The Globe and Mail

Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Globe Investor

News Sources

Take control of your investments with the latest investing news and analysis

Press release from Marketwire

NPR Announces Second Quarter Results and Increase in Distributions

Wednesday, August 04, 2010

NPR Announces Second Quarter Results and Increase in Distributions19:51 EDT Wednesday, August 04, 2010CALGARY, ALBERTA--(Marketwire - Aug. 4, 2010) - Northern Property REIT (TSX:NPR.UN) announced its financial results for the 3 and 6 months ended June 30, 2010.HIGHLIGHTS:- Apartment vacancy continues to decline- Same door growth resumes- Record FFO of $0.59 per unit for NPR- FFO payout ratio of 62%- Distributions increased $0.05 per annum (3.4%) FINANCIAL PERFORMANCE AT A GLANCE: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three Months Six Months In $000's except per unit amounts Ended June 30 Ended June 30 ---------------------------------------------------------------------------- 2010 2009 2010 2009 ---------------------------------------------------------------------------- Total revenue 35,118 33,711 69,081 67,750 Net operating income ("NOI") 23,773 22,268 44,604 43,572 Net earnings 5,610 6,733 8,998 13,834 Net earnings per unit, basic $ 0.223 $ 0.268 $ 0.358 $ 0.552 Distribution to unitholders 9,309 9,279 18,610 18,545 Distributions per unit $ 0.370 $ 0.370 $ 0.740 $ 0.740 Distributable Income ("DI") 14,865 14,057 27,380 27,378 DI per unit, basic $ 0.591 $ 0.560 $ 1.089 $ 1.092 Payout ratio 62.6% 66.0% 68.0% 67.7% Funds from operation ("FFO") 14,957 14,268 27,621 27,782 FFO per unit, basic $ 0.594 $ 0.569 $ 1.098 $ 1.108 FFO payout ratio 62.2% 65.0% 67.4% 66.8% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- For the three months ended June 30, 2010, Northern Property REIT reported total Funds from Operations (FFO) of $14.96 million or 4.8% above the same quarter in 2009. On a per unit basis, FFO increased to $0.594 from $0.569 over the same period.Jim Britton, President and CEO of NPR said, "We are pleased with our operating performance for the second quarter of 2010. Moving out of the recession, apartment vacancy loss has declined steadily this year, just the opposite of our experience in the first half of 2009. Rental market conditions in Newfoundland, Nunavut and the NWT are strong and we posted solid results in B.C. Northern Alberta, while slower to improve than expected, is beginning to show some positive signs." NPR's apartment vacancy loss has declined for 4 consecutive quarters to 6.3% from a peak of 10% in Q3, 2009.Q2, 2010 NOI was 5.6% ahead of the same quarter a year earlier reflecting improved occupancy, rental increases in certain markets and a short term rental contract in Chetwynd. In comparing the quarters it is important to recognize that Q2, 2009 had been adversely affected by one-time items and accelerated maintenance costs. Excluding these and this quarter's exceptional short term results in Chetwynd, NOI still grew by 1.8% over Q2 of 2009.NPR has continued its work to implement IFRS accounting standards and to carry out an extensive re-organization forced by the Government of Canada's SIFT legislation. IFRS implementation costs are estimated to cost an additional $250,000 and SIFT compliance an additional $1,700, 000 by year end. The REIT plans to manage its taxation issues by creating a small taxable public corporation whose shares will be distributed to unitholders. The securities would then be held on a "stapled" basis.The REIT continued to operate in a fiscally conservative manner in the first half of 2010 recording a payout ratio of 67.4% of FFO. The weighted average cost of debt declined slightly to 4.81%. Debt to Gross Book Value was 57.9%."At this point, we believe that Northern Property has returned to the level of financial performance we enjoyed prior to the recession," Jim Britton said. "We are delighted that we are in a position to raise our distributions to shareholders. Our business model is working well even in this more difficult economy". Annual distributions will increase 3.4% from $1.48 to $1.53 annually. The increase becomes effective with the distribution for the month of August, which is paid September 15, 2010, being increased to $0.1275 per unit. NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST Unaudited Consolidated Balance Sheets (Thousands of dollars) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- June 30, 2010 December 31, 2009 ---------------------------------------------------------------------------- ASSETS Rental properties and other capital assets (Note 4) 851,716 836,251 Capital improvements in progress 5,263 7,046 Capital assets under development 20,667 20,423 Prepaid expenses and other assets (Note 5) 4,546 5,088 Accounts receivable (Note 17) 4,591 4,158 Tenant security deposits 4,087 3,555 Deferred rent receivable 5,125 4,539 Loans receivable 2,342 2,456 Intangible assets (Note 6) 4,239 4,851 ---------------------------------------------------------------------------- 902,576 888,367 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- LIABILITIES Mortgages payable (Note 7) 513,696 498,996 Operating facilities (Note 8) 38,998 33,698 Bank indebtedness 791 1,820 Accounts payable and accrued liabilities (Note 17) 17,716 15,555 Distributions payable 3,103 3,096 Future income tax liability (Note 11) 45,865 43,751 Intangible liabilities (Note 6) 59 94 Non-controlling interest 378 464 ---------------------------------------------------------------------------- 620,606 597,474 ---------------------------------------------------------------------------- UNITHOLDERS' EQUITY 281,970 290,893 ---------------------------------------------------------------------------- 902,576 888,367 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. Guarantees, commitments and contingencies (Note 14) APPROVED BY THE BOARD Trustee Trustee NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST Unaudited Consolidated Statements of Earnings and Comprehensive Earnings Three and Six Months Ended June 30 (Thousands of dollars, except per unit amounts) ---------------------------------------------------------------------------- Three Months Six Months Ended June 30 Ended June 30 2010 2009 2010 2009 ---------------------------------------------------------------------------- REVENUE Rental revenue 34,258 32,844 67,279 65,836 Other property income 860 867 1,802 1,914 ---------------------------------------------------------------------------- 35,118 33,711 69,081 67,750 Operating expenses (11,345) (11,443) (24,477) (24,178) ---------------------------------------------------------------------------- 23,773 22,268 44,604 43,572 ---------------------------------------------------------------------------- OTHER EXPENSES Interest on mortgages (6,671) (6,738) (13,257) (13,294) Amortization (8,038) (7,130) (15,776) (14,244) ---------------------------------------------------------------------------- (14,709) (13,868) (29,033) (27,538) ---------------------------------------------------------------------------- EARNINGS BEFORE THE UNDERNOTED 9,064 8,400 15,571 16,034 ---------------------------------------------------------------------------- Trust administration (2,246) (1,316) (3,862) (2,711) Interest on operating facilities (294) (224) (529) (373) Interest and other income 81 135 149 244 Gain on settlement of debt - 84 - 84 Non-controlling interest (25) (23) (51) (32) ---------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES 6,580 7,056 11,278 13,246 ---------------------------------------------------------------------------- INCOME TAXES (Note 11) Current (80) (98) (166) (202) Future (expense) recovery (890) (225) (2,114) 790 ---------------------------------------------------------------------------- (970) (323) (2,280) 588 ---------------------------------------------------------------------------- NET EARNINGS 5,610 6,733 8,998 13,834 Other comprehensive loss - (42) - (185) ---------------------------------------------------------------------------- COMPREHENSIVE EARNINGS 5,610 6,691 8,998 13,649 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net earnings per unit (Note 13) Basic $ 0.223 $ 0.268 $ 0.358 $ 0.552 Diluted $ 0.222 $ 0.268 $ 0.357 $ 0.550 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST Unaudited Consolidated Statements of Unitholders' Equity Three and Six Months Ended June 30 (Thousands of dollars) ---------------------------------------------------------------------------- Three Months Six Months Ended June 30 Ended June 30 2010 2009 2010 2009 ---------------------------------------------------------------------------- TRUST UNITS (Note 12) Balance, beginning of period 369,714 368,175 368,690 367,446 Issuance of units 173 439 506 504 Exercise of unit options 14 35 38 35 Issue costs - - - (2) Long term incentive plan units issued - - 667 666 ---------------------------------------------------------------------------- Balance, June 30 369,901 368,649 369,901 368,649 ---------------------------------------------------------------------------- CONTRIBUTED SURPLUS Balance, beginning of period 1,532 1,174 2,109 1,676 Unit-based compensation 69 114 183 278 Exercise of unit options (14) (35) (38) (35) Long term incentive plan units issued - - (667) (666) ---------------------------------------------------------------------------- Balance, June 30 1,587 1,253 1,587 1,253 ---------------------------------------------------------------------------- CUMULATIVE DEFICIT CUMULATIVE NET EARNINGS Balance, beginning of period 110,773 93,157 107,385 86,056 Net earnings 5,610 6,733 8,998 13,834 ---------------------------------------------------------------------------- Balance, June 30 116,383 99,890 116,383 99,890 ---------------------------------------------------------------------------- CUMULATIVE DISTRIBUTIONS TO UNITHOLDERS Balance, beginning of period (196,592) (159,457) (187,291) (150,191) Distributions declared to unitholders (9,309) (9,279) (18,610) (18,545) ---------------------------------------------------------------------------- Balance, June 30 (205,901) (168,736) (205,901) (168,736) ---------------------------------------------------------------------------- CUMULATIVE DEFICIT, June 30 (89,518) (68,846) (89,518) (68,846) ---------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSS) Balance, beginning of period - (20) - 123 Other comprehensive loss - (42) - (185) ---------------------------------------------------------------------------- Balance, June 30 - (62) - (62) ---------------------------------------------------------------------------- TOTAL UNITHOLDERS' EQUITY 281,970 300,994 281,970 300,994 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST Unaudited Consolidated Statements of Cash Flows Three and Six Months Ended June 30 (Thousands of dollars) ---------------------------------------------------------------------------- Three Months Six Months Ended June 30 Ended June 30 2010 2009 2010 2009 ---------------------------------------------------------------------------- CASH FLOWS RELATED TO THE FOLLOWING ACTIVITIES: OPERATING Net earnings 5,610 6,733 8,998 13,834 Adjustments for: Deferred rental revenue (267) (325) (585) (629) Amortization 8,038 7,130 15,776 14,244 Amortization of fair value of debt 186 162 369 322 Amortization of above and below market leases (11) (48) (25) (97) Amortization of deferred financing fees 188 367 390 546 Gain on settlement of debt - (84) - (84) Non-controlling interest 25 23 51 32 Unit-based compensation 419 264 733 578 Future income tax expense (recovery) 890 225 2,114 (790) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 15,078 14,447 27,821 27,956 Changes in non-cash working capital 5,362 (82) (193) 521 ---------------------------------------------------------------------------- 20,440 14,365 27,628 28,477 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- FINANCING Proceeds from mortgages 7,632 29,355 27,159 37,356 Repayment of mortgages (9,817) (17,351) (21,641) (25,530) Proceeds from operating facilities, net 2,500 (8,502) 5,300 (402) Payments to non-controlling interest (118) (19) (137) (39) Units issued under Option Plan 173 439 506 439 Unit issue costs - - - (2) Distributions paid to unitholders (9,308) (9,276) (18,602) (18,542) ---------------------------------------------------------------------------- (8,938) (5,354) (7,415) (6,720) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- INVESTING Acquisition of rental properties and other assets (6,802) (552) (8,169) (6,890) Capital assets under development (126) (3,023) (225) (9,096) Building capital maintenance (1,970) (1,799) (6,236) (3,188) Capital improvements (2,677) (1,508) (4,554) (3,511) ---------------------------------------------------------------------------- (11,575) (6,882) (19,184) (22,685) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- NET (DECREASE) INCREASE IN CASH (73) 2,129 1,029 (928) CASH (BANK INDEBTEDNESS), BEGINNING OF PERIOD (718) (2,326) (1,820) 731 ---------------------------------------------------------------------------- BANK INDEBTEDNESS END OF PERIOD (791) (197) (791) (197) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- SUPPLEMENTARY INFORMATION Interest paid 6,584 6,409 12,969 12,766 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Interest received 47 79 87 167 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Income taxes paid 207 62 305 208 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST Notes to the Consolidated Financial Statements (unaudited) Three and Six months ended June 30, 2010 and 2009 (Columnar amounts expressed in thousands of dollars except where indicated) 1. DESCRIPTION OF THE TRUSTNorthern Property Real Estate Investment Trust ("NPR" or the "REIT") is an unincorporated open-ended real estate investment trust that invests in and owns a portfolio of residential and commercial income producing properties.2. SIGNIFICANT ACCOUNTING POLICIESBasis of presentationThese unaudited interim consolidated financial statements of NPR have been prepared in accordance with the recommendations of the Handbook of the Canadian Institute of Chartered Accountants ("CICA") that are consistent with those used in the audited consolidated financial statements as at and for the year ended December 31, 2009, except as disclosed in Note 3. These unaudited interim consolidated financial statements do not include all of the disclosures required by Canadian generally accepted accounting principles ("Canadian GAAP") applicable to annual financial statements; therefore, they should be read in conjunction with the December 31, 2009 audited consolidated financial statements.The consolidated financial statements include the accounts of NPR and its wholly-owned subsidiaries, together with the proportionate share of the assets, liabilities, revenues and expenses of joint ventures.The preparation of financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and to make disclosure of