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Press release from Marketwire

NPR Reports Third Quarter 2010 Results

Wednesday, November 10, 2010

NPR Reports Third Quarter 2010 Results16:19 EST Wednesday, November 10, 2010CALGARY, ALBERTA--(Marketwire - Nov. 10, 2010) - Northern Property REIT (TSX:NPR.UN) announced its financial results for the 3 and 9 months ended September 30, 2010.HIGHLIGHTS:- Apartment occupancy continues to improve- Quarterly FFO a record $0.62 per unit- Same door growth of 3.6% for the nine months- Reorganization underway to comply with REIT exemption- SIFT compliance/IFRS adoption expenses of $0.05 per unit FFO in 2010- Equity raise of $49.5 million closed Sept 28.FINANCIAL PERFORMANCE AT A GLANCE-------------------------------------------------------------------------------------------------------------------------------------------------------- Three Months Nine MonthsIn $000's except per unit amounts Ended September 30 Ended September 30---------------------------------------------------------------------------- 2010 2009 2010 2009----------------------------------------------------------------------------Total revenue 36,319 33,282 105,400 101,032Net operating income ("NOI") (1) 24,718 22,461 69,322 66,033Net earnings 6,677 6,829 15,675 20,663Net earnings per unit, basic $ 0.265 $ 0.272 $ 0.623 $ 0.824Distributions to unitholders 9,769 9,269 28,379 27,814Distributions per unit $ 0.378 $ 0.370 $ 1.118 $ 1.110Distributable Income ("DI") (1) 15,492 $ 14,166 42,872 41,544DI per unit, basic $ 0.614 $ 0.564 $ 1.703 $ 1.656Payout ratio 63.1% 65.4% 66.2% 67.0%Funds from operations ("FFO") (1) 15,623 14,356 43,244 42,138FFO per unit, basic $ 0.619 $ 0.572 $ 1.717 $ 1.680FFO payout ratio 62.5% 64.6% 65.6% 66.0%--------------------------------------------------------------------------------------------------------------------------------------------------------For the three months ended September 30, 2010, Northern Property reported total Funds from Operations (FFO) of $15.62 million or 8% above the same quarter of 2009. NPR's quarterly FFO broke through the 60 cent level for the first time reaching $0.62 compared with $0.572 a year earlier.Jim Britton, President & CEO of NPR said, "Q3 was another excellent quarter for us. Our overall vacancy has returned to pre-recession levels. We are experiencing robust conditions in the Far North and Newfoundland, northern B.C. is doing well, and our Alberta markets which are exposed to the oil industry are showing signs of improvement. Grande Prairie, with its exposure to the natural gas industry is our biggest concern; however, our apartment occupancy has improved there as well."Net Operating Income for the first nine months of 2010 was $69.3 million, 5.9 % ahead of the same period a year ago. Improved occupancy, rental increases in certain locations and acquisition activity contributed to the positive results. Trust administration expenses were much higher reflecting approximately $1.2 million of one-time expenses incurred year to date in connection with the reorganization and implementation of IFRS accounting standards. Notwithstanding these extraordinary costs, NPR's payout ratio remained strong at 65.6% of distributable income for the nine months.On November 2, 2010 the REIT announced its intention to adopt a stapled unit structure in order to comply with SIFT legislation. In a Special Meeting to be held November 25, unitholders will as asked to approve a Plan of Arrangement whereby a new taxable corporation, NorSerCo Inc., will be established. NPR's income which does not qualify for the REIT exemption, principally the income associated with the day to day operations of four ExecuSuite properties, will be transferred from NPR to NorSerCo. NPR will retain ownership of the ExecuSuite buildings and lands and will receive lease payments from NorSerCo. The Board of Trustees and Management of NPR strongly encourage unitholders to vote in favour of the Plan of Arrangement. In the absence of receiving 66 2/3% of unitholder votes cast, NPR would be subject to taxation on its cash distributions to unitholders. Such would threaten the REIT's ability to maintain the current level of distribution. Management expects that unitholders will approve The Plan.The NPR/NorSerCo stapled units will trade as a single security on the Toronto Stock Exchange under the trading symbol NPR.UN. Cash distributions to unitholders will be unaffected by the reorganization and will remain at $1.53 per unit annually ($0.1275 per unit monthly)."NPR is in very good health both operationally and financially", Mr. Britton went on to say. "Our portfolio is experiencing low vacancy and we have had solid same door growth for two quarters. Our equity raise in September provided us with substantial financial flexibility. Our debt levels and interest rates are low. When the costs associated with the reorganization and IFRS are behind us, as they soon will be, NPR is well positioned to move ahead."NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUSTUnaudited Consolidated Balance Sheets(Thousands of dollars)-------------------------------------------------------------------------------------------------------------------------------------------------------- September December 30, 2010 31, 2009----------------------------------------------------------------------------ASSETSRental properties and other capital assets (Note 4) 848,758 836,251Capital improvements in progress 6,996 7,046Capital assets under development 24,198 20,423Prepaid expenses and other assets (Note 5) 7,306 5,088Cash and cash equivalents 32,816 -Accounts receivable (Note 17) 3,171 4,158Tenant security deposits 4,105 3,555Deferred rent receivable 5,728 4,539Loans receivable 2,296 2,456Intangible assets (Note 6) 3,953 4,851---------------------------------------------------------------------------- 939,327 888,367--------------------------------------------------------------------------------------------------------------------------------------------------------LIABILITIESMortgages payable (Note 7) 509,331 498,996Operating