SmartCentres Real Estate Investment Trust : 2023 Q3 - Financial Statements

2023 THIRD QUARTER REPORT

UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended

September 30, 2023 and 2022

COMMITTED TO CANADIAN

COMMUNITIES

TABLE OF CONTENTS

• UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

• UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

• UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

• UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

• NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SMARTCENTRES REAL ESTATE INVESTMENT TRUST

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands of Canadian dollars)

As at	Note	September 30, 2023	December 31, 2022
Assets
Non-current assets
Investment properties	4	$10,433,183	$10,208,071
Equity accounted investments	5	779,999	680,999
Mortgages, loans and notes receivable	6	89,226	238,099
Other financial assets	7	173,743	171,807
Other assets	8	89,428	83,230
Intangible assets		42,809	43,807
		$11,608,388	$11,426,013
Current assets
Assets held for sale	4	-	42,321
Residential development inventory		46,834	40,373
Current portion of mortgages, loans and notes receivable	6	195,805	86,593
Amounts receivable and other	9	62,917	57,124
Prepaid expenses, deposits and deferred financing costs	9	50,204	14,474
Cash and cash equivalents		48,955	35,255
		$404,715	$276,140
Total assets		$12,013,103	$11,702,153
Liabilities
Non-current liabilities
Debt	10	$4,514,470	$4,523,987
Other financial liabilities	11	245,527	277,400
Other payables	12	17,604	17,265
		$4,777,601	$4,818,652
Current liabilities
Current portion of debt	10	538,252	459,278
Accounts payable and current portion of other payables	12	273,012	261,122
		$811,264	$720,400
Total liabilities		$5,588,865	$5,539,052
Equity
Trust Unit equity		$5,327,820	$5,126,197
Non-controlling interests		1,096,418	1,036,904
		$6,424,238	$6,163,101
Total liabilities and equity		$12,013,103	$11,702,153

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

Approved by the Board of Trustees.

Michael Young	Garry Foster
Trustee	Trustee

SMARTCENTRES REAL ESTATE INVESTMENT TRUST | THIRD QUARTER REPORT 2023 1

SMARTCENTRES REAL ESTATE INVESTMENT TRUST

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in thousands of Canadian dollars)

		Three Months Ended	Nine Months Ended
			September 30		September 30
	Note	2023	2022	2023	2022
Net rental income and other
Rentals from investment properties and other	16	$206,016	$196,962	$623,560	$598,375
Property operating costs and other	17	(75,614)	(69,481)	(238,450)	(224,922)
Net rental income and other		130,402	127,481	385,110	373,453
Other income and expenses
General and administrative expense, net	18	(7,761)	(10,696)	(25,828)	(25,479)
Earnings from equity accounted investments	5	62,396	1,101	85,277	4,312
Fair value adjustment on investment properties	4	42,734	(92,557)	106,335	188,457
Loss on sale of investment properties		-	(112)	(23)	(216)
Interest expense	10(d)	(42,193)	(39,175)	(121,855)	(108,360)
Interest income		5,268	5,714	15,268	12,540
Fair value adjustment on financial instruments		24,329	11,767	51,654	91,246
Acquisition-related costs		-	25	-	(298)
Net income and comprehensive income		$215,175	$3,548	$495,938	$535,655
Net income and comprehensive income attributable to:
Trust Units		$174,565	$2,795	$402,295	$434,691
Non-controlling interests		40,610	753	93,643	100,964
		$215,175	$3,548	$495,938	$535,655

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

• SMARTCENTRES REAL ESTATE INVESTMENT TRUST | THIRD QUARTER REPORT 2023

SMARTCENTRES REAL ESTATE INVESTMENT TRUST

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of Canadian dollars)