contingent assets and liabilities at the date of the financial statements, and to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reported period. Actual results may differ from those estimates.3. RECENT ACCOUNTING PRONOUNCEMENTSRecent Accounting PronouncementsOn January 5, 2009, the AcSB released Handbook Section 1582 Business Combinations, Section 1601, Consolidated Financial Statements and Section 1602 Non-Controlling Interest which supersedes Section 1581, Business Combinations and Section 1600, Consolidated Financial Statements. The released sections apply to interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011, and prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011. The Sections are consistent with International Financial Reporting Standards ("IFRS"). Early application and adoption are permitted.On February 13, 2008 the Accounting Standards Board ("AcSB") confirmed that the transition date to IFRS from Canadian GAAP would be January 1, 2011 for all publicly accountable enterprises. In April 2008, the AcSB issued an exposure draft proposing to incorporate IFRS into the CICA Handbook as a replacement for current Canadian GAAP for most publicly accountable enterprises including NPR. NPR will adopt IFRS as the basis for preparing its consolidated financial statements and will provide comparative financial information for the previous fiscal year using IFRS beginning with the quarter ending March 31, 2011. 4. RENTAL PROPERTIES AND OTHER CAPITAL ASSETS ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- June 30, December 31, 2010 Net 2009 Net Accumulated Book Accumulated Book Cost Amortization Value Cost Amortization Value ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Land 94,791 - 94,791 90,906 - 90,906 Buildings 833,636 110,127 723,509 815,985 98,983 717,002 Furniture, fixtures and equipment 11,138 5,566 5,572 10,326 4,956 5,370 Vehicles 1,469 775 694 1,307 674 633 Capital and leasehold improvements 44,656 17,506 27,150 36,491 14,151 22,340 ---------------------------------------------------------------------------- 985,690 133,974 851,716 955,015 118,764 836,251 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- During the three months ended June 30, 2010 NPR acquired 180 residential units and for total consideration of $13.5 million. Acquisitions and development projects were financed as follows: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three Months Six Months Ended June 30 Ended June 30 ---------------------------------------------------------------------------- 2010 2009 2010 2009 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Cash paid 4,286 - 4,503 5,550 Mortgages payable 9,223 - 9,223 1,788 Class B LP Units issued - - - 65 ---------------------------------------------------------------------------- Total 13,509 - 13,726 7,403 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Residential rental units 180 - 180 40 Seniors' units - - - 52 ---------------------------------------------------------------------------- Units acquired 180 - 180 92 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 5. PREPAID EXPENSES AND OTHER ASSETS ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- June 30, 2010 December 31, 2009 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Prepaid expenses 2,030 2,543 Prepaid equity leases 1,929 1,997 Other 587 548 ---------------------------------------------------------------------------- 4,546 5,088 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 6. INTANGIBLE ASSETS AND LIABILITIES ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- June 30, 2010 December 31, 2009 Accumulated Net Book Accumulated Net Book Cost Amortization Value Cost Amortization Value ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Above-market leases 173 149 24 173 139 34 In-place leases 6,474 2,949 3,525 6,474 2,466 4,008 Lease origination costs 1,643 953 690 1,643 834 809 ---------------------------------------------------------------------------- 8,290 4,051 4,239 8,290 3,439 4,851 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Below-market leases 1,220 1,161 59 1,220 1,126 94 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Intangible assets are comprised of the value of above-market leases, in-place leases and lease origination costs for rental property acquisitions completed. Intangible liabilities are comprised of the value of below-market leases for rental property acquisitions completed. 7. MORTGAGES PAYABLE ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- June 30, 2010 December 31, 2009 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Mortgages payable 533,654 518,912 Fair value adjustment (7,851) (8,217) Deferred financing costs (12,107) (11,699) ---------------------------------------------------------------------------- 513,696 498,996 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Mortgages payable bear interest at rates ranging from 2.68% to 12.13% and have a weighted average rate of 4.81% as at June 30, 2010 (December 31, 2009 - 4.87%). Mortgages are payable in monthly installments of blended principal and interest of approximately $3.6 million. The mortgages mature between 2010 and 2025 and are secured by charges against specific properties. Land and buildings with a carrying value of $717.9 million have been pledged to secure mortgages payable of NPR. The fair value of mortgages payable at June 30, 2010 is approximately $557.8 million (December 31, 2009 - $535.0 million). Minimum required future principal repayments, including maturities, are as follows: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 2010 22,448 2011 52,336 2012 51,160 2013 92,048 2014 79,197 Subsequent 236,465 ---------------------------------------------------------------------------- 533,654 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 8. OPERATING FACILITIESNPR has two revolving credit facilities totaling $57.5 million (December 31, 2009 - $57.5 million) for acquisition and operating purposes. The $50.0 million facility bears interest at prime plus 1.50% or bankers' acceptance plus 3.00% with a maturity date of May 21, 2010. The maturity date was extended to July 31, 2010. The $7.5 million facility bears interest at prime plus 1.50% or bankers' acceptance plus 3.00% with a maturity date of July 31, 2010. Specific properties with a carrying value of $91.4 million have been pledged as collateral security for the operating facilities. At June 30, 2010 NPR had utilized $39.0 million (December 31, 2009 - $33.7 million) of the operating facilities. Both facilities were renewed for one year in July, 2010.9. LONG-TERM INCENTIVE PLAN AND UNIT OPTION PLANNPR has a Long-Term Incentive Plan ("LTIP") for the executives of NPR, based on the results of each fiscal year. Units granted and issued under the LTIP are as follows: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Number of Units ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Balance - December 31, 2009 48,473 Units vested and issued - January, 2010 (31,650) Units vested and issued - February, 2010 (662) ---------------------------------------------------------------------------- Balance - June 30, 2010 16,161 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The total amount of LTIP awards are determined at the end of each fiscal year by the Board of Trustees based on an assessment of the performance of NPR and the individual performance of the executives. The number of units issued is based on the trading