facilities (Note 8) 32,498 33,698Bank indebtedness - 1,820Accounts payable and accrued liabilities (Note 17) 21,295 15,555Distributions payable 3,457 3,096Future income tax liability (Note 11) 46,355 43,751Intangible liabilities (Note 6) 49 94Non-controlling interest 384 464---------------------------------------------------------------------------- 613,369 597,474----------------------------------------------------------------------------UNITHOLDERS' EQUITY 325,958 290,893---------------------------------------------------------------------------- 939,327 888,367--------------------------------------------------------------------------------------------------------------------------------------------------------See accompanying notes to the consolidated financial statements.Guarantees, commitments and contingencies (Note 14)APPROVED BY THE BOARDTrusteeTrusteeNORTHERN PROPERTY REAL ESTATE INVESTMENT TRUSTUnaudited Consolidated Statements of Earnings and Comprehensive EarningsThree and Nine Months Ended September 30(Thousands of dollars, except per unit amounts)---------------------------------------------------------------------------- Three Months Nine Months Ended September 30 Ended September 30 2010 2009 2010 2009----------------------------------------------------------------------------REVENUERental revenue 35,352 32,558 102,631 98,394Other property income 967 724 2,769 2,638---------------------------------------------------------------------------- 36,319 33,282 105,400 101,032Operating expenses (11,601) (10,821) (36,078) (34,999)---------------------------------------------------------------------------- 24,718 22,461 69,322 66,033----------------------------------------------------------------------------OTHER EXPENSESInterest on mortgages (6,663) (6,730) (19,920) (20,024)Amortization (8,165) (6,985) (23,941) (21,229)---------------------------------------------------------------------------- (14,828) (13,715) (43,861) (41,253)----------------------------------------------------------------------------EARNINGS BEFORE THE UNDERNOTED 9,890 8,746 25,461 24,780----------------------------------------------------------------------------Trust administration (2,332) (1,460) (6,194) (4,171)Interest on operating facilities (358) (181) (887) (554)Interest and other income 84 86 233 330Gain on settlement of debt - 46 - 130Non-controlling interest (30) (37) (81) (69)----------------------------------------------------------------------------EARNINGS BEFORE INCOME TAXES 7,254 7,200 18,532 20,446----------------------------------------------------------------------------INCOME TAXES (Note 11)Current (87) (121) (253) (323)Future (expense) recovery (490) (250) (2,604) 540---------------------------------------------------------------------------- (577) (371) (2,857) 217----------------------------------------------------------------------------NET EARNINGS 6,677 6,829 15,675 20,663Other comprehensive income (loss) - 62 - (123)----------------------------------------------------------------------------COMPREHENSIVE EARNINGS 6,677 6,891 15,675 20,540--------------------------------------------------------------------------------------------------------------------------------------------------------Net earnings per unit (Note 13)Basic $ 0.265 $ 0.272 $ 0.623 $ 0.824Diluted $ 0.263 $ 0.271 $ 0.620 $ 0.821--------------------------------------------------------------------------------------------------------------------------------------------------------See accompanying notes to the consolidated financial statements.NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUSTUnaudited Consolidated Statements of Unitholders' EquityThree and Nine Months Ended September 30(Thousands of dollars)---------------------------------------------------------------------------- Three Months Nine Months Ended September 30 Ended September 30 2010 2009 2010 2009----------------------------------------------------------------------------TRUST UNITS (Note 12)Balance, beginning of period 369,901 368,649 368,690 367,446Issuance of units 49,569 - 50,075 504Exercise of unit options 5 - 43 35Units cancelled - (13) - (13)Issue costs (2,505) - (2,505) (2)Long term incentive plan units issued - - 667 666----------------------------------------------------------------------------Balance, September 30 416,970 368,636 416,970 368,636----------------------------------------------------------------------------CONTRIBUTED SURPLUSBalance, beginning of period 1,587 1,253 2,109 1,676Unit-based compensation 16 113 199 391Exercise of unit options (5) - (43) (35)Long term incentive plan units issued - - (667) (666)----------------------------------------------------------------------------Balance, September 30 1,598 1,366 1,598 1,366----------------------------------------------------------------------------CUMULATIVE DEFICIT CUMULATIVE NET EARNINGS Balance, beginning of period 116,383 99,890 107,385 86,056 Units cancelled - 13 - 13 Net earnings 6,677 6,829 15,675 20,663---------------------------------------------------------------------------- Balance, September 30 123,060 106,732 123,060 106,732---------------------------------------------------------------------------- CUMULATIVE DISTRIBUTIONS TO UNITHOLDERS Balance, beginning of period (205,901) (168,736) (187,291) (150,191) Distributions declared to unitholders (9,769) (9,269) (28,379) (27,814)---------------------------------------------------------------------------- Balance, September 30 (215,670) (178,005) (215,670) (178,005)----------------------------------------------------------------------------CUMULATIVE DEFICIT, September 30 (92,610) (71,273) (92,610) (71,273)----------------------------------------------------------------------------ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSS)Balance, beginning of period - (62) - 123Other comprehensive loss - 62 - (123)----------------------------------------------------------------------------Balance, September 30 - - - -----------------------------------------------------------------------------TOTAL UNITHOLDERS' EQUITY 325,958 298,729 