		Three Months Ended	Nine Months Ended
			September 30		September 30
	Note	2023	2022	2023	2022
Cash provided by (used in)
Operating activities
Net income and comprehensive income		$215,175	$3,548	$495,938	$535,655
Items not affecting cash and other items	19	(90,497)	117,251	(126,890)	(179,439)
Cash interest paid	10(d)	(24,426)	(20,929)	(98,024)	(82,104)
Interest received		2,807	2,959	8,645	9,052
Distributions from equity accounted investments	5	780	15,231	3,995	17,190
Expenditures on direct leasing costs and tenant incentives		(1,982)	(2,391)	(8,935)	(6,752)
Expenditures on tenant incentives for properties under development		(2,479)	(267)	(4,716)	(2,543)
Changes in other non-cash operating items	19	(5,523)	(18,391)	(32,905)	(47,259)
Cash flows provided by operating activities		$93,855	$97,011	$237,108	$243,800
Financing activities
Proceeds from issuance of unsecured debentures, net of issuance	10(b)	-	-	298,950	-
costs
Proceeds from secured debt		466	-	2,733	-
Proceeds from unsecured debt		23,226	40,000	32,485	400,000
Proceeds from revolving operating facilities		125,027	75,000	218,027	325,000
Repayment of unsecured debentures	10(b)	-	-	(200,000)	-
Repayments of secured debt		(34,589)	(16,554)	(113,180)	(199,344)
Repayments of unsecured debt		(780)	(30,463)	(21,127)	(53,913)
Repayments of revolving operating facility		(83,000)	(65,000)	(163,832)	(230,000)
Distributions paid on Trust Units		(66,891)	(66,891)	(200,672)	(200,672)
Distributions paid on non-controlling interests and Units classified		(15,514)	(15,494)	(46,554)	(46,789)
as liabilities
Payment of lease liability		(471)	(500)	(1,420)	(1,441)
Cash flows used in financing activities		$(52,526)	$(79,902)	$(194,590)	$(7,159)
Investing activities
Acquisitions and Earnouts of investment properties	3	(357)	(1,779)	(2,777)	(127,539)
Additions to investment properties		(32,467)	(31,348)	(95,976)	(81,443)
Additions to equity accounted investments		(17,940)	(9,155)	(25,637)	(26,288)
Additions to equipment	8	(719)	(99)	(1,320)	(382)
Decrease in cash held as collateral		-	(32,761)	-	(83,093)
Advances of mortgages and loans receivable		(2,251)	(12,996)	(5,585)	(49,914)
Repayments of mortgages and loans receivable		16,372	39,289	53,352	47,964
Net proceeds from sale of investment properties		196	16,529	49,125	41,294
Cash flows used in investing activities		$(37,166)	$(32,320)	$(28,818)	$(279,401)
Increase (decrease) in cash and cash equivalents during the		4,163	(15,211)	13,700	(42,760)
period
Cash and cash equivalents - beginning of period		44,792	34,686	35,255	62,235
Cash and cash equivalents - end of period		$48,955	$19,475	$48,955	$19,475

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

SMARTCENTRES REAL ESTATE INVESTMENT TRUST | THIRD QUARTER REPORT 2023 3

SMARTCENTRES REAL ESTATE INVESTMENT TRUST

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (in thousands of Canadian dollars)

					Attributable to LP Units
		Attributable to Unitholders	Classified as Non-Controlling
			Interests
		Trust						Other Non-
							Controlling
	Note	Units	Retained	Unit	LP Units	Retained	LP Unit	Interest	Total
		(Note 14)	Earnings	Equity	(Note 14)	Earnings	Equity	(Note 20)	Equity
Equity - January 1, 2023		$3,090,118	$2,036,079	$5,126,197	$643,223	$390,121	$1,033,344	$3,560	$6,163,101
Issuance of Units	14	-	-	-	1,471	-	1,471	-	1,471
Net income and comprehensive		-	402,295	402,295	-	93,322	93,322	321	495,938
income
Distributions	15	-	(200,672)	(200,672)	-	(35,600)	(35,600)	-	(236,272)
Equity - September 30, 2023		$3,090,118	$2,237,702	$5,327,820	$644,694	$447,843	$1,092,537	$3,881	$6,424,238
Equity - January 1, 2022		$3,090,368	$1,787,593	$4,877,961	$641,944	$317,965	$ 959,909	$3,445	$5,841,315
Issuance of Units	14	-	-	-	1,071	-	1,071	-	1,071
Unit issuance costs	14	(250)	-	(250)	-	-	-	-	(250)
Net income and comprehensive		-	434,691	434,691	-	100,669	100,669	295	535,655
income
Distributions	15	-	(200,672)	(200,672)	-	(35,519)	(35,519)	(283)	(236,474)
Equity - September 30, 2022		$3,090,118	$2,021,612	$5,111,730	$643,015	$383,115	$1,026,130	$3,457	$6,141,317