price on December 31 of each year. Pursuant to the policy, rights to units generally vest in 1/3 tranches: immediately upon award, then 12 and 24 months following. As at June 30, 2010, a total of 224,448 LTIP units had vested and been issued (December 31, 2009 - 192,136).NPR has a Unit Option Plan (the "Option Plan"), which is subject to the rules of the Toronto Stock Exchange ("TSX"). In accordance with the Option Plan, NPR may grant options to acquire units up to a total of 1,830,429 units. All options to acquire units expire after 5 years and vest as determined by the Governance and Compensation Committee of NPR. The exercise price is determined using the weighted average trading price of the units on the five days prior to the options being granted.The following table summarized the outstanding unit options as at June 30, 2010: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Number Number Outstanding Weighted Average Weighted Exercisable Weighted at Remaining Average at Average Exercise June 30, Contractual Exercise June 30, Exercise Price 2010 Life in Years Price 2010 Price ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- $23.12 726,000 2.9 $ 23.12 726,000 $ 23.12 $15.05 105,172 3.7 $ 15.05 52,675 $ 15.05 ---------------------------------------------------------------------------- 831,172 3.3 $ 22.10 778,675 $ 22.57 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Compensation expense for the six months ended June 30, 2010 relating to options granted was $183,000 (2009 - $278,000). During the six months ended June 30, 2010, 9,000 options with an exercise price of $23.12 and 19,825 options with an exercise price of $15.05 were exercised.10. EMPLOYEE UNIT PURCHASE PLANUnder the terms of the Employee Unit Purchase Plan (the "EUPP"), employees may invest a maximum of 5% of their salary in NPR trust units and NPR contributes one unit for every three units acquired by an employee. The units are purchased on the TSX at market prices. During the six months ended June 30, 2010, employees invested a total of $67,500 (2009 - $57,200) and NPR contributed $22,500 (2009 - $19,100). During the six months ended June 30, 2010, 3,724 units (2009 - 4,370 units) were purchased at an average cost of $23.21 per unit (2009 - $16.89 per unit).11. INCOME TAXESNPR has certain corporate subsidiaries which are subject to income tax on their respective taxable income at the applicable legislated tax rates.On October 31, 2006, a "Distribution Tax" on publicly traded investment trusts and publicly listed partnerships was announced by the federal Minister of Finance. The announcement created a new tax regime for Specified Investment Flow Throughs ("SIFTs"), which include certain publicly listed income trusts and publicly listed partnerships. These entities will be taxed in effect as corporations (at a rate comparable to the general combined federal/provincial corporate income tax rate). Certain real estate investment trusts are excluded from the SIFT definition and therefore are not subject to the new regime.The legislation provides for a transition period for publicly traded entities that existed prior to November 1, 2006 and is not expected to apply to NPR until 2011, The new tax regime, does not apply to entities that qualify for the REIT Exemption. Where an entity does not qualify for the REIT Exemption certain distributions will not be deductible in computing income for tax purposes and will be subject to tax on such distributions at a rate comparable to the general corporate income tax rate. At June 30, 2010, NPR does not appear to qualify for the REIT exemption.GAAP requires NPR to recognize future income tax assets and liabilities based on estimated temporary differences expected as at January 1, 2011. Under the current legislation, NPR does not appear to qualify for the REIT Exemption. The future income tax provision arises from temporary differences between the estimated accounting and tax values of NPR's assets and liabilities at January 1, 2011 and has been calculated using the expected tax rates of 19.63% to 28.40% (December 31, 2009 - 19.63% to 28.40%).The future tax liabilities arise from the temporary differences summarized below: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- June 30, 2010 December 31, 2009 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Future tax liabilities arising from temporary differences between accounting and tax basis of: Rental property assets in corporate subsidiaries 9,168 9,304 Rental properties 30,892 28,868 Deferred financing costs 1,823 1,574 Other assets 3,982 4,005 ---------------------------------------------------------------------------- 45,865 43,751 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The provision for income taxes differs from the results which would be obtained by applying the combined federal and provincial income tax rate to net income before taxes. The provision for income taxes is comprised of the following: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three Months Six Months Ended June 30 Ended June 30 ---------------------------------------------------------------------------- 2010 2009 2010 2009 ---------------------------------------------------------------------------- Current 80 98 166 202 Future expense (recovery) 890 225 2,114 (790) ---------------------------------------------------------------------------- 970 323 2,280 (588) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 12. UNITHOLDERS' CAPITALTrust unitsThe total authorized number of trust units is unlimited. The total number of trust units of the REIT outstanding as at June 30, 2010 is 23,234,060 (December 31, 2009 - 23,020,538) representing a net book value of $347.9 million (December 31, 2009 - $343.3 million), net of issue costs.Class B Exchangeable Limited Partnership Units and Special Voting UnitsThe Class B Units can be exchanged for trust units at any time at the option of the holder of the Class B units. Each Class B unit has a "Special Voting Unit" attached to it, which entitles the holder to one vote, either in person or by proxy at the meeting of unitholders of the trust as if he or she was a unitholder of the trust. Total number of Class B LP Units and special voting units of Northern Property Limited Partnership, a controlled limited partnership, outstanding as at June 30, 2010, is 1,932,705 (December 31, 2009 - 2,085,090) representing a net book value of $22.0 million (December 31, 2009 - $25.4 million).Distributions to UnitholdersPursuant to the Trust Declaration, holders of Trust units and Class B units are entitled to receive distributions made on each distribution date as approved by the Trustees. Unless determined otherwise at the discretion of the Trustees, distributions for the year are required to be at least equal to the net income as determined in accordance with the income tax act.The total number of NPR Trust units and Class B units issued, as the result of an exchange of Class B limited partnership units of Northern Property Limited Partnership (the "Class B LP Units"), outstanding and eligible for distributions at June 30, 2010 is 25,166,765 (December 31, 2009 - 25,105,628), representing net proceeds of $369.9 million, net of issue costs of $19.6 million (December 31, 2009 - $368.7 million, net of issue costs of $19.6 million). The number of units issued and outstanding is as follows: ---------------------------------------------------------------------------- Trust Issue Class B Issue Date