325,958 298,729--------------------------------------------------------------------------------------------------------------------------------------------------------See accompanying notes to the consolidated financial statements.NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUSTUnaudited Consolidated Statements of Cash FlowsThree and Nine Months Ended September 30(Thousands of dollars)---------------------------------------------------------------------------- Three Months Nine Months Ended September 30 Ended September 30 2010 2009 2010 2009----------------------------------------------------------------------------CASH FLOWS RELATED TO THE FOLLOWING ACTIVITIES: OPERATING Net earnings 6,677 6,829 15,675 20,663 Adjustments for: Deferred rental revenue (321) (330) (906) (959) Amortization 8,165 6,985 23,941 21,229 Amortization of fair value of debt 194 178 563 500 Amortization of above and below market leases (4) (38) (29) (135) Amortization of deferred financing fees 190 358 580 904 Gain on settlement of debt - (46) - (130) Non-controlling interest 30 37 81 69 Unit-based compensation 291 338 1,024 916 Future income tax expense (recovery) 490 250 2,604 (540)-------------------------------------------------------------------------------------------------------------------------------------------------------- 15,712 14,561 43,533 42,517 Changes in non-cash working capital 767 (1,630) 574 (1,109)---------------------------------------------------------------------------- 16,479 12,931 44,107 41,408-------------------------------------------------------------------------------------------------------------------------------------------------------- FINANCING Proceeds from mortgages 882 10,010 28,041 47,366 Repayment of mortgages (5,554) (9,984) (27,195) (35,514) Proceeds from operating facilities, net (6,500) 5,500 (1,200) 5,098 Payments to non-controlling interest (24) (18) (161) (57) Units issued under Option Plan 61 - 567 439 Proceeds from public offering (net of issue costs) 47,003 - 47,003 (2) Distributions paid to unitholders (9,416) (9,268) (28,018) (27,810)---------------------------------------------------------------------------- 26,452 (3,760) 19,037 (10,480)-------------------------------------------------------------------------------------------------------------------------------------------------------- INVESTING Acquisition of rental properties and other assets (1,682) (3,483) (9,851) (10,373) Capital assets under development (2,396) (2,088) (2,621) (11,184) Building capital maintenance (2,971) (3,202) (9,207) (6,390) Capital improvements (2,275) (2,546) (6,829) (6,057)---------------------------------------------------------------------------- (9,324) (11,319) (28,508) (34,004)--------------------------------------------------------------------------------------------------------------------------------------------------------NET (DECREASE) INCREASE IN CASH 33,607 (2,148) 34,636 (3,076)CASH AND CASH EQUIVELANTS (BANK INDEBTEDNESS), BEGINNING OF PERIOD (791) (197) (1,820) 731----------------------------------------------------------------------------CASH AND CASH EQUIVELANTS (BANK INDEBTEDNESS), END OF PERIOD 32,816 (2,345) 32,816 (2,345)--------------------------------------------------------------------------------------------------------------------------------------------------------SUPPLEMENTARY INFORMATIONInterest paid 6,657 6,549 19,626 19,140--------------------------------------------------------------------------------------------------------------------------------------------------------Interest received 51 48 138 215--------------------------------------------------------------------------------------------------------------------------------------------------------Income taxes paid 100 6 308 214--------------------------------------------------------------------------------------------------------------------------------------------------------See accompanying notes to the consolidated financial statements.NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUSTNotes to the Consolidated Financial Statements (unaudited)Three and Nine months ended September 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-------------------------------------------------------------------------------------------------------------------------------------------------------- September 30, 2010 December 31, 2009 Accumulated Net Book Accumulated Net Book Cost Amortization Value Cost Amortization Value--------------------------------------------------------------------------------------------------------------------------------------------------------Land 94,791 - 94,791 90,906 - 90,906Buildings 835,688 116,728 718,960 815,985 98,983 717,002Furniture, fixtures and equipment 11,621 5,892 5,729 10,326 4,956 5,370Vehicles 1,540 816 724 1,307 674 633Capital and leasehold improvements 47,918 19,364 28,554 36,491 14,151 22,340---------------------------------------------------------------------------- 991,558 142,800 848,758 955,015 118,764 836,251--------------------------------------------------------------------------------------------------------------------------------------------------------During the nine months ended September 30, 2010 NPR acquired 180 residential units and 14 seniors' units for total consideration of $14.6 million. Acquisitions and development projects were financed as follows:-------------------------------------------------------------------------------------------------------------------------------------------------------- Three Months Nine Months Ended September 30 Ended September 30---------------------------------------------------------------------------- 2010 2009 2010 2009--------------------------------------------------------------------------------------------------------------------------------------------------------Cash paid 913 2,786 5,416 8,347Mortgages payable - - 9,223 1,788Class B LP Units issued - - - 65----------------------------------------------------------------------------Total 913 2,786 14,639 