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Press release from CNW Group


Wednesday, March 09, 2011

NPR REPORTS YEAR END 2010 RESULTS14:30 EST Wednesday, March 09, 2011CALGARY, March 9 /CNW/ - Northern Property REIT and NorSerCo Inc. (NPR.UN - TSX) announced financial results for the 3 and 12 months ended December 31, 2010. The Financial Statements and MD&A for the entities are reported on a combined basis at under Northern Property Real Estate Investment Trust.HIGHLIGHTS:Strong property performance continuesNOI up 7.5% year over year2010 same door NOI growth of 5.7%Reorganization to secure REIT exemption completed at a cost of $2.6 millionFuture Income Tax recovery of $43.8 million recordedFINANCIAL PERFORMANCE AT A GLANCE   In $000's except per unit amountsThree MonthsEnded December 31Year EndedDecember 31 2010200920102009Total revenue36,74733,200142,147134,232Net operating income ("NOI")24,05120,76093,37386,793Net earnings51,88165367,55621,316Net earnings per unit, basic$1.892$0.026$2.624$0.850     Distributions to unitholders10,4919,28638,87037,100Distributions per unit$0.383$0.370$1.501$1.480Distributable Income ("DI")14,08512,79256,95754,336DI per unit, basic$0.514$0.510$2.212$2.166Payout ratio74.5%72.6%68.2%68.3%     Funds from operations  ("FFO")14,22812,96957,47255,107FFO per unit, basic$0.519$0.517$2.232$2.196FFO payout ratio73.7%71.6%67.6%67.3%"NPR's property portfolio continued to generate improved financial results in Q4", said Jim Britton, NPR's President and CEO.  "Notwithstanding  having the burden of almost 10 cents per unit in one time expenses  associated with our SIFT reorganization and IFRS adoption,  NPR was able to achieve a record FFO level of $2.23 and maintain a positive FFO payout ratio of 67.6%."Much lower apartment vacancy loss was the major contributor to NPR's strong financial performance for the year.  Quarterly vacancy loss for Q4 2010 was 4.5% compared to the 8.7% vacancy experienced in Q4 2009.  At its recessionary peak in Q3 2009, NPR experienced overall apartment vacancy loss of 10%.Apartment rental market conditions at year end were robust in Nunavut and Newfoundland with Q4 vacancies at 0.6% and 1.1% respectively.  The NWT was strong at 2.6% vacancy in Yellowknife and 4.2% in Inuvik.  NPR's apartment portfolio in British Columbia, predominantly in the north eastern part of the Province, was at 5.6% vacancy, far below the levels of current years.  The REIT still has room to improve in Alberta where aggregate vacancy in portfolios in Grande Prairie, Fort McMurray and Lloydminster were 9.3% in Q4.Sustaining capex expenditures for the year were $11.4 million reflecting NPR's commitment to getting its rental properties into excellent condition while labour market and occupancy conditions facilitate such work.  Capex levels are forecast to be lower in 2011 and 2012."Far too much of management's time and unitholders' money in 2010 was employed dealing with the vicissitudes associated with policy changes of both government and the accounting profession, " Mr. Britton went on to say.  "NPR was forced to spend approximately $2.6 million in a Plan of Arrangement to create a stapled unit structure to preserve its REIT status.  Another $200,000 was spent in connection with IFRS compliance in 2010."Net Operating Income for 2010 reached $93.4 million, up from $86.8 million a year earlier.  Funds From Operations per unit increased to $2.23 per unit from $2.20 per unit in 2009, notwithstanding the one time costs associated with the SIFT reorganization.  The REIT's payout ratio for 2010 was 67.6% of FFO.  Distribution payments were increased in September from $1.48 annually to $1.53.NPR completed $28.5 million in acquisitions during 2010 for a total of 276 units.  A $22 million rental housing project is under development in Iqaluit with further development opportunities being explored in other markets.  Subsequent to year end the REIT acquired a 230 unit apartment complex in Jasper National Park at a cost of $16.8 million.NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST NorSerCo INC.Combined Balance SheetsAt December 31(Thousands of dollars)           2010 (Note 1)  2009       ASSETS      Rental properties and other capital assets (Note 5)  885,087  836,251Capital improvements in progress  2,705  7,046Capital assets under development  5,555  20,423Prepaid expenses and other assets (Note 6)  5,154  5,088Cash  3,216  -Accounts receivable (Note 18)  2,916  4,158Tenant security deposits  4,087  3,555Deferred rent receivable  6,058  4,539Loans receivable  279  2,456Intangible assets (Note 7)  3,671  4,851   918,728  888,367       LIABILITIES             Mortgages payable (Note 8)  512,544  498,996Operating facilities (Note 9)  7,898  33,698Bank indebtedness  -  1,820Accounts payable and accrued liabilities (Note 18)  18,410  15,555Distributions payable  3,499  3,096Future income tax liability (Note 12)  253  43,751Intangible liabilities (Note 7)  43  94Non-controlling interest  382  464   543,029  597,474       EQUITY  375,699  290,893   918,728  888,367See accompanying notes to the combined financial statements.Guarantees, commitments and contingencies (Note 15)APPROVED BY THE BOARD        Trustee        TrusteeNORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST NorSerCo INC.Combined Statements of Earnings and Comprehensive EarningsYears ended December 31(Thousands of dollars, except per unit amounts)            2010 (Note 1)   2009REVENUE       Rental revenue  138,209   130,767Other property income  3,938   3,465   142,147   134,232Operating expenses  (48,774)   (47,439)   93,373   86,793OTHER EXPENSES       Interest on mortgages  (26,525)   (26,435)Amortization  (32,471)   (28,789)   (58,996)   (55,224)EARNINGS BEFORE THE UNDERNOTED  34,377   31,569Trust administration  (9,489)   (5,619)Interest on operating facilities  (1,043)   (755)Interest and other income  398   458Gain on settlement of debt  -   130Gain on sale of capital assets  9   246Non-controlling interest  (104)   (100)EARNINGS BEFORE INCOME TAXES  24,148   25,929INCOME TAXES (Note 12)       Current  (343)   (373)Future recovery (expense)  43,751   (4,240)   43,408   (4,613)NET EARNINGS  67,556   21,316Other comprehensive loss  -   (123)COMPREHENSIVE EARNINGS  67,556   21,193Net earnings per unit (Note 