Units Price LP Units Price Total $(000's) ---------------------------------------------------------------------------- December 31, 2009 23,020,538 - 2,085,090 25,105,628 368,690 ---------------------------------------------------------------------------- January 4, LTIP units 2010 issued 12,941 $18.88 - - 12,941 244 January 6, LTIP units 2010 issued 18,709 $21.90 - - 18,709 410 February 8, LTIP units 2010 issued 662 $19.16 - - 662 13 Options Q1, 2010 exercised 9,000 $23.12 - - 9,000 222 Options Q1, 2010 exercised 8,333 $15.05 - - 8,333 135 Options Q2, 2010 exercised 11,492 $15.05 - - 11,492 187 Class B LP units exchanged 152,385 - (152,385) - - - ---------------------------------------------------------------------------- June 30, 2010 23,234,060 - 1,932,705 - 25,166,765 369,901 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 13. NET EARNINGS PER UNIT ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three Months Six Month Ended June 30 Ended June 30 ---------------------------------------------------------------------------- 2010 2009 2010 2009 ---------------------------------------------------------------------------- Net earnings 5,610 6,733 8,998 13,834 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Weighted average units for basic net earnings per unit 25,166,765 25,083,873 25,150,715 25,073,656 Dilutive effect of units to be issued under the LTIP 16,161 19,523 17,031 25,082 Dilutive effect of Option Plan 68,081 46,793 52,190 43,328 ---------------------------------------------------------------------------- Weighted average units for diluted net earnings per unit 25,251,007 25,150,189 25,219,936 25,142,066 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net earnings per unit: Basic $0.223 $0.268 $0.358 $0.552 Diluted $0.222 $0.268 $0.357 $0.550 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 14. GUARANTEES, COMMITMENTS AND CONTINGENCIESIn the ordinary course of business, NPR may provide indemnification commitments to counterparties in transactions such as credit facilities, leasing transactions, service arrangements, director and officer indemnification agreements and sales of assets. These indemnification agreements may require NPR to compensate the counterparties for costs incurred as a result of changes in laws and regulations (including tax legislation) or as a result of litigation claims or statutory sanctions that may be suffered by counterparties as a consequence of the transaction. The terms of these indemnification agreements may vary based on the contract and do not provide any limit on the maximum potential liability. To date, NPR has not made any payments under such indemnifications and no amount has been accrued in the financial statements with respect to these indemnification commitments. In the normal course of operations, NPR becomes subject to various legal and other claims. Management and its legal counsel evaluate these claims and, where required, accrue the best estimate of costs relating to these claims. Management believes the outcome of claims of this nature at June 30, 2010 will not have a material impact on NPR.During the normal course of operations, NPR provided guarantees for mortgages payable relating to investments in corporations and joint ventures where NPR owns less than 100%. The mortgages payable are secured by specific charges against the properties owned by the corporations and joint ventures. In the event of a default of the corporation or joint venture, NPR may be liable for 100% of the outstanding balances of these mortgages payable. At June 30, 2010, NPR has provided guarantees totaling $6.0 million (December 31, 2009 - $6.1 million). These mortgages bear interest at rates ranging from 3.06% to 6.1% and mature July 2010 to December 2013 (December 2009 - 3.06% to 6.10% and mature July 2010 to December 2013). As at June 30, 2010, land and buildings with a carrying value of $8.8 million have been pledged to secure these mortgages payable (December 2009 - $6.3 million). NPR has included its proportionate share of its joint ventures' mortgages payable totaling $4.7 million at June 30, 2010 (December 31, 2009 - $4.9 million) in these consolidated financial statements.15. SEGMENTED INFORMATIONThe primary business segments used by management are geographic segments (i.e. provinces and territories). NPR operates in 5 geographic segments, British Columbia, Alberta, the Northwest Territories, Nunavut and Newfoundland. Within its geographic business segments, NPR has two business operating segments: residential and commercial income producing properties. The REIT's residential properties are comprised of three components: apartments, townhomes and single family rental units; execusuite apartment rental units, where the rental periods range from a few days to several months; and seniors' properties where the properties are leased on a long term basis to qualified operators who provide services to individual residents. The commercial business segment is comprised of office, industrial and retail properties in areas where NPR has residential operations. All items, except gain on sale of rental properties and gain on settlement of debt which are related only to the REIT and are included in the Consolidated Statement of Earnings, are not allocated to the defined segments. As such, NPR has not provided a reconciliation of Earnings before Other Items to Net Earnings. In 2009, gain on sale of rental properties was earned in the residential rental and commercial business segments in Nunavut and the Northwest Territories, respectively. Gain on settlement of debt was earned in the residential business segments in all geographic segments. Segmented information for NPR is provided below: Total Assets ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- June 30, 2010 BC Alberta NWT Nunavut Nfld Total ---------------------------------------------------------------------------- Residential Multi-family 94,004 184,988 91,707 110,704 58,048 539,451 Execusuites - - 10,466 9,247 9,569 29,282 Seniors' 16,067 120,397 - - 51,171 187,635 ---------------------------------------------------------------------------- 110,071 305,385 102,173 119,951 118,788 756,368 Commercial 21,422 9,001 91,459 19,182 1,173 142,237 Trust - 3,971 - - - 3,971 ---------------------------------------------------------------------------- TOTAL ASSETS 131,493 318,357 193,632 139,133 119,961 902,576 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total Assets ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- December 31, 2009 BC Alberta NWT Nunavut Nfld Total ---------------------------------------------------------------------------- Residential Multi-family 92,488 176,982 85,046 113,105 58,392 526,013 Execusuites - - 10,470 9,537 9,428 29,435 Seniors' 16,230 121,691 - - 49,610 187,531 ---------------------------------------------------------------------------- 108,718 298,673 95,516 122,642 117,430 742,979 Commercial 21,289 9,083 90,388 19,660 1,192 141,612 Trust - 3,776 - - - 3,776 ---------------------------------------------------------------------------- TOTAL ASSETS 130,007 311,532 185,904 142,302 118,622 888,367 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Geographic Segments ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended June 30, 2010 BC Alberta NWT Nunavut Nfld Total ---------------------------------------------------------------------------- Rental revenue 4,533 8,364 9,856 6,533 4,972 34,258 Other income 177 192 302 