10,200--------------------------------------------------------------------------------------------------------------------------------------------------------Residential rental units - - 180 40Seniors' units 14 30 14 82----------------------------------------------------------------------------Units acquired 14 30 194 122--------------------------------------------------------------------------------------------------------------------------------------------------------5. PREPAID EXPENSES AND OTHER ASSETS-------------------------------------------------------------------------------------------------------------------------------------------------------- September December 30, 2010 31, 2009--------------------------------------------------------------------------------------------------------------------------------------------------------Prepaid expenses 3,934 2,543Prepaid equity leases 2,302 1,997Other 1,070 548---------------------------------------------------------------------------- 7,306 5,088--------------------------------------------------------------------------------------------------------------------------------------------------------6. INTANGIBLE ASSETS AND LIABILITIES-------------------------------------------------------------------------------------------------------------------------------------------------------- September 30, 2010 December 31, 2009 Accumulated Net Book Accumulated Net Book Cost Amortization Value Cost Amortization Value--------------------------------------------------------------------------------------------------------------------------------------------------------Above-market leases 173 154 19 173 139 34In-place leases 6,474 3,180 3,294 6,474 2,466 4,008Lease origination costs 1,643 1,003 640 1,643 834 809---------------------------------------------------------------------------- 8,290 4,337 3,953 8,290 3,439 4,851--------------------------------------------------------------------------------------------------------------------------------------------------------Below-market leases 1,220 1,170 49 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-------------------------------------------------------------------------------------------------------------------------------------------------------- September December 30, 2010 31, 2009--------------------------------------------------------------------------------------------------------------------------------------------------------Mortgages payable 528,981 518,912Fair value adjustment (7,659) (8,217)Deferred financing costs (11,991) (11,699)---------------------------------------------------------------------------- 509,331 498,996--------------------------------------------------------------------------------------------------------------------------------------------------------Mortgages payable bear interest at rates ranging from 2.68% to 7.00% and have a weighted average rate of 4.78% as at September 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 $714.0 million have been pledged to secure mortgages payable of NPR. The fair value of mortgages payable at September 30, 2010 is approximately $559.9 million (December 31, 2009 - $535.0 million).Minimum required future principal repayments, including maturities, are asfollows:----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------2010 (remainder of year) 11,0512011 54,3162012 51,4292013 92,3192014 79,580Subsequent 240,286---------------------------------------------------------------------------- 528,981--------------------------------------------------------------------------------------------------------------------------------------------------------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 2.50% with a maturity date of May 21, 2011. The $7.5 million facility bears interest at prime plus 1.50% or bankers' acceptance plus 2.50% with a maturity date of July 31, 2011. Specific properties with a carrying value of $90.6 million have been pledged as collateral security for the operating facilities. At September 30, 2010 NPR had utilized $32.5 million (December 31, 2009 - $33.7 million) of the operating facilities.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 48,473Units vested and issued - January, 2010 (31,650)Units vested and issued - February, 2010 (662)----------------------------------------------------------------------------Balance - September 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 September 30, 2010, a total of 224,448 LTIP units had vested and been issued since the inception of the plan (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 September 30, 2010:-------------------------------------------------------------------------------------------------------------------------------------------------------- Weighted- Number Weighted- Number Average Weighted- Exercisable AverageExercise Outstanding Remaining Average at ExercisePrice at Contractual Exercise Price September 30, Price--------------------------------------------------------------------------------------------------------------------------------------------------------$23.12 726,000 2.6 $ 23.12 726,000 $ 23.12$15.05 101,172 3.4 $ 15.05 48,675 $ 15.05---------------------------------------------------------------------------- 827,172 3.0 $ 22.13 774,675 $ 22.61--------------------------------------------------------------------------------------------------------------------------------------------------------Compensation expense for the nine months ended September 30, 2010 relating to options granted was $199,000 (2009 - $391,000). During the nine months ended September 30, 2010, 9,000 options with an exercise price of $23.12 and 23,825 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 nine months ended September 30, 2010, employees invested a total of $100,095 (2009 - $89,641) and NPR contributed $33,405 (2009 - $29,888). During the nine months ended September 30, 2010, 5,909 units (2009 - 7,029 units) were purchased at an average cost of $23.72 per unit (2009 - $17.96 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 September 