14)       Basic  $2.624   $0.850Diluted  $2.617   $0.847See accompanying notes to the combined financial statements.NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST NorSerCo Inc.Combined Statements of EquityYear Ended December 31 (Thousands of dollars)      2010 (Note 1)2009UNITS (Note 13)          Balance, beginning of year    368,690367,446Issuance of REIT Trust Units    57,42065Distribution of NorSerCo common shares (Notes 2, 13) 6,867 -Exercise of unit options    556528Units cancelled    -(13)Issue costs    (2,505)(2)Long term incentive plan units issued    667666Balance, December 31    431,695368,690       CONTRIBUTED SURPLUS          Balance, beginning of year    2,1091,676Unit-based compensation    215504Exercise of unit options    (556)(39)Long term incentive plan units granted    990634Long term incentive plan units issued    (667)(666)Balance, December 31    2,0912,109       CUMULATIVE DEFICIT       CUMULATIVE NET EARNINGS       Balance, beginning of year    107,38586,056 Units cancelled    -13 Net earnings    67,55621,316 Balance, December 31    174,941107,385           CUMULATIVE DISTRIBUTIONS TO UNITHOLDERS         Balance, beginning of year    (187,291)(150,191) Distributions declared to unitholders    (38,870)(37,100) Distribution on reorganization (Notes 2, 13)    (6,867)- Balance, December 31    (233,028)(187,291)        CUMULATIVE DEFICIT, December 31    (58,087)(79,906)        ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSS)      Balance, beginning of year    -123Other comprehensive loss    -(123)Balance, December 31    --       TOTAL EQUITY    375,699290,893See accompanying notes to the combined financial statements.NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST NorSerCo INC.Combined Statements of Cash FlowsYears Ended December 31(Thousands of dollars)         2010 (Note 1)2009CASH FLOWS RELATED TO THE FOLLOWING ACTIVITIES:    OPERATING      Net earnings    67,55621,316Adjustments for:        Deferred rental revenue     (1,233)(1,292)  Amortization    32,47128,789  Amortization of fair value of debt    749681  Amortization of above and below market leases   (31)(160)  Amortization of deferred financing fees   7711,078  Gain on settlement of debt   -(130)  Gain on sale of rental properties    (9)(246)  Non-controlling interest    104100  Unit-based compensation    1,2051,138  Future income tax (recovery) expense    (43,751)4,240     57,83255,514Changes in non-cash working capital    2,721679     60,55356,193FINANCING      Proceeds from mortgages    32,04656,563Repayment of mortgages    (36,870)(41,716)Proceeds from operating facilities, net   (25,800)7,098Payments to non-controlling interest    (186)(76)Units issued under Option Plan    7,912489Proceeds from public offering (net of issue costs)   47,003(2)Distributions paid to unitholders    (38,467)(37,096)     (14,362)(14,740)INVESTING      Acquisition of rental properties and other assets   (15,861)(12,764)Proceeds from sale of rental properties    79992Capital assets under development    (5,578)(11,426)Building capital maintenance    (11,521)(11,235)Capital improvements    (8,274)(9,571)     (41,155)(44,004)NET INCREASE (DECREASE)  IN CASH    5,036(2,551)(BANK INDEBTEDNESS) CASH, BEGINNING OF YEAR  (1,820)731CASH (BANK INDEBTEDNESS), END OF YEAR   3,216(1,820)SUPPLEMENTARY INFORMATION      Interest paid    26,14025,346Interest received    232282Income taxes paid    348214See accompanying notes to the combined financial statements.NORTHERN PROPERTY REAL ESTATE INVESTMENT TRUST NorSerCo INC.Notes to the Combined Financial Statements                                                            Years ended December 31, 2010 and 2009(Columnar amounts expressed in thousands of dollars except where indicated)1. NATURE AND DESCRIPTION OF THE COMBINED ENTITIESThese combined financial statements include the accounts of Northern Property Real Estate Investment Trust (the "REIT"), an unincorporated open-ended real estate investment trust and NorSerCo Inc. ("NorSerCo"), a corporation which was incorporated under the Canada Business Corporations Act on October 18, 2010 ("NPR" or the "Entities"). The REIT invests in and owns a portfolio of residential and commercial income producing properties and NorSerCo's operates execusuite hotel properties and carries out certain other business activities. Unitholders of the REIT and shareholders of NorSerCo participate in distributions of income and, in the event of termination of the REIT or NorSerCo, participate pro rata in the net assets remaining after satisfaction of all liabilities.The combined financial statements are a result of the completion of the REIT's internal reorganization on December 31, 2010, pursuant to the Plan of Arrangement ("Arrangement") that was approved by unitholders at a special meeting held on November 25, 2010 (Note 2).  Each REIT unitholder received, for each REIT Trust Unit held, a NorSerCo Common Share.  Each issued and outstanding share of NorSerCo is stapled to a REIT unit on a one-for-one basis so as to form stapled units ("Stapled Units" or "Units") which are listed for trading on the Toronto Stock Exchange ("TSX").  The Stapled Units of the REIT and NorSerCo may only be transferred together as Stapled Units unless a "separation event" has occurred.  A separation of the REIT Trust Units and NorSerCo Common Shares can occur under either of the following:  (a) the holders of REIT Trust Units vote in favour of the unstapling of REIT Trust Units and NorSerCo Common Shares; or (b) at the sole discretion of the trustees of the REIT or the directors of NorSerCo, upon an event of bankruptcy or insolvency of either the REIT or NorSerCo and/or their respective subsidiaries.  The presentation of the combined financial statements of the two entities is useful to unitholders because of the following:The Trust Units of the REIT and the Common Shares of NorSerCo are stapled together (Note 2), resulting in the two entities being under common ownership;The sole activity of NorSerCo is to hold and operate the non-qualifying business assets which generate non-qualifying revenue as defined by the Income Tax Act, enabling the REIT to qualify under the REIT Exemption (the "Exemption") provisions applicable to publicly traded trusts;The combined financial information represents financial statements in a similar format as previously reported in NPR's consolidated financial statements.As a result of the Arrangement as described in note 2, NPR's financial statements are prepared on a combined basis as at December 31, 2010. Prior to that date, NorSerCo did not have any assets, liabilities, equity or transactions.  