113 76 860 Operating expense (1,743) (2,249) (3,891) (1,822) (1,640) (11,345) ---------------------------------------------------------------------------- 2,967 6,307 6,267 4,824 3,408 23,773 Interest on mortgages (794) (2,724) (1,431) (976) (746) (6,671) Amortization (1,208) (2,146) (2,181) (1,522) (981) (8,038) ---------------------------------------------------------------------------- EARNINGS BEFORE OTHER 965 1,437 2,655 2,326 1,681 9,064 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Geographic Segments ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended June 30, 2009 BC Alberta NWT Nunavut Nfld Total ---------------------------------------------------------------------------- Rental revenue 3,972 8,624 9,430 6,297 4,521 32,844 Other income 128 274 198 159 108 867 Operating expense (1,530) (2,084) (4,070) (2,167) (1,592) (11,443) ---------------------------------------------------------------------------- 2,570 6,814 5,558 4,289 3,037 22,268 Interest on mortgages (723) (2,892) (1,487) (996) (640) (6,738) Amortization (989) (1,823) (2,083) (1,373) (862) (7,130) ---------------------------------------------------------------------------- EARNINGS BEFORE OTHER 858 2,099 1,988 1,920 1,535 8,400 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Six months ended June 30, 2010 BC Alberta NWT Nunavut Nfld Total ---------------------------------------------------------------------------- Rental revenue 8,743 16,520 19,482 12,847 9,687 67,279 Other income 294 374 679 235 220 1,802 Operating expenses (3,602) (5,217) (8,457) (3,821) (3,380) (24,477) ---------------------------------------------------------------------------- 5,435 11,677 11,704 9,261 6,527 44,604 Interest on mortgages (1,597) (5,412) (2,852) (1,936) (1,460) (13,257) Amortization (2,350) (4,174) (4,280) (3,033) (1,939) (15,776) ---------------------------------------------------------------------------- EARNINGS BEFORE OTHER ITEMS 1,488 2,091 4,572 4,292 3,128 15,571 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Six months ended June 30, 2009 BC Alberta NWT Nunavut Nfld Total ---------------------------------------------------------------------------- Rental revenue 8,024 17,709 18,448 12,945 8,710 65,836 Other income 243 529 526 387 229 1,914 Operating expenses (3,132) (4,551) (8,594) (4,614) (3,287) (24,178) ---------------------------------------------------------------------------- 5,135 13,687 10,380 8,718 5,652 43,572 Interest on mortgages (1,451) (5,578) (2,846) (2,013) (1,406) (13,294) Amortization (1,954) (3,729) (4,030) (2,811) (1,720) (14,244) ---------------------------------------------------------------------------- EARNINGS BEFORE OTHER ITEMS 1,730 4,380 3,504 3,894 2,526 16,034 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Business Segments ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended June 30, Multi- Total 2010 family Execusuites Seniors' Residential Commercial Total ---------------------------------------------------------------------------- Rental revenue 21,708 2,203 4,412 28,323 5,935 34,258 Other income 700 28 - 728 132 860 Operating expenses (8,138) (1,058) (3) (9,199) (2,146) (11,345) ---------------------------------------------------------------------------- 14,270 1,173 4,409 19,852 3,921 23,773 Interest on mortgages (4,213) (335) (1,506) (6,054) (617) (6,671) Amortization (5,171) (362) (1,140) (6,673) (1,365) (8,038) ---------------------------------------------------------------------------- EARNINGS BEFORE OTHER ITEMS 4,886 476 1,763 7,125 1,939 9,064 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended June 30, Multi- Total 2009 family Execusuites Seniors' Residential Commercial Total ---------------------------------------------------------------------------- Rental Revenue 20,595 2,046 4,341 26,982 5,862 32,844 Other Income 756 41 - 797 70 867 Operating Expenses (8,109) (1,089) (6) (9,204) (2,239) (11,443) ---------------------------------------------------------------------------- 13,242 998 4,335 18,575 3,693 22,268 Interest on Mortgages (4,252) (284) (1,523) (6,059) (679) (6,738) Amortization (4,355) (347) (1,116) (5,818) (1,312) (7,130) ---------------------------------------------------------------------------- EARNINGS BEFORE OTHER ITEMS 4,635 367 1,696 6,698 1,702 8,400 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Six months ended June 30, Multi- Total 2010 family Execusuites Seniors' Residential Commercial Total ---------------------------------------------------------------------------- Rental revenue 42,215 4,167 8,851 55,233 12,046 67,279 Other income 1,418 59 - 1,477 325 1,802 Operating expenses (17,733) (2,184) (9) (19,926) (4,551) (24,477) ---------------------------------------------------------------------------- 25,900 2,042 8,842 36,784 7,820 44,604 Interest on mortgages (8,351) (620) (3,020) (11,991) (1,266) (13,257) Amortization (10,094) (714) (2,280) (13,088) (2,688) (15,776) ---------------------------------------------------------------------------- EARNINGS BEFORE OTHER ITEMS 7,455 708 3,542 11,705 3,866 15,571 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Six months ended June 30, Multi- Execusuites Total 2009 family Seniors' Residential Commercial Total ---------------------------------------------------------------------------- Rental revenue 41,848 3,834 8,633 54,315 11,521 65,836 Other income 1,620 154 - 1,774 140 1,914 Operating expenses (17,342) (2,178) (12) (19,532) (4,646) (24,178) ---------------------------------------------------------------------------- 26,126 1,810 8,621 36,557 7,015 43,572 Interest on mortgages (8,296) (549) (3,083) (11,928) (1,366) (13,294) Amortization (8,808) (634) (2,212) (11,654) (2,590) (14,244) ---------------------------------------------------------------------------- EARNINGS BEFORE OTHER ITEMS 9,022 627 3,326 12,975 3,059 16,034 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 16. RELATED PARTY TRANSACTIONSRelated party transactions are conducted in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed upon by the related parties. A Trustee of NPR is the Chairman of AgeCare Investment Ltd. ("AgeCare"), which leases six seniors' properties. For the six months ended June 30, 2010, NPR earned rental income, including rental revenue earned on a straight-line basis over the term of the lease, totaling $6.3 million (2009 - $6.3 million) from AgeCare. Amounts outstanding in accounts receivable pertaining to this lease were $nil at June 30, 2010 (December 31, 2009 - $nil). In addition, AgeCare is paid an annual fee for advisory services provided to NPR respecting prospective acquisitions of seniors' properties. For the six months ended June 30, 2010, NPR paid $60,000 for these services (2009 - $60,000).NPR has a loan receivable from AgeCare relating to renovations completed on a property in 2009. The loan is repayable with interest over 15 years in accordance with the lease agreement. Interest revenue of $30,000 was earned for the three months ended June 30, 2010 (2009 - $23,000) relating to this receivable. Interest revenue of $60,000 was earned for the six months ended June 30, 2010 (2009 - $38,000). Amounts outstanding at June 30, 2010 totaled $2.0 million (December 31, 2009 - $2.1 million).A company owned by a Trustee of NPR leases commercial space from NPR under normal commercial terms. NPR earned rental revenue from that arrangement of $245,000 for the six months ended June 30, 2010 (2009 - $243,000). Amounts outstanding in accounts receivable