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:-------------------------------------------------------------------------------------------------------------------------------------------------------- September December 30, 2010 31, 2009--------------------------------------------------------------------------------------------------------------------------------------------------------Future tax liabilities arising from temporary differences between accounting and tax basis of: Rental property assets in corporate subsidiaries 9,015 9,304 Rental properties 31,953 28,868 Deferred financing costs 1,949 1,574 Other assets 3,438 4,005---------------------------------------------------------------------------- 46,355 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 Nine Months Ended September 30 Ended September 30---------------------------------------------------------------------------- 2010 2009 2010 2009----------------------------------------------------------------------------Current 87 121 253 323Future expense (recovery) 490 250 2,604 (540)---------------------------------------------------------------------------- 577 371 2,857 (217)--------------------------------------------------------------------------------------------------------------------------------------------------------12. UNITHOLDERS' CAPITALTrust unitsThe total authorized number of trust units is unlimited. The total number of trust units of the REIT outstanding as at September 30, 2010 is 25,214,560 (December 31, 2009 - 23,020,538) representing a net book value of $395.7 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 September 30, 2010, is 1,897,705 (December 31, 2009 - 2,085,090) representing a net book value of $21.3 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 September 30, 2010 is 27,112,265 (December 31, 2009 - 25,105,628), representing net proceeds of $417.0 million, net of issue costs of $22.1 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:---------------------------------------------------------------------------- Class Trust Issue B LP IssueDate Description Units Price Units Price Total $(000's)----------------------------------------------------------------------------December 31, 2009 23,020,538 - 2,085,090 25,105,628 368,690----------------------------------------------------------------------------January LTIP units 4, 2010 issued 12,941 $18.88 - - 12,941 244January LTIP units 6, 2010 issued 18,709 $21.90 - - 18,709 410February LTIP units 8, 2010 issued 662 $19.16 - - 662 13 OptionsQ1, 2010 exercised 9,000 $23.12 - - 9,000 222 OptionsQ1, 2010 exercised 8,333 $15.05 - - 8,333 135 OptionsQ2, 2010 exercised 11,492 $15.05 - - 11,492 187 OptionsQ3, 2010 exercised 4,000 $15.05 - - 4,000 66 PublicQ3, 2010 Offering 1,941,500 $25.50 - - 1,941,500 49,508Q3, 2010 Issue costs - - - - - (2,505)Class B LP units exchanged 187,385 - (187,385) - - -----------------------------------------------------------------------------September 30, 2010 25,214,560 - 1,897,705 - 27,112,265 416,970--------------------------------------------------------------------------------------------------------------------------------------------------------13. NET EARNINGS PER UNIT-------------------------------------------------------------------------------------------------------------------------------------------------------- Three Months Nine Month Ended September 30 Ended September 30---------------------------------------------------------------------------- 2010 2009 2010 2009----------------------------------------------------------------------------Net earnings 6,677 6,829 15,675 20,663--------------------------------------------------------------------------------------------------------------------------------------------------------Weighted average units for basic net earnings per unit 25,233,807 25,102,612 25,178,717 25,083,414Dilutive effect of units to be issued under the LTIP 16,161 19,523 16,738 23,209Dilutive effect of Option Plan 104,683 51,077 67,238 51,001----------------------------------------------------------------------------Weighted average units for diluted net earnings per unit 25,354,651 25,173,212 25,262,693 25,157,624--------------------------------------------------------------------------------------------------------------------------------------------------------Net earnings per unit: Basic $ 0.265 $ 0.272 $ 0.623 $ 0.824 Diluted $ 0.263 $ 0.271 $ 0.620 $ 0.821--------------------------------------------------------------------------------------------------------------------------------------------------------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 September 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 up to 100% of the outstanding balances of these mortgages payable. At September 30, 2010, NPR has provided guarantees totaling $6.2 million (December 31, 2009 - $6.1 million). These mortgages bear interest at rates ranging from 3.06% to 6.10% and mature November 2010 to July 2015 (December 2009 - 3.06% to 6.10% and mature July 2010 to December 2013). As at September 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 $4.8 million at September 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. 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--------------------------------------------------------------------------------------------------------------------------------------------------------September 30, 2010 BC Alberta NWT Nunavut Nfld Total----------------------------------------------------------------------------Residential Multi-family 94,432 184,893 92,628 113,578 58,281 543,812 Execusuites - - 10,505 9,316 9,337 29,158 Seniors' 15,947 119,844 - - 51,826 187,617---------------------------------------------------------------------------- 110,379 304,737 103,133 122,894 119,444 760,587Commercial 21,103 8,889 91,134 19,617 1,169 141,912Trust - 36,828 - - - 36,828----------------------------------------------------------------------------TOTAL ASSETS 131,482 350,454 194,267 142,511 120,613 939,327--------------------------------------------------------------------------------------------------------------------------------------------------------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 