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

• SMARTCENTRES REAL ESTATE INVESTMENT TRUST | THIRD QUARTER REPORT 2023

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SMARTCENTRES REAL ESTATE INVESTMENT TRUST

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2023 and September 30, 2022 (in thousands of Canadian dollars, except Unit, square foot and per Unit amounts)

1. Organization

SmartCentres Real Estate Investment Trust and its subsidiaries (collectively, "the Trust"), is an unincorporated open-ended mutual fund trust governed by the laws of the Province of Alberta created under a declaration of trust, dated December 4, 2001, subsequently amended and last restated on December 9, 2020 ("the Declaration of Trust"). The Trust develops, leases, constructs, owns and manages shopping centres, office buildings, high-rise and low-rise condominiums and rental residences, seniors' housing, townhome units, self-storage rental facilities, and industrial facilities in Canada, both directly and through its subsidiaries, Smart Limited Partnership, Smart Limited Partnership II, Smart Limited Partnership III, Smart Limited Partnership IV, Smart Oshawa South Limited Partnership, Smart Oshawa Taunton Limited Partnership, Smart Boxgrove Limited Partnership, ONR Limited Partnership, ONR Limited Partnership I, and SmartVMC West Limited Partnership. The exchangeable securities of these subsidiaries, which are presented as non-controlling interests or as a liability, as appropriate, are economically equivalent to voting trust units ("Trust Units") as a result of voting, exchange and distribution rights as more fully described in Note 14(a). The address of the Trust's registered office is 3200 Highway 7, Vaughan, Ontario, L4K 5Z5. The Units of the Trust are listed on the Toronto Stock Exchange ("TSX") under the ticker symbol "SRU.UN".

These unaudited interim condensed consolidated financial statements have been approved for issue by the Board of Trustees on November 8, 2023. The Board of Trustees has the power to amend the unaudited interim condensed consolidated financial statements after issue.

As at September 30, 2023, the Penguin Group of Companies ("Penguin"), owned by Mitchell Goldhar, owned approximately 20.9% (December 31, 2022 - 20.8%) of the issued and outstanding Units of the Trust and Limited Partnerships (see also Note 20, "Related party transactions").

2. Summary of significant accounting policies

1. Basis of presentation
   These unaudited interim condensed consolidated financial statements of the Trust have been prepared in accordance with International Financial Reporting Standards ("IFRS") applicable to the preparation of interim condensed consolidated financial statements, International Accounting Standard ("IAS") 34, "Interim Financial Reporting", as issued by the International Accounting Standards Board ("IASB"). The unaudited interim condensed consolidated financial statements contain disclosures that are supplemental to the Trust's annual consolidated financial statements. They do not include all the information and disclosures required by IFRS applicable for annual consolidated financial statements and, therefore, they should be read in conjunction with the annual audited consolidated financial statements as at and for the year ended December 31, 2022.
2. Accounting policies
   The accounting policies followed in these unaudited interim condensed consolidated financial statements are consistent with the policies and method of their application used in the preparation of the audited consolidated financial statements as at and for the year ended December 31, 2022, except as noted below:
   Amendments to IAS 8, Definition of Accounting Estimates
   On January 1, 2023, the Trust adopted the amendments to IAS 8, Definition of Accounting Estimates. The amendments clarify the effects on an accounting estimate of a change in an input or a change in a measurement technique are changes in accounting estimates unless they result from the correction of prior period errors. There was no material impact to the Trust's unaudited interim condensed consolidated financial statements on the adoption.

SMARTCENTRES REAL ESTATE INVESTMENT TRUST | THIRD QUARTER REPORT 2023 5

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. Acquisitions and Earnouts

Earnouts completed during the nine months ended September 30, 2023

During the nine months ended September 30, 2023, pursuant to development management agreements referred to in Note 4, "Investment properties" (see also Note 20, "Related party transactions"), the Trust completed the purchase of Earnout transactions on 12,610 square feet of retail space and one parcel of land.

The following table summarizes the consideration for Earnouts completed for the nine months ended September 30, 2023:

	Note	Total
Cash		$2,777
LP Units issued	4(d)(ii)	1,471
Adjustments for other working capital amounts		3,948
		$8,196

In July 2023, pursuant to a redemption agreement between the Trust and the joint venture partner, the partner transferred all its rights and ownership stake in Markham Main Street RR PropCo LP for a total redemption price of $9,875 representing the partner's share. The transaction was deemed as an asset acquisition in accordance with IFRS 3 Business Combinations. (See also Note 5, "Equity accounted investments", for additional details on acquisitions reflected in equity accounted investments).