pertaining to this lease were $nil at June 30, 2010 (December 31, 2009 - $nil).17. FINANCIAL INSTRUMENTSNPR's accounts and loans receivable and other financial liabilities are substantially carried at amortized cost, which approximates fair value. Such fair value estimates are not necessarily indicative of the amounts the Trust might pay or receive in actual market transactions.The fair value hierarchy of financial instruments measured at fair value on the balance sheet is as follows: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- June 30, 2010 December 31, 2009 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Financial assets and Bank indebtedness 791 - - 1,820 - - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The three levels of the fair value hierarchy are described as follows:Level 1: Values based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.Level 2: Values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability.Level 3: Values based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.NPR had no embedded derivatives requiring separate recognition.Utility cost riskNPR is exposed to utility cost risk, which results from the fluctuation in utility prices for fuel oil, natural gas and electricity, the primary utilities used to heat NPR's properties. The exposure to utility cost risk is restricted primarily to the REIT's residential rental and execusuites portfolio. The leases in the remainder of the portfolio generally provide for recovery of operating costs, including utilities. Because of the northern location of a portion of NPR's portfolio, the exposure to utility price fluctuations is more pronounced in the first and last fiscal quarter of the year. NPR manages its exposure to utility risk through a number of preventative measures, including retrofitting properties with energy efficient appliances, fixtures and windows. With the exception of a fixed price utility contract in place for certain residential rental units in Alberta, NPR does not utilize hedges or forward contracts to manage exposure to utility cost risk.Heating oil is the primary source of fuel for heating properties located in Nunavut and the Northwest Territories. Over the last two years, NPR converted heating systems for certain properties in Yellowknife from fuel oil based boilers to wood pellet boilers. The investment in these environmentally friendly boilers continues to reduce NPR's exposure to volatile heating oil prices. Exposure to increases in the cost of heating oil is partially offset by the ability to recover these increases from a significant proportion of its commercial and some residential tenants.Natural gas is the significant source of fuel for heating properties located in Alberta, BC and Inuvik, NWT. NPR has fixed price contracts for certain of its properties which accounts for approximately 21% of the REIT's usage in Alberta. Natural gas prices in Inuvik and BC are not subject to regulated price control and the REIT does not use financial instruments to manage the exposure to the price risk.Management prepared a sensitivity analysis on the impact of price changes in the cost of heating oil and natural gas. A 10% change in the average price of heating oil and natural gas would impact NPR's net earnings by $220,000 for the six months ended June 30, 2010.Electricity is the primary source of fuel for heating properties located in Newfoundland as well as parts of north eastern BC. In Newfoundland, electricity is purchased from the provincially regulated utility and is directly paid by the tenants for a significant portion of the REIT's multi-family rental units. As there is not a significant direct risk to NPR regarding the price of electricity, a sensitivity analysis has not been prepared.Liquidity riskUltimate responsibility for monitoring liquidity risk management lies with management and the Board of Trustees of the REIT. The REIT moderates liquidity risk by managing mortgage and loan maturities to ensure a relatively even amount of mortgage maturities in each year. At June 30 2010 the REIT has operating facilities totaling $57.5 million (December 31, 2009 - $57.5 million). At June 30, 2010, $39.0 million of the operating facilities were utilized (December 31, 2009 - $33.7 million). Cash flow projections are completed on a regular basis to ensure there will be adequate liquidity to maintain operating and investment activities in addition to making monthly distributions to unitholders. The Board of Trustees reviews current financial results and the annual business plan in determining appropriate distribution levels.Credit riskNPR's credit risk primarily arises from the possibility that tenants may not be able to fulfill their lease commitments. Tenant receivables are comprised of a large number of tenants spread across the geographic areas in which the REIT operates. There are no significant exposures to single tenants with the exception of AgeCare (See note 16), which leases seniors' properties in Alberta and BC and the Governments of Canada, the Northwest Territories and Nunavut, which lease a large number of residential units and commercial property in the Northwest Territories and Nunavut.NPR mitigates this risk through conducting thorough credit checks on prospective tenants, requiring rental payments on the first of the month, obtaining security deposits approximating one month's rent from tenants where legislation permits, and geographic diversification in its portfolio. Tenants are required to pay rent on the first of each month, with the exception of certain government leases where rent is due at the end of the month and certain commercial tenants where operating cost recoveries are billed in arrears. As such, the majority of tenant receivables are past due at the balance sheet date.The following is an aging of current tenant and other receivables: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- June 30, 2010 December 31, 2009 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 0-30 days 1,635 1,405 31-60 days 543 221 61-90 days 209 58 Over 90 days 647 730 ---------------------------------------------------------------------------- Tenant receivables 3,034 2,414 Other receivables 1,907 2,094 Allowance for doubtful accounts (350) (350) ---------------------------------------------------------------------------- 4,591 4,158 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- NPR classifies tenants as past tenants on the date of their move out from a residential unit. NPR records a specific allowance for doubtful accounts on all balances owed by past tenants. Any subsequent recovery of balances owed from past tenants is recorded as a reduction in the bad debt provision for the period. In addition, NPR records an allowance for doubtful accounts from current tenants and other receivables where the expected amount to be collected is less than the actual accounts receivable. The amounts disclosed on the balance sheet are net of allowances for uncollectible accounts from current and past tenants and other receivables, estimated by Management based on prior experience and current economic conditions.The reconciliation of changes in allowance for doubtful accounts is as follows: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three Months Six Months Ended June 30 Ended June 30 ---------------------------------------------------------------------------- 2010 2009 2010 2009 ---------------------------------------------------------------------------- Balance, beginning