET during the six months ended June 30, 2014.

PIRET is related to a mortgage brokerage firm (Westbridge Finance Inc.) by virtue of having a trustee and director (Robert King) in common. PIRET paid the firm $nil in mortgage brokerage fees for the six months ended June 30, 2014 and $281,650 during the year ended December 31, 2013 for the refinancing of 14 investment properties and new financing of 12 investment properties. It is management’s opinion that the mortgage brokerage fees are in line with current market rates.

Key personnel have the authority and responsibility for planning, directing and controlling the activities of the Trust, directly or indirectly. The Trust’s key personnel include the Co-Chief Executive Officers, Chief Financial Officer, and Trustees. Salaries and bonuses, trustee fees, and other short-term employee benefits are accrued when earned and are as follows:

Six months ended


June 30 ($000s) 2014 2013 2014 2013

Salaries and bonuses, trustee fees, and other short-term employee incentive benefits $ 1,163 $ 1,037 $ 615 $ 524 Unit-based compensation 287 79 102 8 $ 1,450 $ 1,116 $ 717 $ 532

On December 17, 2013, certain employees of the Trust were granted loans for the purpose of purchasing Class A units of the Trust through the facilities of the Toronto Stock Exchange. The loans commenced on December 17, 2013, mature on December 31, 2023 and bear interest on a monthly basis at the Trust’s borrowing rate per annum, currently equal to the prime rate of the Canadian Imperial Bank of Canada plus 1.0%. As security for the obligations of the employees, a unit pledge agreement has been executed with respect to the units owned. As at June 30, 2014, $1,540,144 (December 31, 2013 – $1,545,976) has been advanced to employees.

OUTSTANDING UNIT DATA

Except as set out in the Declaration of Trust, no Class A Unit or Class B Unit has any preference or priority over another. The Class A Units and the Class B Units have voting rights, and the Class B Units have conversion rights, as set out in the Declaration of Trust.

As at June 30, 2014, the total number of Class A Units outstanding was 189,410,770 and the total number of Class B Units outstanding was 278,947.

As at August 7, 2014, the Trust has issued a total of 507,357 restricted Units and 54,723 related distribution restricted units of which 334,965 restricted Units and 15,643 distribution restricted Units are outstanding.

SECTION VI

SIGNIFICANT EVENTS AND SUBSEQUENT EVENTS

(a) On July 14, 2014, the Trust obtained a $2,375,898 mortgage loan on an investment property under development located in Richmond, BC. The new 3.5 year mortgage bears an interest rate of 4.00% per annum.

(b) On July 22, 2014, the Trust completed the disposition of two industrial properties for gross proceeds of $6,200,000. The properties were located at 8461 and 8481 Keele Street, Vaughan, Ontario.

(c) On August 5, 2014, the Trust completed the acquisition of 8 light industrial properties for an aggregate purchase price of approximately US $135.5 million. The properties consist of 8 ground distribution facilities totaling over 1.4 million square feet leased entirely to a multi-national ground package courier company. The 8 properties acquired are part of an 11 property portfolio (the “portfolio”), the purchase of which PIRET previously announced on June 18, 2014. PIRET expects to complete the purchase of the 3 remaining properties in the portfolio by the end of August, upon the satisfaction of outstanding purchase conditions. In connection with the purchase, PIRET advanced a loan of approximately US $44.0 million to the vendor. The loan is secured by mortgages on the two New Jersey properties in the portfolio, the purchase of which is pending. The


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loan bears interest at a rate of 7.0% per annum and will be repaid by the vendor to PIRET upon completion of the purchase of the two New Jersey properties.

ADDITIONAL INFORMATION

Additional information relating to PIRET, including PIRET’s most recent annual information form, is available on SEDAR at www.sedar.com or on PIRET’s website at www.piret.ca.

MANAGEMENT’S DISCUSSION AND ANALYSIS 2014-Q2... · 2015-04-24 · MANAGEMENT’S DISCUSSION AND...

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