Accordingly, the consolidated financial statements of the REIT, as previously reported, are presented as the combined financial statements for the dates and periods prior to December 31, 2010. 2. PLAN OF ARRANGEMENTOn December 31, 2010, NPR completed its internal reorganization pursuant to the Arrangement which was approved by unitholders at a special meeting held on November 25, 2010. The Arrangement was completed to ensure NPR meets the definition of a Real Estate Investment Trust as defined in the Income Tax Act.The Arrangement has resulted in the following:   i.     The creation of a taxable Alberta corporation, NorSerCo.  NorSerCo operates the three wholly owned execusuite properties under a lease arrangement with the REIT, whereby the REIT retained ownership of the real estate assets and leases the properties to NorSerCo under market commercial leases.  Following the transaction, NorSerCo holds and operates the business assets which produce non-qualifying revenue as defined under the Income Tax Act.   NorSerCo also holds the 50% interest in the execusuite operation in Inuvik, NWT;   ii.     The Class B Limited Partnership units of Northern Property Limited Partnership were converted into REIT Trust Units;   iii.    The Common Shares of NorSerCo were distributed to all REIT unitholders.  The REIT Trust Units and NorSerCo Common Shares are listed on the TSX together as a "Stapled Unit" under the trading symbol NPR.UN; and   iv.     The simplification of NPR's organization structure through the elimination and amalgamation of certain wholly owned subsidiaries. 3. SIGNIFICANT ACCOUNTING POLICIESBasis of presentationNPR's combined financial statements are prepared in conformity with Canadian generally accepted accounting principles ("GAAP").Principles of combinationThe principles used to prepare combined financial statements are similar to those used to prepare consolidated financial statements. The combined financial statements include the assets, liabilities and equity of the REIT and NorSerCo.  NorSerCo did not have any transactions in 2009 or 2010 other than the initial transaction as described in note 2.  NorSerCo did not have any assets, liabilities, equity or transactions prior to December 31, 2010. The combination of the two entities does not result in the elimination of the equity of NorSerCo as the REIT does not hold any interest in NorSerCo. The equity reported in these combined financial statements will be presented by way of combining the entities together. The creation of NorSerCo resulted in a reclassification within equity for the issuance of NorSerCo Common Shares, being an increase of $6.9 million in Units equal to the special distribution in the cumulative deficit reported by the REIT for the distribution of the NorSerCo Common Shares to the unitholders of the REIT.Principles of consolidationThe combined financial statements include the accounts of NPR and its wholly-owned subsidiaries, together with the proportionate share of the assets, liabilities, revenue and expenses of joint ventures.  All material intercompany transactions and balances have been eliminated upon consolidation and upon combination.Use of estimatesThe preparation of financial statements in conformity with 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 combined financial statements and revenue and expenses for the reported periods. Actual results could differ from those estimates. Estimates are used to determine amounts reported as allowance for doubtful accounts, estimated useful lives, amortization and values of rental properties, intangible and other assets, accrued liabilities and capital adequacy. Actual amounts could differ from those estimates.Capital assetsRental properties, capital improvements in progress and capital assets under development are stated at the lower of cost less accumulated amortization and fair value.  Cost of the properties includes the original acquisition costs of the property and other acquisition related costs.  Costs associated with upgrading the existing facilities, other than ordinary repairs and maintenance, are capitalized as project improvements. The fair value represents the undiscounted, estimated future net cash flow expected to be received from the ongoing use of the property plus its residual worth and is intended to determine recovery of an investment and is not an expression of a property's fair market value.All capital assets are recorded at cost and are amortized using the following annual rates and methods:   Buildings  30 - 40 years   straight-line basis   Furniture, fixtures and equipment  20% - 30%   declining-balance   Vehicles  20% - 30%   declining-balance   Capital and leasehold improvements  3 - 20 years   straight-line basisRevenue and expenses associated with properties under development are capitalized until the properties achieve a satisfactory level of occupancy or predetermined period of time no greater than two years.Estimated useful lives of capital assets are periodically evaluated by management and any changes in these estimates are accounted for on a prospective basis.NPR reviews its capital assets and, if it is determined that the carrying value of a building exceeds the undiscounted estimated future net cash flow expected to be received from the ongoing use and residual worth of the property, the carrying value of the building is reduced to its fair value.  