95,516 122,642 117,430 742,979Commercial 21,289 9,083 90,388 19,660 1,192 141,612Trust - 3,776 - - - 3,776----------------------------------------------------------------------------TOTAL ASSETS 130,007 311,532 185,904 142,302 118,622 888,367--------------------------------------------------------------------------------------------------------------------------------------------------------Geographic Segments--------------------------------------------------------------------------------------------------------------------------------------------------------Three months endedSeptember 30, 2010 BC Alberta NWT Nunavut Nfld Total----------------------------------------------------------------------------Rental revenue 4,685 8,519 10,161 6,653 5,334 35,352Other income 186 260 322 89 110 967Operating expense (1,603) (2,431) (4,228) (1,772) (1,567) (11,601)---------------------------------------------------------------------------- 3,268 6,348 6,255 4,970 3,877 24,718Interest on mortgages (792) (2,711) (1,516) (903) (741) (6,663)Amortization (1,254) (2,198) (2,172) (1,526) (1,015) (8,165)----------------------------------------------------------------------------EARNINGS BEFORE OTHER 1,222 1,439 2,567 2,541 2,121 9,890--------------------------------------------------------------------------------------------------------------------------------------------------------Geographic Segments--------------------------------------------------------------------------------------------------------------------------------------------------------Three months endedSeptember 30, 2009 BC Alberta NWT Nunavut Nfld Total----------------------------------------------------------------------------Rental revenue 4,045 8,103 8,978 6,399 5,033 32,558Other income 98 212 266 71 77 724Operating expense (1,530) (2,411) (3,585) (1,878) (1,417) (10,821)---------------------------------------------------------------------------- 2,613 5,904 5,659 4,592 3,693 22,461Interest on mortgages (794) (2,688) (1,639) (964) (645) (6,730)Amortization (1,036) (1,644) (1,929) (1,456) (920) (6,985)----------------------------------------------------------------------------EARNINGS BEFORE OTHER 783 1,572 2,091 2,172 2,128 8,746----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Nine months endedSeptember 30, 2010 BC Alberta NWT Nunavut Nfld Total----------------------------------------------------------------------------Rental revenue 13,428 25,039 29,643 19,500 15,021 102,631Other income 480 634 1,001 324 330 2,769Operating expenses (5,205) (7,648) (12,685) (5,593) (4,947) (36,078)---------------------------------------------------------------------------- 8,703 18,025 17,959 14,231 10,404 69,322Interest on mortgages (2,389) (8,123) (4,368) (2,839) (2,201) (19,920)Amortization (3,604) (6,372) (6,452) (4,559) (2,954) (23,941)----------------------------------------------------------------------------EARNINGS BEFORE OTHER ITEMS 2,710 3,530 7,139 6,833 5,249 25,461----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Nine months endedSeptember 30, 2009 BC Alberta NWT Nunavut Nfld Total----------------------------------------------------------------------------Rental revenue 12,069 25,812 27,426 19,344 13,743 98,394Other income 341 741 792 458 306 2,638Operating expenses (4,662) (6,962) (12,179) (6,492) (4,704) (34,999)---------------------------------------------------------------------------- 7,748 19,591 16,039 13,310 9,345 66,033Interest on mortgages (2,245) (8,266) (4,485) (2,977) (2,051) (20,024)Amortization (2,990) (5,373) (5,959) (4,267) (2,640) (21,229)----------------------------------------------------------------------------EARNINGS BEFORE OTHER ITEMS 2,513 5,952 5,595 6,066 4,654 24,780--------------------------------------------------------------------------------------------------------------------------------------------------------Business SegmentsThree months ended September 30, Multi- Total 2010 family Execusuites Seniors' Residential Commercial Total----------------------------------------------------------------------------Rental revenue 22,193 2,678 4,510 29,381 5,971 35,352Other income 793 36 - 829 138 967Operating expenses (8,002) (1,135) (6) (9,143) (2,458) (11,601)---------------------------------------------------------------------------- 14,984 1,579 4,504 21,067 3,651 24,718Interest on mortgages (4,194) (260) (1,500) (5,954) (709) (6,663)Amortization (5,276) (361) (1,153) (6,790) (1,375) (8,165)----------------------------------------------------------------------------EARNINGS BEFORE OTHER ITEMS 5,514 958 1,851 8,323 1,567 9,890----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Three months ended September 30, Multi- Total 2009 family Execusuites Seniors' Residential Commercial Total----------------------------------------------------------------------------Rental Revenue 20,122 2,547 4,401 27,070 5,488 32,558Other Income 635 26 - 661 63 724Operating Expenses (7,669) (1,091) (6) (8,766) (2,055) (10,821)---------------------------------------------------------------------------- 13,088 1,482 4,395 18,965 3,496 22,461Interest on Mortgages (4,304) (224) (1,533) (6,061) (669) (6,730)Amortization (4,351) (339) (1,111) (5,801) (1,184) (6,985)----------------------------------------------------------------------------EARNINGS BEFORE OTHER ITEMS 4,433 919 1,751 7,103 1,643 8,746----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Nine months ended September 30, Multi- Execusuites Total 2010 family Seniors' Residential Commercial Total----------------------------------------------------------------------------Rental revenue 64,408 6,845 13,361 84,614 18,017 102,631Other income 2,211 95 - 2,306 463 2,769Operating expenses (25,735) (3,319) (15) (29,069) (7,009) (36,078)---------------------------------------------------------------------------- 40,884 3,621 13,346 57,851 11,471 69,322Interest on mortgages (12,545) (880) (4,520) (17,945) (1,975) (19,920)Amortization (15,370) (1,075) (3,433) (19,878) (4,063) (23,941)----------------------------------------------------------------------------EARNINGS