4. Investment properties

The following table summarizes the activities in investment properties:

		Nine Months Ended September 30, 2023	Year Ended December 31, 2022
		Income	Properties		Income	Properties
	Note	Under	Total	Under	Total
	Properties	Development	Properties	Development
Balance - beginning of period		$8,496,893	$1,753,499	$10,250,392	$8,395,077	$1,452,001	$9,847,078
Additions (deductions):
Acquisitions, Earnouts and related		-	2,435	2,435	101,993	28,679	130,672
adjustments of investment properties
Earnout Fees on properties subject to	4(d)(ii)	1,666	-	1,666	1,401	-	1,401
development management agreements
Transfer to income properties from		64,220	(64,220)	-	39,707	(39,707)	-
properties under development
Transfer from income properties to		(7,308)	7,308	-	(7,887)	7,887	-
properties under development
Transfer from properties under development		-	-	-	-	(25,000)	(25,000)
to equity accounted investments
Transfer to properties under development		-	18,931	18,931	-	-	-
from equity accounted investments
Additions		20,686	49,009	69,695	21,501	79,373	100,874
Capitalized interest	10(d)	-	32,877	32,877	-	35,036	35,036
Dispositions	4(b)	-	(49,148)	(49,148)	(777)	(40,726)	(41,503)
Fair value adjustment on investment		82,241	24,094	106,335	(54,122)	255,956	201,834
properties
Balance - end of period		$8,658,398	$1,774,785	$10,433,183	$8,496,893	$1,753,499	$10,250,392
Investment properties		8,658,398	1,774,785	10,433,183	8,496,893	1,711,178	10,208,071
Investment properties classified as held for		-	-	-	-	42,321	42,321
sale
		$8,658,398	$1,774,785	$10,433,183	$8,496,893	$1,753,499	$10,250,392

Secured debt with a carrying value of $869,867 (December 31, 2022 - $969,054) is secured by investment properties with a fair value of $2,449,269 (December 31, 2022 - $2,807,896).

Presented separately from investment properties is $85,246 (December 31, 2022 - $78,820) of net straight-line rents receivable and tenant incentives (these amounts are included in Note 8, "Other assets") arising from the recognition of rental revenues on a straight-line basis and amortization of tenant incentives over the respective lease terms. The fair value of investment properties has been reduced by these amounts.

• SMARTCENTRES REAL ESTATE INVESTMENT TRUST | THIRD QUARTER REPORT 2023

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Valuation methods underlying management's estimation of fair value
2. 1. Income properties
      The Trust applies the discounted cash flow valuation method to estimate the value of income properties, which include: freehold properties, properties with leasehold interests with purchase options, and properties with leasehold interests without purchase options. The Trust applies this valuation method as it believes that the discounted cash flow valuation method represents the Trust's estimate of fair values of income properties based on expectations of changes in rental rates, occupancy rates, lease renewal rates, leasing costs, expected credit losses and downtime on lease expiries, among others.
   2. Properties under development
      Properties under development are valued using two primary methods: i) discounted cash flow method, factoring in future cash inflows and outflows such as construction costs to complete development, leasing costs and other fees, and Earnout Fees, if any; or ii) land, development and construction costs are recorded at market value, factoring in development risks such as planning, zoning, timing and market conditions.

The following table summarizes significant assumptions in Level 3 valuations:

As at	September 30, 2023	December 31, 2022
Weighted Average:
Terminal Capitalization Rate	5.96 %	5.95 %
Discount Rate	6.48 %	6.47 %
Range:
Terminal Capitalization Rate	4.20% - 7.70%	4.18% - 7.53%
Discount Rate	4.60% - 8.20%	4.58% - 8.03%

The following table summarizes the fair value sensitivity for the portion of the Trust's investment properties that are sensitive to changes in discount rates as at September 30, 2023:

Discount rate sensitivity	Weighted average overall	Estimated fair value of	Fair value variance	% Change
(decrease)/increase	discount rate	investment properties
(1.00)%	5.48 %	$10,678,200	$1,832,600	20.7 %
(0.50)%	5.98 %	$9,674,400	$828,800	9.4 %
(0.25)%	6.23 %	$9,241,300	$395,700	4.5 %
-%	6.48 %	$8,845,600	$-	- %
0.25%	6.73 %	$8,482,000	$(363,600)	(4.1)%
0.50%	6.98 %	$8,147,200	$(698,400)	(7.9)%
1.00%	7.48 %	$7,553,200	$(1,292,400)	(14.6)%

SMARTCENTRES REAL ESTATE INVESTMENT TRUST | THIRD QUARTER REPORT 2023 7

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Dispositions
   Disposition of investment properties during the nine months ended September 30, 2023
   In January 2023, the Trust contributed its interest in a parcel of land totalling 1.41 acres located in Whitby, Ontario, to a joint venture, Whitby Self Storage LP, with the intention to develop and operate a self-storage facility.
   In February 2023, the Trust, together with its co-ownership partner, Penguin, sold a land parcel totalling 4.3 acres located in Vaughan, Ontario, for gross proceeds of $63,450, which was satisfied by cash. The Trust's share of such proceeds was $42,300 relating to the Trust's two-thirds share in this land parcel, which was previously presented as assets held for sale in the Trust's consolidated financial statements for the year ended December 31, 2022.
   In February 2023, the Trust sold a parcel of land totalling 2.64 acres located in Chilliwack, British Columbia, for gross proceeds of $4,800, which was satisfied by cash.
2. Leasehold property interests
   At September 30, 2023, 16 (December 31, 2022 - 16) investment properties with a fair value of $987,118 (December 31, 2022 - $964,916) are leasehold property interests accounted for as leases.
3. 1. Leasehold property interests without bargain purchase options
      The Trust previously prepaid its entire lease obligations for the 14 leasehold interests with Penguin (see also Note 20, "Related party transactions") in the amount of $889,931 (December 31, 2022 - $889,931), including prepaid land rent of $229,846 (December 31, 2022 - $229,846).
   2. Leasehold property interests with bargain purchase options
      One leasehold interest commenced in 2003 under the terms of a 35-year lease with Penguin (see also Note 20, "Related party transactions"). The lease requires a $10,000 payment at the end of the lease term in 2038 to exercise a purchase option, which is considered to be a bargain purchase option. The Trust prepaid its entire lease obligation for this property of $57,997 (December 31, 2022 - $57,997). As the Trust expects to exercise the purchase option in 2038, the purchase option price has been included in accounts payable in the amount of $2,517 (December 31, 2022 - $2,350), net of imputed interest at 9.18% of $7,483 (December 31, 2022 - $7,650) (see also Note 12, "Accounts and other payables").
      A second leasehold interest was acquired on February 11, 2015 and includes a land lease that expires on September 1, 2054. The land lease requires monthly payments ranging from $450 to $600 annually until September 1, 2054, and a $6,000 payment between September 1, 2023 and September 1, 2025 to exercise a purchase option that is considered to be a bargain purchase option. As the Trust expects to exercise the purchase option, the purchase option price has been included in accounts payable in the amount of $6,000 (December 31, 2022 - $6,061), net of imputed interest at 6.25% of $478 (December 31, 2022 - $314) (see also Note 12, "Accounts and other payables").
4. Properties under development
   The following table presents properties under development:

As at	September 30, 2023	December 31, 2022
Properties under development not subject to development management agreements i)	$1,713,840	$1,698,652
Properties under development subject to development management agreements ii)	60,945	54,847
	$1,774,785	$1,753,499
Less: Properties under development classified as held for sale	-	42,321
	$1,774,785	$1,711,178

1. Properties under development not subject to development management agreements
   During the nine months ended September 30, 2023, the Trust completed the development and leasing of certain properties under development not subject to development management agreements, for which the value of land and development costs incurred have been reclassified from properties under development to income properties.
   For the three months ended September 30, 2023, the Trust incurred land and development costs of $16,564 (three months ended September 30, 2022 - $12,170). For the nine months ended September 30, 2023, the Trust incurred land and development costs of $59,697 (nine months ended September 30, 2022 - $36,463).
2. Properties under development subject to development management agreements (Earnout agreements) These properties under development (including certain leasehold property interests) are subject to various development management agreements with Penguin and Walmart.

• SMARTCENTRES REAL ESTATE INVESTMENT TRUST | THIRD QUARTER REPORT 2023