Based on this review, a provision for impairment of $nil has been recorded for the year ended December 31, 2010 (December 31, 2009 - $nil).Disposal of long-lived assets Amounts related to the disposal of long-lived assets are classified as held for sale, and the results of operations and cash flows associated with the assets disposed are reported separately as discontinued operations, less applicable income taxes. A long-lived asset is classified as an asset held for sale at the point in time when it is available for immediate sale, management has committed to a plan to sell the asset and is actively locating a buyer for the asset at a sales price that is reasonable in relation to the current fair value of the asset, and the sale is probable and is expected to be completed within a one-year period. For unsolicited interest in a long-lived asset, the asset is classified as held for sale only if all the conditions of the purchase and sale agreement have been met, a sufficient purchaser deposit has been received and the sale is probable and expected to be completed shortly after the end of the current period.Land equity leasesPrepaid land equity leases are amortized over the remaining lives of the related leases ranging from 15 to 30 years.Deferred financing costsDeferred financing costs are amortized using the effective interest method over the amortization period of the related mortgages and loans payable.Income taxesThe REIT is taxed as a "mutual fund trust" for income tax purposes.  Pursuant to the Declaration of Trust, the trustees of the REIT may make distributions which the Trustees in their discretion determine to be appropriate to unitholders and may deduct such distributions and designations for income tax purposes. NorSerCo is taxed as a "corporation" for income tax purposes. The directors of NorSerCo may declare dividends to the shareholders of NorSerCo which the Directors in their discretion determine to be appropriate.NPR follows the liability method with respect to accounting for income taxes. Under this method, future income taxes are recognized for the expected future tax consequences of differences between the carrying amount of assets and liabilities and their corresponding tax values.  Future income taxes are computed using the enacted or substantively enacted corporate income tax rates, as appropriate, that will be in effect when these tax and accounting basis differences are expected to reverse. Future income tax assets, if any, are recognized only to the extent that, in the opinion of management, it is more likely than not that the assets will be realized.Following the completion of the Arrangement, the REIT meets the definition of a Real Estate Investment Trust under the Income Tax Act and is not subject to entity level income taxation.Revenue recognitionRevenue from a rental property is recognized when a tenant commences occupancy of a property and rent is due.  NPR retains all benefits and risk of ownership of its rental properties, and therefore, accounts for leases with its tenants as operating leases.  Rental revenue and other property income include rent and other sundry revenue recoveries. Rental revenue to be received from leases with rental rates varying over the term of the lease is recorded on a straight-line basis over the term of the associated lease. Accordingly the difference between the rental revenue recorded on a straight line basis and the rent that is contractually due from the tenant has been recorded as deferred rent receivable for accounting purposes.Intangible assets and liabilitiesNPR allocates the purchase price of real property to land, building, and intangible assets and liabilities, such as the value of above-market and below-market leases, in-place leases and lease origination costs, if any. Intangible assets and liabilities are recorded at cost and amortized over their estimated useful lives ranging from 1 year to 20 years.The values of above-market and below-market leases for acquired properties are determined based on the present value of the difference between the contractual base rentals under the lease and fair market lease rates for similar in-place leases, measured from the date of acquisition to the end of the remaining lease term.The values of in-place leases are calculated as the present value of the net operating income lost during a hypothetical expected lease-up period required to replace the existing leases at the date of purchase.Intangible assets and liabilities associated with the acquisition of real property are amortized over the remaining term of the associated lease. Above and below market leases are amortized to rental revenue. The amortization of the remaining intangible assets is included in amortization expense.Financial InstrumentsManagement has determined that the majority of NPR's financial assets are designated as loans and receivables, as defined by Section 3855 of the CICA Handbook, and are carried at amortized cost.  Management has also determined that all of its financial liabilities have been designated as other financial liabilities and are carried at amortized cost utilizing the effective interest method. Financial instruments include loans receivable, accounts receivable, tenant security deposits, mortgages payable, operating facilities, distributions payable, accounts payable and accrued liabilities and bank indebtedness. Except for mortgages payable, the fair value of financial instruments approximated carrying values due to the short-term nature of the financial instruments. The fair value of mortgages payable is disclosed in note 8.Under NPR's Long Term Incentive Plan, the fair value of the units granted to trustees, officers and employees is recognized as compensation expense with an offsetting amount to contributed surplus based on the closing price of the Stapled Units on December 31 of the fiscal year. Upon issuance in accordance with the vesting policy, the units issued are credited to capital with an offsetting amount to contributed surplus based on the fair value of the units at the time of the grant.Unit-based compensationUnder NPR's Unit Option Plan, options to acquire Stapled Units are granted to trustees, officers and employees from time to time at exercise prices not less than the market value of the units at the date of the grant. Options granted by NPR are accounted for in accordance with the fair-value method of accounting for stock-based compensation, and as such, the calculated fair value of the option is recognized as compensation expense with an offsetting amount recorded to contributed surplus, based on an estimate of the fair value using a Black-Scholes option-pricing model. Compensation expense is recognized over the vesting period of the related options.Upon exercise of the options, consideration paid, which approximates the market value of the shares on grant date, is credited to capital. In addition, contributed surplus, representing the calculated fair value of the options exercised, is reclassified to capital. Forfeitures of options are accounted for as they occur.4. 