BEFORE OTHER ITEMS 12,969 1,666 5,393 20,028 5,433 25,461----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Nine months ended September 30, Multi- Execusuites Total 2009 family Seniors' Residential Commercial Total----------------------------------------------------------------------------Rental revenue 61,970 6,381 13,034 81,385 17,009 98,394Other income 2,255 180 - 2,435 203 2,638Operating expenses (25,011) (3,269) (18) (28,298) (6,701) (34,999)---------------------------------------------------------------------------- 39,214 3,292 13,016 55,522 10,511 66,033Interest on mortgages (12,600) (773) (4,616) (17,989) (2,035) (20,024)Amortization (13,159) (973) (3,323) (17,455) (3,774) (21,229)----------------------------------------------------------------------------EARNINGS BEFORE OTHER ITEMS 13 455 1 546 5 077 20 078 4 702 24 780--------------------------------------------------------------------------------------------------------------------------------------------------------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 nine months ended September 30, 2010, NPR earned rental income, including rental revenue earned on a straight-line basis over the term of the lease, totaling $9.5 million (2009 - $9.5 million) from AgeCare. Amounts outstanding in accounts receivable pertaining to this lease were $67,000 at September 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 nine months ended September 30, 2010, NPR paid $90,000 for these services (2009 - $90,000).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 $29,000 was earned for the three months ended September 30, 2010 (2009 - $23,000) relating to this receivable. Interest revenue of $89,000 was earned for the nine months ended September 30, 2010 (2009 - $61,000). Amounts outstanding at September 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 $364,000 for the nine months ended September 30, 2010 (2009 - $362,000). Amounts outstanding in accounts receivable pertaining to this lease were $nil at September 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:-------------------------------------------------------------------------------------------------------------------------------------------------------- September 30, 2010 December 31, 2009 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3--------------------------------------------------------------------------------------------------------------------------------------------------------Financial assets: Cash and cash equivalents 32,816 - - - - -Financial liabilities: - - - 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 retail prices for fuel oil, natural gas and electricity, the primary utilities used to heat its properties. The exposure to utility cost risk is restricted primarily to the residential rental and execusuites portfolio. The leases in the remainder of the portfolio generally provide for recovery of operating costs from tenants, including utilities. Because of the northern location of a significant 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 on 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 three years, NPR converted heating systems for some properties in Yellowknife from fuel oil based boilers to wood pellet boilers and in Inuvik, all of the fuel oil based boilers in the residential portfolio have now been converted to natural gas based boilers. The investment in these environmentally friendly and more efficient 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 main 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 $252,000 for the nine months ended September 30, 2010.Electricity is the primary source of fuel for heating properties located in Newfoundland as well as parts of northeastern 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 liquidity risk management lies with management and the Board of Trustees. NPR manages liquidity risk by managing mortgage and loan maturities to ensure a relatively even amount of mortgage maturities in each year. At September 30, 2010, NPR has two revolving credit facilities totaling $57.5 million. At September 30, 2010, NPR has utilized $32.5 million of its operating facilities compared to $33.7 million at December 31, 2009. Cash flow projections are completed on a regular basis to ensure there will be adequate liquidity to maintain operating, capital and investment activities in addition to making monthly distributions to unitholders. The Board of Trustees reviews the 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 Investments Ltd. ("AgeCare"), which leases seniors' properties in Alberta and BC and the Governments of Canada, Nunavut and the Northwest Territories, which lease a large number of residential units and commercial space in the Northwest Territories and Nunavut.NPR mitigates credit 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. NPR records a specific bad debt provision on balances owed from past tenants and provides an allowance for receivables, net of security deposits, from current tenants where the expected amount to be collected is less than the actual accounts receivable.The following is an aging of current tenant and other receivables:-------------------------------------------------------------------------------------------------------------------------------------------------------- September December 30, 2010 31, 2009--------------------------------------------------------------------------------------------------------------------------------------------------------0-30 days 1,022 1,40531-60 days 218 22161-90 days 47 58Over 90 days 906 730----------------------------------------------------------------------------Tenant receivables 2,193 2,414Other receivables 1,328 2,094Allowance for doubtful accounts (350) (350)---------------------------------------------------------------------------- 3,171 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 asfollows:-------------------------------------------------------------------------------------------------------------------------------------------------------- Three