of period 350 350 350 350 Accounts receivable written off (12) (235) (24) (279) Accounts recovered 92 168 263 252 Increase (decrease) in allowance (80) 67 (239) 27 ---------------------------------------------------------------------------- Balance, June 30 350 350 350 350 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The following is an aging of accounts payable and accrued liabilities: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- June 30, 2010 December 31, 2009 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 0-6 months 12,210 10,629 6 months to 1 year 1,315 1,193 Over 1 year 199 212 ---------------------------------------------------------------------------- 13,724 12,034 Tenant security deposits 3,992 3,521 ---------------------------------------------------------------------------- 17,716 15,555 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Management believes that future cash flows from operations and availability under the current operating facilities provide sufficient available funds through the foreseeable future to support these financial liabilities.Interest rate riskNPR is exposed to interest rate risk on mortgages payable and does not hold any financial instruments to mitigate that risk. NPR utilizes both fixed and floating rate debt. Interest rate risk related to floating interest rates is limited primarily to the utilization of operating facilities. Management mitigates interest rate risk by utilizing fixed rate mortgages, ensuring access to a number of sources of funding and staggering mortgage maturities with the objective of achieving relatively even annual debt maturities. To the extent possible, NPR maximizes the amount of mortgages on residential rental properties where it is possible to lower interest rates through Canada Mortgage and Housing Corporation mortgage insurance.The sensitivity analysis for floating rate debt has been completed based on the exposure to interest rates at the balance sheet date. Floating rate debt includes all mortgage payable which are not subject to fixed interest rates and the credit facilities. A 0.50% change in interest rates, keeping all other variables constant, would change the REIT's net earnings for the six months ended June 30, 2010 by $137,000. 18. CAPITAL MANAGEMENTNPR's objectives when managing its capital are to safeguard its assets while maximizing the growth of its business, returns to unitholders and maintaining the sustainability of cash distributions. NPR's capital consists of mortgages payable, operating and acquisition facilities, Trust Units and Class B LP Units.Management monitors the REIT's capital structure on an ongoing basis to determine the appropriate level of mortgages payable to be placed on specific properties at the time of acquisition or when existing debt matures. NPR follows conservative guidelines which are set out in the Trust Declaration. In determining the most appropriate debt, consideration is given to strength of cash flow generated from the specific property, interest rate, amortization period, maturity of the debt in relation to the existing debt of the REIT, interest and debt service ratios, and limits on the amount of floating rate debt. NPR has operating facilities which are used to fund acquisitions and capital expenditures until specific mortgage debt is placed or additional equity is raised.Consistent with others in the industry, NPR monitors capital on the basis of debt to gross book value ratio. The Declaration of Trust provides for a maximum debt to gross book value ratio of 70%. The REIT does not anticipate operating above a debt to gross book value ratio of 60%. NPR's debt to gross book value is as follows: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Six Months Ended Year Ended June 30, 2010 December 31, 2009 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Bank indebtedness 791 1,820 Operating facilities 38,998 33,698 Mortgages payable 533,654 518,912 ---------------------------------------------------------------------------- Debt 573,443 554,430 ---------------------------------------------------------------------------- Rental properties and other capital assets 851,716 836,251 Capital assets improvements in progress 5,263 7,046 Capital assets under development 20,667 20,423 Accumulated amortization 133,974 118,764 Future income taxes on acquisitions (21,647) (21,647) ---------------------------------------------------------------------------- Gross Book Value 989,973 960,837 ---------------------------------------------------------------------------- Debt to Gross Book Value 57.9% 57.7% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- NPR is subject to three principal financial covenants in its mortgage payable and operating facilities. The financial covenants are described as follows:- Debt Service Coverage - calculated as Net earnings before interest, taxes and amortization divided by the debt service payments (total interest expense and principal repayments);- Interest Coverage - calculated as Net earnings before interest, taxes and amortization divided by total interest expense;- Debt to Gross Book Value as calculated above. ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Six Months Ended Year Ended June 30, 2010 December 31, 2009 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Earnings from continuing operations before taxes 11,278 25,929 Amortization 15,776 28,789 Interest on mortgages 13,257 26,435 Interest on operating facilities 529 755 ---------------------------------------------------------------------------- Net earnings before interest, taxes and amortization 40,840 81,908 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Interest on mortgages 13,257 26,435 Interest on operating facilities 529 755 ---------------------------------------------------------------------------- Total Interest Expense 13,786 27,190 Principal repayments 8,400 16,198 ---------------------------------------------------------------------------- Debt Service Payments 22,186 43,388 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Interest Coverage 2.96 3.01 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Debt Service Coverage 1.84 1.89 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- As at and during the six month period ended June 30, 2010, NPR complied with all externally imposed capital requirements and all covenants relating to its debt facilities.19. SUBSEQUENT EVENTSBetween July 1, 2010 and Aug 4, 2010 NPR completed mortgage financings and renewals totalling $1.6 million with interest rates from 4.25% to 5.50% and terms to maturity from 3 months to 10 years. Proceeds from the mortgage financings were used to fund new acquisitions, repay existing mortgage debt and a portion of the operating facility.On July 1, 2010, NPR completed the acquisition of a 14 unit expansion to an existing seniors' property for consideration of approximately $0.9 million. The acquisition was financed through the operating facilities.Both credit facilities were renewed for one year in July, 2010. On completion of the renewal, the interest rate spread over Bankers Acceptances decreased to 2.50% from 3.00%.On August 4, 2010 the Board of Trustees approved a 3.4% increase in annual distribution of $0.05 per unit. This will increase annual distributions to $1.53 per unit effective for the August, 2010 distribution.FOR FURTHER INFORMATION PLEASE CONTACT: Northern Property REIT Todd Cook CFO 403-531-0720