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 combined financial statements and will provide comparative financial information for the previous fiscal year using IFRS beginning with the quarter ending March 31, 2011.5. RENTAL PROPERTIES AND OTHER CAPITAL ASSETS     December 31 2010December 31, 2009 CostAccumulatedAmortizationNet BookValueCostAccumulatedAmortizationNet BookValueLand95,979-95,97990,906-90,906Buildings872,569121,585750,984815,98598,983717,002Furniture, fixtures and equipment9,4403,7555,68510,3264,9565,370Vehicles1,6528687841,307674633Capital and leasehold improvements52,96021,30531,65536,49114,15122,340 1,032,600147,513885,087955,015118,764836,251During the year ended December 31, 2010 NPR acquired 262 residential units and 14 seniors' units for total consideration of $28.5 million. On October 1, 2010, the lease up of the 189 unit development in Grande Prairie was completed and the asset was transferred to rental properties from Capital assets under development. Total capitalized costs on the development were $23.5 million.Acquisitions and development projects were financed as follows:      Year EndedDecember 31Year EndedDecember 31   20102009Cash paid  31,7529,800Mortgages assumed  13,4021,788New mortgages  4,070-Class B LP Units issued  -65Total  49,22411,653Residential rental units  45140Seniors' units  14111Units acquired  4651516. PREPAID EXPENSES AND OTHER ASSETS    December 31, 2010December 31, 2009Prepaid expenses1,7592,543Prepaid equity leases2,2651,997Other1,130548 5,1545,0887. INTANGIBLE ASSETS AND LIABILITIES    December 31, 2010December 31, 2009 CostAccumulatedAmortizationNet BookValueCostAccumulatedAmortizationNet BookValueAbove-market leases1731591417313934In-place leases6,4743,4103,0646,4742,4664,008Lease origination costs1,6431,0505931,643834809 8,2904,6193,6718,2903,4394,851       Below-market leases1,2201,177431,2201,12694Intangible 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.8. MORTGAGES PAYABLE    December 31, 2010December 31, 2009   Mortgages payable531,560518,912Fair value adjustment(6,999)(8,217)Deferred financing costs(12,017)(11,699) 512,544498,996Mortgages payable bear interest at rates ranging from 2.96% to 7.00% and have a weighted average rate of 4.80% as at December 31, 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 2011 and 2025 and are secured by charges against specific properties. Land and buildings with a carrying value of $718.4 million have been pledged to secure mortgages payable of NPR. The fair value of mortgages payable at December 31, 2010 is approximately $550.8 million (December 31, 2009 - $535.0 million).Minimum required future principal repayments, including maturities, are as follows:            2011    56,1012012    51,8352013    93,8492014    79,9772015    40,931Subsequent    208,867     531,5609. 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 $89.5 million have been pledged as collateral security for the operating facilities. At December 31, 2010 NPR had utilized $7.9 million (December 31, 2009 - $33.7 million) of the operating facilities.10. 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:       Numberof Units    Balance - December 31, 2009  48,473Units vested and issued - January, 2010  (31,650)Units vested and issued - February, 2010  (662)Units granted - December 31, 2010  34,229Balance - December 31, 2010  50,390The 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 December 31, 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 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 December 31, 2010:      Exercise PriceNumber Outstanding at December 31,2010Weighted-Average Remaining Contractual Life In YearsWeighted- Average Exercise PriceNumber Exercisable at December 31,2010Weighted- Average Exercise Price$23.12431,3002.4$23.12431,300$23.12$15.0565,8313.2$15.0513,334$15.05 497,1312.5$22.05444,634$22.88On May 20, 2008, 735,000 options with an exercise price of $23.12 and expiring on May 20, 2013 were granted to trustees and officers. 245,002 options vested immediately, 245,001 options vested on May 20, 2009 and 244,997 vested on May 20, 2010.On March 12, 2009, 157,500 options with an exercise price of $15.05 and expiring on March 12, 2014 were granted to trustees and officers. 52,507 options vested immediately, 52,497 options vested on March 12, 2010 and 52,496 will vest on March 12, 2011.NPR accounts for its Option Plan using the fair value method, under which compensation expense is measured at the date the options are granted using the Black-Scholes model and recognized over the vesting period. The following assumptions were used in calculating the fair value of the options granted on May 20, 2008; expected annual dividend rate of 6.40%, expected volatility of 18%, risk-free rate of return of 3.10% and expected life of 5 years. The following assumptions were used in calculating the fair value of the options granted on March 12, 2009; expected annual dividend rate of 9.83%, expected volatility of 28.8%, risk-free rate of return of 1.75% and expected life of 5 years. Compensation expense for the year ended December 31, 2010 relating to options granted was $215,000 (2009 - $504,000). During the year ended December 31, 2010, 362,866 (2009 - 32,503) options were exercised.Both the LTIP and Option Plans were amended and approved by the TSX to allow for the issuance of stapled units following the Arrangement (Note 2).11. 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 REIT 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 year ended December 31, 2010, employees invested a total of $146,720 (2009 - $117,434) and NPR contributed $48,958 (2009 - $39,166). During the year ended December 31, 2010, 8,319 units (2009 - 8,955 units) were purchased at an average cost of $24.78 per unit (2009 - $18.71 per unit).12. INCOME TAXESOn 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 rateGAAP requires NPR to recognize future income tax assets and liabilities based on the estimated temporary differences expected.  