Months Nine Months Ended September 30 Ended September 30---------------------------------------------------------------------------- 2010 2009 2010 2009----------------------------------------------------------------------------Balance, beginning of period 350 350 350 350Accounts receivable written off (14) (20) (38) (299)Accounts recovered 91 154 354 406Increase (decrease) in allowance (77) (134) (316) (107)----------------------------------------------------------------------------Balance, June 30 350 350 350 350--------------------------------------------------------------------------------------------------------------------------------------------------------The following is an aging of accounts payable and accrued liabilities:-------------------------------------------------------------------------------------------------------------------------------------------------------- September December 30, 2010 31, 2009--------------------------------------------------------------------------------------------------------------------------------------------------------0-6 months 16,095 10,6296 months to 1 year 994 1,193Over 1 year 168 212---------------------------------------------------------------------------- 17,257 12,034Tenant security deposits 4,038 3,521---------------------------------------------------------------------------- 21,295 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. In the current economic environment, it is difficult to predict what future interest rates will be and as such, NPR may not be able to continue to renew mortgage loans with interest rates that are lower than those currently in place. The REIT 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. During the first nine months of 2010, the Bank of Canada has increased the Overnight Rate by 0.75%, which resulted in corresponding increases in Prime Interest Rates charged by most Canadian Financial institutions. This increase directly impacts NPR's borrowing costs on its credit facilities and other floating rate debt.A sensitivity analysis on floating rate debt has been completed based on the exposure to interest rates at the balance sheet date. Floating rate debt includes all mortgages 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 NPR's net earnings for the nine months ended September 30, 2010 by $203,000.18. 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:-------------------------------------------------------------------------------------------------------------------------------------------------------- Nine Months Ended Year Ended September December 30, 2010 31, 2009--------------------------------------------------------------------------------------------------------------------------------------------------------Bank indebtedness (Cash and cash equivalents) (32,816) 1,820Operating facilities 32,498 33,698Mortgages payable 528,981 518,912----------------------------------------------------------------------------Debt 528,663 554,430----------------------------------------------------------------------------Rental properties and other capital assets 848,758 836,251Capital assets improvements in progress 6,996 7,046Capital assets under development 24,198 20,423Accumulated amortization 142,800 118,764Future income taxes on acquisitions (21,647) (21,647)----------------------------------------------------------------------------Gross Book Value 1,001,105 960,837----------------------------------------------------------------------------Debt to Gross Book Value 52.8% 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.-------------------------------------------------------------------------------------------------------------------------------------------------------- Nine Months Ended Year Ended September December 30, 2010 31, 2009--------------------------------------------------------------------------------------------------------------------------------------------------------Earnings from continuing operations before taxes 18,532 25,929Amortization 23,941 28,789Interest on mortgages 19,920 26,435Interest on operating facilities 887 755----------------------------------------------------------------------------Net earnings before interest, taxes and amortization 63,280 81,908--------------------------------------------------------------------------------------------------------------------------------------------------------Interest on mortgages 19,920 26,435Interest on operating facilities 887 755----------------------------------------------------------------------------Total Interest Expense 20,807 27,190Principal repayments 12,697 16,198----------------------------------------------------------------------------Debt Service Payments 33,504 43,388--------------------------------------------------------------------------------------------------------------------------------------------------------Interest Coverage 3.04 3.01--------------------------------------------------------------------------------------------------------------------------------------------------------Debt Service Coverage 1.89 1.89--------------------------------------------------------------------------------------------------------------------------------------------------------As at and during the nine month period ended September 30, 2010, NPR complied with all externally imposed capital requirements and all covenants relating to its debt facilities.19. SUBSEQUENT EVENTSBetween October 1, 2010 and November 10, 2010 NPR completed mortgage assumptions and renewals totalling $15.8 million with interest rates from 2.96% to 5.10% and terms to maturity from 1 to 5 years. Proceeds from the mortgage assumptions were used to fund new acquisitions.Subsequent to September 30, 2010, NPR acquired 32 residential units in Nanaimo BC and 50 residential units in Yellowknife, NWT for total consideration of $13.8 million.On October 1, 2010, trustees and officers exercised 304,541 options with a weighted average exercise price of $22.30 per unit.FOR FURTHER INFORMATION PLEASE CONTACT: Todd CookNorthern Property REITCFO(403) 531-0720