Prior to December 31, 2010, NPR did not qualify for the REIT Exemption and recorded a future income tax provision which arose from temporary differences between the estimated accounting and tax values of NPR's assets and liabilities calculated using the expected tax rates of 19.63% to 28.40%.  The future income tax liability of $253,000 reported at December 31, 2010 was recorded as a result of temporary differences between the estimated accounting and tax values of the related execusuite business assets distributed to NorSerCo under the Arrangement using the expected tax rate of 27.66%.During 2010, NPR had certain corporate subsidiaries which are subject to income tax on their respective taxable income at the applicable legislated tax rates. On December 31, 2010, NPR completed an internal reorganization as described in note 2.  Following the Arrangement, the REIT qualifies for the Exemption and will not be subject to entity level income taxes. In addition, the Arrangement resulted in the elimination of certain wholly owned subsidiaries which were subject to income tax on their respective taxable income.  NorSerCo is a taxable Canadian corporation and is subject to income tax on its taxable income at the applicable legislated tax rates.  NorSerCo had no active business operations or taxable income in 2010 or 2009.The future tax liabilities arise from the temporary differences summarized below:      December 31, 2010  December 31, 2009Future tax liabilities arising from temporary differences between accounting and tax basis of:        Rental property assets in corporate subsidiaries253  9,304    Rental properties-  28,868    Deferred financing costs-  1,574    Other assets-  4,005 253  43,751The 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:        20102009         Current  343373    Future expense (recovery)  (43,751)4,240   (43,408)4,613The 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:  20102009   Earnings from before income taxes24,14825,929   Less income attributable to NPR not subjectto future income tax (22,388) (23,999)   Income in corporate subsidiaries1,7591,930   Income tax rate based on basicand weighted average rates 19.63% 19.13%Expected income tax expense from statutory income tax rate345369   Increase (decrease) in current taxes resulting from:      Non-deductible expenses(197)57    Sale of rental properties448    Other191(101)Current income tax expense343373   Increase (decrease) in future taxes resulting from:      Future income taxes - corporate subsidiaries(503)(310)    Decrease in future income tax upon internal     reorganization(43,248)(1,250)    Future income taxes relating to Bill-C52-5,800Future income tax (recovery) expense(43,751)4,240Total income tax (recovery) expense(43,408)4,61313. EQUITYREIT Trust UnitsThe total authorized number of trust units is unlimited. The total number of Trust Units of the REIT outstanding as at December 31, 2010 is 27,442,306 (December 31, 2009 - 23,020,538).NorSerCo Common SharesThe total authorized number of common shares is unlimited. The total number of Common Shares of NorSerCo outstanding as at December 31, 2010 is 27,442,306. NorSerCo Common Shares are "stapled" to REIT Trust Units and trade together as "Stapled Units" on the Toronto Stock Exchange under the trading symbol NPR.UN. NPLP Class B Exchangeable Limited Partnership Units and Special Voting Units ("NPLP Class B Units")Prior to the Arrangement, Northern Property Limited Partnership ("NPLP"), a wholly owned subsidiary of the REIT had issued NPLP Class B Units on the formation of the REIT and for subsequent property acquisitions. The NPLP Class B Units were exchangeable for REIT Trust Units at any time at the option of the holder of the NPLP Class B Units. Each NPLP Class B Unit had a "Special Voting Unit" attached to it, which entitled 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. As part of the Arrangement completed on December 31, 2010 (Note 2) all outstanding NPLP Class B Units were redeemed for REIT Trust Units and NPLP was subsequently dissolved. The total number of NPLP Class B Units and special voting units outstanding as at December 31, 2010, is nil (December 31, 2009 - 2,085,090).NPR Class B Limited Partnership Units and Special Voting Units ("NPR LP Class B Units")As part of the Arrangement (Note 2), a new wholly owned partnership, NPR Limited Partnership ("NPR LP") was created.  Similar to NPLP, NPR LP can issue NPR LP Class B Units in conjunction with property acquisitions.  NPR LP Class B Units can be exchanged for trust units at any time at the option of the holder. Each NPR LP 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. The total number of NPR LP Class B Units and special voting units outstanding as at December 31, 2010, is nil.NorSerCo Special SharesThe total authorized number of special shares is unlimited. The NorSerCo special shares are "stapled" to the NPR LP Class B Units, a wholly owned subsidiary of the REIT. The special shares are convertible into common shares upon NPR LP Class B unitholders exercising their option to convert to REIT Trust Units. The total number of NorSerCo special shares outstanding as at December 31, 2010, is nil.As part of the Arrangement (Note 2), NPR distributed the Common Shares of NorSerCo to each NPR Unitholder.  The transaction is a related party transaction and was recorded at net book value of $6.9 million (Note 17).The units of the REIT are stapled to the NorSerCo Common Shares effective December 31, 2010.  These stapled units are listed and posted for trading on the TSX. Providing that a "separation event" has not occurred; a REIT Trust Unit may only be transferred together with a NorSerCo Common Share; no trust unit may be issued by the REIT unless a NorSerCo Common Share is issued; and a unitholder may require the REIT to redeem a particular number of trust units only if the same number of NorSerCo Common Shares are redeemed. Equivalent restrictions apply with respect to the transfer, issuance and redemption of NorSerCo Common Shares.The Stapled Units of the REIT and NorSerCo may only be transferred together as Stapled Units unless a "separation event" has occurred.  A separation of the REIT Trust Units and NorSerCo Common Shares can occur under either of the following:  (a) the holders of REIT Trust Units vote in favour of the unstapling of REIT Trust Units and NorSerCo Common Shares; or (b) at the sole discretion of the trustees of the REIT or the directors of NorSerCo, upon an event of bankruptcy or insolvency of either the REIT or NorSerCo and/or their respective subsidiaries. The total number of Units outstanding and eligible for distributions at December 31, 2010 is 27,442,306 (REIT Trust Units December 31, 2009 - 25,105,628).The number of Stapled Units issued and outstanding is as follows:       DateDescriptionStapled Units*NPLP ClassB UnitsIssue PriceTotal StapledUnits$(000's)December 31, 2009 23,020,5382,085,090-25,105,628368,690January 4, 2010LTIP units issued12,941-$18.8812,941244January 6, 2010LTIP units issued18,709-$21.9018,709410February 8, 2010LTIP units issued662-$19.1666213Q1, 2010Options exercised9,000-$23.129,000222Q1, 2010Options exercised8,333-$15.058,333135Q2, 2010Options exercised11,492-$15.0511,492187Q3, 2010Options exercised4,000-$15.054,00066Q3, 2010Public Offering1,941,500-$25.501,941,50049,508Q3, 2010Issue costs----(2,505)Q4, 2010Options exercised35,341-$15.0535,341574Q4, 2010Options exercised294,700-$23.12294,7007,284Class B LP units exchanged during 2010213,663(213,663)---Class B LP units exchanged on internal reorganization (Note 2)1,871,427(1,871,427)---Issuance of NorSerCo Common Shares on internal reorganization(Note 2)----6,867December 31, 2010 27,442,306 - 27,442,306431,695* Effective December 31, 2010, the REIT Trust Units and NorSerCo Common Shares are listed on the TSX together as a "Stapled Unit".Distributions to UnitholdersPursuant to the Trust Declaration, holders of REIT Trust Units and NPLP Class B Units (prior to December 31, 2010) and NPR LP Class B Units (subsequent to December 31, 2010) 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. 14. NET EARNINGS PER UNIT        20102009Net earnings  67,55621,316     Weighted average units for basic net earnings per unit  25,744,66025,088,584Dilutive effect of units to be issued under the LTIP  16,59322,280Dilutive effect of Option Plan  57,48144,264Weighted average units for dilutednet earnings per unit  25,818,73425,155,128Net earnings per unit:        Basic  $2.624$0.850    Diluted  $2.617$0.847Prior to the internal reorganization (Note 2), all stapled unit amounts were trust unit amounts.15. 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 December 31, 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 December 31, 2010, NPR has provided guarantees totaling $11.2 million (December 31, 2009 - $6.1 million). These mortgages bear interest at rates ranging from 3.46% to 6.10% and mature May 2011 to December 2015 (December 2009 - 3.06% to 6.10% and mature July 2010 to December 2013). As at December 31, 2010, land and buildings with a carrying value of $12.8 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 $8.3 million at December 31, 2010 (December 31, 2009 - $4.9 million) in these combined financial statements.16. 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. NPR'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 Combined 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       December 31, 2010BCAlbertaNWTNunavutNfldTotalResidential        Multi-family95,005181,400101,331114,80956,947549,492  Execusuites--10,5629,2349,41429,210  Seniors'16,157119,386--51,156186,699 111,162300,786111,893124,043117,517765,401Commercial20,8938,70590,16720,3071,357141,429Trust-11,898---11,898TOTAL ASSETS132,055321,389202,060144,350118,874918,728Total Assets       December 31, 2009BCAlbertaNWTNunavutNfldTotalResidential       Multi-family92,488176,98285,046113,10558,392526,013 Execusuites--10,4709,5379,42829,435 Seniors'16,230121,691--49,610187,531 108,718298,67395,516122,642117,430742,979Commercial21,2899,08390,38819,6601,192141,612Trust-3,776---3,776TOTAL ASSETS130,007311,532185,904142,302118,622888,367Geographic Segments       Twelve months endedDecember 31, 2010BCAlbertaNWTNunavutNfldTotal       Rental revenue18,19534,21339,65626,06120,084138,209Other income6919351,3745034353,938Operating expense(6,799)(10,490)(17,338)(7,611)(6,536)(48,774) 12,08724,65823,69218,95313,98393,373Interest on mortgages(3,184)(10,878)(5,765)(3,758)(2,940)(26,525)Amortization(4,918)(8,747)(8,694)(6,138)(3,974)(32,471)EARNINGS BEFORE OTHER ITEMS3,9855,0339,2339,0577,06934,377Geographic Segments       Twelve months endedDecember 31, 2009BCAlbertaNWTNunavutNfldTotal       Rental revenue16,16933,96336,36425,81218,459130,767Other income4629431,1065534013,465Operating expense(6,292)(9,816)(16,495)(8,596)(6,240)(47,439) 10,33925,09020,97517,76912,62086,793Interest on mortgages(3,002)(10,978)(5,908)(3,867)(2,680)(26,435)Amortization(4,085)(7,500)(7,899)(5,715)(3,590)(28,789)EARNINGS BEFORE OTHER ITEMS3,2526,6127,1688,1876,35031,569Business Segments       Year EndedDecember 31, 2010Multi- familyExecusuitesSeniors'TotalResidentialCommercialTotal       Rental revenue87,6618,90417,877114,44223,767138,209Other income3,150127-3,2776613,938Operating expenses(34,892)(4,442)(20)(39,354)(9,420)(48,774) 55,9194,58917,85778,36515,00893,373Interest on mortgages(16,759)(1,154)(6,014)(23,927)(2,598)(26,525)Amortization(21,022)(1,445)(4,562)(27,029)(5,442)(32,471)EARNINGS BEFORE OTHER ITEMS18,1381,9907,28127,4096,96834,377              Year endedDecember 31, 2009Multi-familyExecusuitesSeniors'TotalResidentialCommercialTotal       Rental Revenue82,3528,19017,486108,02822,739130,767Other Income2,942208-3,1503153,465Operating Expenses(33,935)(4,334)(24)(38,293)(9,146)(47,439) 51,3594,06417,46272,88513,90886,793Interest on Mortgages(16,670)(969)(6,130)(23,769)(2,666)(26,435)Amortization(18,062)(1,305)(4,460)(23,827)(4,962)(28,789)EARNINGS BEFORE OTHER ITEMS16,6271,7906,87225,2896,28031,56917. 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.As described in note 2, the distribution of NorSerCo Common Shares under the Arrangement is a related party transaction and is measured at the exchange amount.  The contribution of certain assets to NorSerCo and the subsequent distribution of the NorSerCo Common Shares to REIT unitholders were recorded at the REIT's carrying amount. NorSerCo entered into lease agreements with the REIT for the lease of the three execusuite properties, which are effective January 1, 2011. The lease rate was determined by an independent third party and has a two year term with a renewal option at prevailing market rates.  Annual payments by Norserco to the REIT under the lease agreements are $3.2 million. A Trustee of the REIT is the Chairman of AgeCare Investment Ltd. ("AgeCare"), which leases six seniors' properties. For the year ended December 31, 2010, NPR earned rental income, including rental revenue earned on a straight-line basis over the term of the lease, totaling $12.6 million (2009 - $12.6 million) from AgeCare. Amounts outstanding in accounts receivable pertaining to this lease were $nil at December 31, 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 year ended December 31, 2010, NPR paid $120,000 for these services (2009 - $120,000).In the fourth quarter of 2010, the loan receivable of $2.0 million from AgeCare, which related to the renovations completed in 2009, was converted to a capital improvement and the loan payments converted to lease payments in accordance to its lease agreement.  Interest revenue of $29,000 was earned for the three months ended December 31, 2010 (2009 - $51,800) relating to this receivable. Interest revenue of $118,000 was earned for the year ended December 31, 2010 (2009 - $112,800).A company owned by a Trustee of the REIT leases commercial space from NPR under normal commercial terms. NPR earned rental revenue from that arrangement of $490,000 for the year ended December 31, 2010 (2009 - $481,000). Amounts outstanding in accounts receivable pertaining to this lease were $nil at December 31, 2010 (December 31, 2009 - $nil).18. 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:    December 31, 2010December 31, 2009 Level 1Level 2Level 3Level 1Level 2Level 3Financial assets:       Cash3,216-----Financial liabilities:     Bank indebtedness---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.Utility risk is managed 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. In addition, exposure to increases in the cost of heating oil is partially offset by the ability to recover these increases from a significant proportion of commercial tenants.  Utility costs are also recovered from residential tenants where allowed under their lease agreements.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 18% of the REIT's usage in Alberta. Natural gas prices in Inuvik and BC are not subject to regulated price control and NPR 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 $311,000 for the year ended December 31, 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 December 31, 2010, NPR has two revolving credit facilities totaling $57.5 million. At December 31, 2010, NPR has utilized $7.9 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 NPR 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:    December 31, 2010December 31, 2009   0-30 days1,0201,40531-60 days42522161-90 days7658Over 90 days754730Tenant receivables2,2752,414Other receivables9912,094Allowance for doubtful accounts(350)(350) 2,9164,158NPR 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:        December 31, 2010December 31, 2009     Balance, beginning of year  350350     Accounts receivable written off  (144)(532)Accounts recovered  430590Decrease in allowance  (286)(58)   350350The following is an aging of accounts payable and accrued liabilities:    December 31, 2010December 31, 2009   0-6 months14,17010,6296 months to 1 year1061,193Over 1 year111212 14,38712,034Tenant security deposits4,0233,521 18,41015,555Management 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. 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.During 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 year ended December 31, 2010 by $245,000.19. 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, REIT Trust Units, NorSerCo Common Shares, NPLP Class B Units (prior to December 31, 2010), NPR LP Class B Units and NorSerCo Special Shares (subsequent to December 31, 2010).  NorSerCo's capital management consists of its 50% mortgage payable in Inuvik Capital Suites Zheh Gwizu' Limited Partnership and common shares.Management monitors NPR'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 REIT's 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 NPR, 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%. NPR does not anticipate operating above a debt to gross book value ratio of 60%. For the purposes of these financial statements, Debt to Gross Book Value is calculated on the combined Entities. The Entities debt to gross book value is as follows:    December 31, 2010December 31, 2009(Cash) Bank indebtedness(3,216)1,820Operating facilities7,89833,698Mortgages payable531,560518,912Debt536,242554,430   Rental properties and other capital assets885,087836,251Capital assets improvements in progress2,7057,046Capital assets under development5,55520,423Accumulated amortization147,513118,764Future income taxes on acquisitions(21,900)(21,647)Gross Book Value1,018,960960,837   Debt to Gross Book Value52.6%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.Calculations for Debt Service Coverage and Interest Service Coverage for the Entities are shown below:    December 31, 2010December 31, 2009Earnings from continuing operations before taxes24,14825,929Amortization32,47128,789Interest on mortgages26,52526,435Interest on operating facilities1,043755Net earnings before interest, taxes and amortization84,18781,908   Interest on mortgages26,52526,435Interest on operating facilities1,043755Total Interest Expense27,56827,190Principal repayments16,95216,198Debt Service Payments44,52043,388   Interest Coverage 3.053.01   Debt Service Coverage 1.891.89As at and during the years ended December 31, 2010 and 2009, NPR complied with all externally imposed capital requirements and all covenants relating to its debt facilities.20. SUBSEQUENT EVENTSBetween January 1, 2011 and March 8, 2011 the REIT completed mortgage assumptions and renewals totalling $31.5 million with interest rates from 3.69% to 4.53% and terms to maturity from 5 to 10 years. Proceeds from the mortgage assumptions were used to fund new acquisitions.On February 15, 2011, the REIT acquired 230 residential units in Jasper, Alberta at an approximate cost of $16.8 million. The acquisition was funded through a combination of mortgage financing and the operating facility.For further information: Dave Leiman, CFO, 403-692-5550.